After eight lessons on what commodities are, the practical question: should they sit in a portfolio alongside stocks and bonds? The honest answer is a small slice, for specific reasons — not as a core holding.
The case for a slice
- Diversification. Commodity returns have low correlation with stocks and bonds. They answer to weather, wars, and supply cycles, not corporate earnings — so they can zig when your other holdings zag.
- Inflation protection. This is the strongest argument. Commodities are real assets whose prices often lead inflation. In the inflationary 1970s — and again in 2021–22 — commodities surged while stocks and bonds fell together. That’s exactly when diversification is worth the most.
The case against a large position
- No income, no compounding. Stocks pay dividends and grow earnings; bonds pay coupons. A barrel of oil just sits there. Over the very long run, broad commodities have roughly tracked inflation — not beaten it.
- High volatility. Big swings mean a large allocation adds a lot of noise for little long-run reward.
- Roll costs. As the investing lesson covered, futures-based exposure bleeds value in contango. The drag is real and persistent.
How it’s usually done
Investors who hold commodities typically keep them to a small allocation — often in the single-digit percent range — as a deliberate inflation hedge and diversifier, then rebalance. Rebalancing is what monetises the volatility: you trim commodities after a spike and top up after a slump, selling high and buying low by rule rather than by nerve.
Common vehicles: a broad commodity ETF for diversification, or a gold ETF specifically for the crisis/inflation hedge.
The takeaway
Commodities earn a place as a small, deliberate slice — a diversifier and inflation hedge that shines exactly when stocks and bonds struggle together. They’re not a growth engine: no income, high volatility, and roll costs argue against a big position. Size it small, hold it for the diversification, and rebalance.
This is education, not financial advice.