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Commodities were the Winner Last Month
Sectors: Commodity
, ETFs
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Blood was definitely running in the streets last month.
As our table below reminds, red is now the dominant color in performance
tallies. But black hasn't been completely banished. For those who owned
commodities, inflation-indexed Treasuries or cash, June wasn't a complete
loss.
Commodities, of course, were the big winner last month. The Dow Jones-AIG
Commodity Index surged more than 9% in June and is now up 27% so far this year,
based on the exchange traded note proxy cited in our numbers above. Clearly, if
you didn't have commodities exposure in your portfolio, your portfolio
suffered.
Although it's tempting to chase the hot performance in commodities,
strategic-minded investors should be wary at this point. The DJ-AIG Commodity
index, like all commodities benchmarks, has been rallying for years. The last
calendar year loss for DJ-AIG Commodity was 2001. If the index manages a gain by
the end of 2008, that will mark the seventh straight year of calendar year
gains.
No, we're not willing to say when the commodities boom will end. For all we
know, it'll go on for another seven years. Then again, it could end tomorrow. As
a general rule, however, the longer any asset class rallies, the more cautious
we become on estimating expected returns. At the same time, the longer asset
classes endure selling, the more optimistic we become.
That said, we never doubt the value of diversification across all the major
asset classes. On that note, we're adding a new monthly update to our usual
scorecard of asset class returns. As you can see in the table above, there's a
new line at the bottom for the Capital Spectator Global Market Index. This
benchmark, compiled and updated by your editor, owns all the major asset classes
in their respective market-based weights. We'll be writing more about the CS
Global Market Index in future posts; meantime, here's
a brief overview, as per our recent post.
Returning to the issue of June's performance, it's clear that the CS Global
Market Portfolio Index was only slightly bruised in last month's selling.
Posting a relatively mild loss of 1.8%, our global market index has held up
quite well. It's encouraging to see that for the past year it's up 3.7%.
In fact, the value of owning everything in its market-based weight is that
over the long term the mix has proven itself a worthy competitor to those who
attempt to outguess Mr. Market. Or so history tells us. No guarantees for the
future, of course, although there are fundamental reasons for thinking that more
of the same is available for patient investors. One reason is that a
market-weighted portfolio of everything requires no rebalancing. That, in turn,
keeps trading costs, and associated taxes at zero, excepting, of course, for any
distributions from the various funds. Meanwhile, building a real-world portfolio
based on all the major asset classes via ETFs, ETNs and index mutual funds
carries a low fee in terms of dollar-weighted expense ratios--something on the
order of 50 basis points.
To be sure, owning everything isn't a short-cut to easy riches. Nor can any
one say for sure that it'll always and forever beat the majority of actively
managed portfolios. As we learned last month, even a global market portfolio can
lose money at times. But to the extent that diversification is a good thing, the
world's equities, bonds, REITs and commodities are available for a relative
song. For most investors with a long-term perspective, partaking of the full
offering of the world's markets is a compelling strategy.
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