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Commodities are a relatively poor investment

For a collection of reasons, the world is experiencing a commodity boom. Oil is hovering around $100 a barrel, while gold and platinum are setting new records. That said, it is still questionable whether commodities are a good long-term investment. While they boom sometimes, there will also be times when a glut or changes in demand cause prices to plummet.
Looking at the trends from 1985 to present, you can see a sharp divergence in asset performance between different classes of investment. The average dollar invested in global real estate in 1985 would be about $7.50 today. An investment in stocks would have yielded about $6.50, while bond growth would have left you with about $4. Investing in a basket containing all traded commodities would have yielded a return of about $2.60, while investing in just oil would have yielded less than $2.00 (oil having seen sustained growth in price only since 1998 or 1999).
None of this is to say you can’t make a fortune trading commodities. It just suggests that if you want to put money away for a few decades, not think about it much, and live well off it later, investing in equities is the way to go. Given the costs of management versus the extra returns, it is probably best to invest in index tracking funds, but that’s an issue to comment on another time.

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8 Responses to “Commodities are a relatively poor investment”

Neal Says:

January 29th, 2008 at 1:15 pm

If you invested in the DJIA in 1929 and held onto it, it would take until the 1950s before you broke even in nominal terms. Personally, looking at that graph, bonds look like a better choice than stocks or real estate, but even then, what happens to the bond markets if the big bond insurers go under?
To paraphrase someone on Metafilter, these days, baroque financial instruments are making it increasingly hard to tell where real assets lie, and who’s holding a bag of exploding lepers.

R.K. Says:

January 29th, 2008 at 1:21 pm

These things are a lot simpler when one is in debt. Paying it off is usually the best form of investment.

. Says:

January 29th, 2008 at 4:17 pm

If Donald Trump had taken the millions he inherited from his father and put it all into mutual funds, you’d never have had to suffer through one of his books. But he’d be just as rich or richer today.
Common stocks have returned an average of 7 percent per year, adjusted for inflation. If you are way smarter, luckier, and less risk-averse than all of the companies in the United States, you may be able to do substantially better. But a return on investment of 200 percent per year is not very exciting when you only have a few hundred dollars in capital. That’s why it is so important to pick your parents carefully.

Milan Says:

January 29th, 2008 at 5:04 pm

If you invested in the DJIA in 1929 and held onto it, it would take until the 1950s before you broke even in nominal terms.
Right before the Great Depression was admittedly a bad time to invest in stock. When holding stock, rather than something like Guaranteed Investment Certificates, you are betting that the risk of such catastrophic stock market declines is adequately compensated by the difference in interest rates between the assets. Over a long enough time period, this is highly likely to be true.
[B]aroque financial instruments are making it increasingly hard to tell where real assets lie, and who's holding a bag of exploding lepers.
There is some truth to this, but I am still willing to bet that a dollar invested today will be worth the most in 20 years if it is invested in a low-fee index tracking fund of global equities.

tristan Says:

January 29th, 2008 at 6:39 pm

If you invested in Gold on september 13th 2001, which at the time I thought of as a good idea, it appears one would have done quite well.

Neal Says:

January 29th, 2008 at 6:43 pm

Hindsight is 20/20, and I think gold is wildly overvalued right now. That said, I’m not willing to put my money where my mouth is.

Milan Says:

January 29th, 2008 at 7:04 pm

Tristan,
Over certain spans of time, it is inevitable that individual commodities will experience big changes in price. What I was describing above is multi-decade investment strategies.
It would be interesting to have the same trend lines as those linked running back to 1900.

R.K. Says:

January 30th, 2008 at 1:53 pm

Does this mean that the average value of a commodity has increased 2.6 times since 1985?

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