FAAR - Commodities For The Long Run?

2024-07-09 07:40:00 ET

Summary

• When considering the risk of an asset, it’s important to realize that it is not always possible to capture its potential benefit if you focus only on returns and covariances over a one-year investment horizon.
• Real assets like commodities are often viewed as being inefficient within a larger opportunity set of choices and therefore commonly receive a little allocation in common portfolio optimization routines like mean-variance optimization.
• The optimal allocations to commodities are approximately 10% when focused on nominal wealth, regardless of the investor’s equity risk target or investment horizon, and closer to 20% or higher when focused on real wealth.

If you focus only on returns and covariances over a one-year investment horizon, you may conclude that commodities have no place in an investment portfolio. The efficiency of commodities improves dramatically over longer investment horizons, however, especially when using expected returns and maintaining historical serial dependencies....

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