If Congress thinks that their constituents are upset about $4 per gallon gasoline, what will happen when they find out a year from now that Congress restricted then from diversifying their portfolio and it cost their pension plans or 401Ks 10% or more, possibly thousands of dollars.
It could happen.
Futures did a quick calculation in our upcoming August issue on what would be the difference for the first six months of 2008 in a portfolio that had a 50/50 allocation to stocks and bonds and a similar portfolio but with a 20% allocation to the S&P Goldman Sachs Commodity Index(GSCI). The addition of the commodity allocation added approximately 10% and was the difference of having a significant loss to having a decent return. Numerous studies have indicated that an allocation to commodities improves a portfolio’s risk adjusted returns.
That is one argument being made by the Coalition to Protect Competitive Markets, an organization made up of industry lobbying groups and exchanges “to educate lawmakers about the negative consequences of imposing unnecessary regulations on investors’ participation in the commodity markets.”
Just to give you an idea how these indexes may have improved the returns of a traditional portfolio over the last decade; since January 2000 according to the Barclay Hedge database the S&P 500 Total Return Index has produced a compound annual return (CAR) of 0.06%, the Lehman Bros. Government Bond Index has produced a (CAR) of 8.20%, the S&P GSCI has produced a (CAR) of 17.04%, the Rogers International Commodity Index has produced a CAR of 19.47% and the Dow Jones AIG Commodity Index has produced a CAR of 15.12%. Obviously, an allocation into one or more of the funds benchmarked to these indexes would have significantly improved a tradtional portfolio.
If Congress and others are absolutely convinced that speculators or more specifically money benchmarked to commodity indexes are pushing the price of commodities higher, they should also inform people what the consequences could be from restricting access to certain forms of diversification.
The retail public is already unfairly—in our opinion—restricted from certain alternative investment vehicles that tend to perform best when mainstream stock and bond vehicles underperform. If additional restrictions to alternatives are mandated and, as many analysts suspect, traditional investment vehicles continue to underperform over the next decade—right by the way when an enormous amount of baby boomers will hit retirement age—who will Congress blame then?
Tags: alternative investments, Coalition to Protect Competitive Markets, Congress, diversification, RICI, risk adjusted returns, S&P GSCI
I hope your study estimates the net, as well as the gross, difference to an investor. The commodity-related investments may be rising but so is the cost of living due to the same phenomena. No matter what the American Petroleum Institute says about pensions’ ownership of refinery shares, the individual pensioner could well be paying that gain at the pump, and more.