Gold is falling like a rock (which it is), preparing to bust through $1,000 an ounce and possibly headed lower. Oil could hit $20 a barrel before the dust settles, energy analysts warn. What the heck is going on?
Nothing unusual at all. Commodities are volatile. That’s because prices for so-called “real assets” are driven entirely by the brute forces of supply and demand. They are by definition undiversified.
Yes, there are some interesting trends at work in the commodities markets. Certainly the slowdown in China is playing a big role in the falling demand for energy, a host of less flamboyant minerals and other raw materials, such as timber and steel.
The ongoing train wreck once known as OPEC is an interesting case study in how a cartel can fail itself. There have always been cheaters undermining the power of OPEC to set prices. Now its main constituent, Saudi Arabia, is openly pumping with abandon.
Combine that with slower economies worldwide and you get falling oil prices. Should retirement investors worry about a gold and oil crash? Absolutely not.
There’s a reason prudent retirement portfolios don’t take big positions in commodities: They’re not great long-term investments. Sure, you can cherry-pick a window of 10 years or 15 years and show prices skyrocketing for any given real asset. But that only works if you can ignore the preceding decade (or decades) of virtually no growth at all.
Retirement investors need growth and that comes from stocks. The reason is simple. Stocks appreciate along with economic growth and they generate dividend income.
Dividends can be reinvested, a fact which supercharges a portfolio and helps it compound and grow.
Yes, you can make mistakes with stocks. Investors try to time their entries and exits in the stock market. That often ends in tears. People tend to buy after stocks rise then sell after they fall — the opposite of what they should be doing.
Investors also concentrate too much cash into too few positions. They then become emotionally attached to specific shares, the so-called “story stocks” that brokers love to sell.
When those stocks move higher, investors feel vindicated, as if the rise had something to do with their wisdom in investing in that particular company.
When they fall, it can feel like a plot against us personally. Investors begin to look for reasons why the markets are “wrong.” It could not possibly be the investor who is wrong.
Deep sleep
Gold and oil have their own stories attached. Investors who buy into those very emotional narratives often pay a steep price.
Once they come to accept their error it’s too late. By then a commodity has settled into a deep sleep that can drag on for years. Meanwhile, dividend output is zero, zilch, nada.
The solution for retirement investors is to shut off the noise. Buy a broadly diversified portfolio and own commodities in small proportions and only to the degree that spurts of commodity price growth offset stock declines, lowering overall portfolio volatility.
A well-designed, low-cost retirement portfolio focused on diversified stock holdings can achieve your retirement goals — no drama, no headaches, no stories.
