The world of investments in Wall Street has traditionally been a universe consisting of bonds and equities. These are the two dimensions of investing in modern portfolio theory.
1) Bonds have done well over the past 20 years. Interest rates have continually dropped (though not always monotonically), and therefore prices have had an upward trend. For those bonds that didn't default, the coupon yield or discount to maturity have added to the pie. Whether bonds will continue to be lucrative remains to be seen, but who among you is predicting that rates will fall more? Is the coupon yield being offered enough to satisfy your demands upon your investments? This remains to be seen, but I know many readers are skeptical about bonds.
2) Then there are equities. While there was a great bull market, not without interruptions, between 1980 and 2000, there hasn't been such a rise since then. Since 2000, the major indices have oscillated, sometimes violently, underneath previous all-time highs. Are we in a "bear market" or a "sideways" market? For the Nasdaq, I would vote bear, since it is still 40% beneath its 2000 high. But even if you go with "sideways" for the S&P and Russell 2000 indices, this would still be a revelation for many average investors. Their Wall Street "buy and hold" mantra has been far from optimal for the past 12 years. Modern portfolio theory puts us in a two dimensional-world with a mixture of stocks and bonds. But with sideways stocks and interest rates at very low levels, this "mixture" could end up as a formula for investment disaster.
3) Bear markets in equities average 20 years according to one university study; and commodities generally rise during this time, and conversely. So, we add a third investment dimension, that of commodities: things that can be owned. Now, owing to modern technology, gold, food, and other commodities can be invested in without having to have a warehouse in which to store them. Exchange-traded funds (ETFs) are traded on the stock exchanges, and with them one can avoid the leverage inherent in the traditional commodity vehicles such as futures contracts. The ETF world of commodities allows an investment in non-paper assets (non-equities, and non-bonds) ironically through a paper vehicle known as the ETF. These vehicles can rise in the midst of hyper-inflation while equities and bonds plummet due to rising interest rates. In fact, inflation, almost by its very definition, will cause a rise in a commodity ETF. Furthermore, to the extent that any world currency is debased, there is also a possible gain due to a smart currency play. Last year, on balance, was a good time to be long the Aussie Dollar and the Canadian Dollar, whilst the US financial rating was downgraded.
In the next 8 years, if the bear market plays out its "average" length, it seems reasonable to add a 3rd dimension to our investment portfolio. Commodities should be considered as an alternative. Many smart investors have known this for years. Certainly, the Harvard Endowment Fund was one. George Soros, Jimmy Rodgers, the list goes on and on.
For more information, have a look at some of the BLOG pages. One page lists ETF symbols of interest, others our methodology.
