Can you Plan for Inflation Risk with Commodities?

by brendon on May 11, 2011

Prudent independent financial planning and advice means knowing how to measure and manage risk.  Kansas City investors need to protect and plan for inflation-risk.  Your inflation risk strategies shouldn’t include the ownership of gold (or any other commodity such as oil, gas, cotton, silver and copper).   TV, radio, the internet, billboards on the highway, magazines, newsletters and newspapers are full of offers and advertisements to own commodities.  You’ll even hear they’re a great hedge against inflation, right? 

Absolutely not!   Watch this 3 minute video appearance by Mark Matson with Liz Claman at Fox business and consider the example below to learn your BEST HEDGE AGAINST INFLATION…………


Gold is great for jewelry…..and you should never “hedge for inflation” with something as this commodity (and all commodities in general).  The best hedge against inflation is a globally diversified portfolio of stocks and bonds, allocated to match your tolerance for risk.  (This can be scientifically measured with “standard deviation”.)  The portfolio should be rebalanced systematically to take advantage of “buying low” and “selling high”.  

Consider this as an example:  

If you bought 1 oz. of gold in 1927, the price was $20.64.   The value of gold in 2010 was $1,421.  

If invested the same $20.64 and invested it into a moderately diversified portfolio that contained these four asset categories:  US Large Cap (S&P 500), US Value, US Microcap (Small co) and US Value—your same $20.64 would have grown to $255,193.  

Don’t invest in commodities unless you recognize that it’s speculation.   Your best hedge against inflation is to capture market rates of return without the gambling and speculating.

Educate yourself, understand what market rates of return are and capture them with proven investment strategies.  

  Annualized             Capital Return  
US Micro Cap Stocks 12.33 1927-2009
S&P 500 (Large US) 9.79 1927-2009
Small Cap Value 14.85 1927-2009
Large Value 11.79 1927-2009
International Small Co. 15.05 1970-2009
International Large Co. 10.18 1970-2009

Performance figures taken from Dimensional Fund Advisors, Inc. (DFA) Returns software 12/31/09.  Some data provided to DFA by the Center for Research & Security Pricing (CRSP), University of Chicago.  Asset Classes defined as: S&P 500 Index for U.S. Large stocks, CRSP 9-10 Index for U.S. micro cap stocks, Morgan Stanley Europe, Australia Far East (EAFE) Index for international large stocks, and the international CRSP Large Value Index for Large Value and CRSP Small Value Index for Small Cap Value.

Required disclaimer:  reference to historical investment performance is for information purposes only and should not be construed as a guarantee of future performance.

{ 2 comments… read them below or add one }

Dennis D. Duffy May 11, 2011 at 10:01 am

Great video Brendon! Thanks for the great educational web site too!


Dennis D. Duffy May 11, 2011 at 10:01 am

Great video Brendon! Love the web site and the focus on education.


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