Either way, here’s a point of view you won’t hear from the commodities experts: the super-cycle theory is not so important.
You shouldn’t be investing in commodities because you buy the theory – nor, for that matter, should you be avoiding the asset class because you think the super-cycle is bunk. The reason to consider investing in commodities is that you think your portfolio will be improved for doing so.
Aiming for balance
“Improved” doesn’t necessarily mean delivering higher returns, though that may be an effect over the longer term. The question you should be asking when considering an investment in commodities is the same one as you should ask before investing in any other asset class: will this give my portfolio greater balance and diversity as I work towards achieving my savings objectives?
Everyone invests for a reason, even if your motivation is as non-specific as just wanting to put money by for an unknown future rainy day. Your portfolio should be designed with your ambitions in mind, but also to reflect your attitude to risk – the extent to which you are prepared to put up with short term fluctuations, or volatility, in your returns as you work towards your long-term goals.
A balanced portfolio is one that reflects those two requirements. It’s the optimal mix of investments to deliver the long-term performance you need without compromising your desire to manage volatility in the short term.
To achieve that, you need to hold different asset classes in your portfolio. Equities for example, come with a different risk and return profile to fixed income assets. As a very general rule they offer the potential for greater long term capital growth, but with more volatility.
So what about commodities? Forget the super-cycle – one of the best reasons to consider commodities is the asset class’s low correlation with other asset classes. Correlation is a measure of the extent to which the returns of two investments move together – so if you’re looking for balance in your portfolio, you want a mix of assets with low correlations with each other.
Read the small print
Here’s the thing though. To get that benefit from commodities you need exposure to the raw materials themselves rather than shares in businesses that make their living from this sector. Many commodities funds invest most of their assets in natural resources companies, rather than the stuff these firms are pulling out of the ground. Such funds won’t give you the same diversification benefits.
It’s an important lesson. To build a balanced portfolio, you need to have a good understanding of the investments within it, even if you’re investing through a collective fund.
Whatever you do however, don’t get hung up on the super-cycle theory. It’s the wrong way to approach a potential investment in commodities.