How Commodities Can Buoy 60/40 Portfolios: Stocks and bonds suffer when inflation spikes, but an allocation to commodities would cut risk and boost returns, research finds

 

 

“Do commodities deserve a place in your investment portfolio?

 

Some financial experts have suggested as much, especially since the traditional 60/40 stock-and-bond portfolio failed to protect investors in 2022 when inflation caused both the bond and stock markets to decline.

 

But are they right? And if so, how much of an allocation should commodities get?

 

My research assistants (Tanya Ashwin and Kevin Pena-Mallon) and I looked back at the past 45 years of returns for the 60/40 portfolio with allocations to commodities and we found that a 10% position can reduce risk while sacrificing just a bit of returns in most years. What's more, we found that a 10% allocation to commodities can reduce risk and add to returns during periods of high inflation, such as was the case in 2022.

 

To test this idea, we examined three portfolios with differing allocations to commodities -- a 57.5% stock, 37.5% bond, and a 5% commodities portfolio, a 55/35/10 portfolio and a 50/30/20 portfolio -- and then compared them against a control 60/40 portfolio.

 

For the stock positions, we used an equal weighting of the S&P 500 index of large-cap stocks and the MSCI EAFE international-stock index; for the fixed-income allocations, we used the Bloomberg U.S. Aggregate Bond Index of investment-grade bonds; and for the commodities positions, we used the Bloomberg Commodity Index.

 

A 10% allocation

 

Since 1979, the 60/40 portfolio has delivered an average return of 8.98% a year with volatility of 9.62%. Yet if we add a 10% position to commodities, this becomes an 8.62% annualized return over the same period with 9.33% volatility.

 

So by adding this 10% commodity position to one's portfolio -- and taking 5 percentage points each from stocks and bonds -- an investor is sacrificing 0.36 percentage point a year in returns, but also reducing volatility by 0.29 percentage point.

 

While this is a relatively negligible trade-off in terms of risk versus returns, if we isolate periods of high inflation, we can see the real benefit of a commodities position.

 

During the period from 2021 to 2022, when inflation was taking off in the U.S., the 60/40 portfolio yielded a return of negative 2.25% a year with volatility of 12.02%. Yet if you added just 10% of your allocation to commodities, your portfolio return was 0.10% a year during this period with 11.75% volatility.

 

This is a 2.35-percentage-point increase in annual returns and a small reduction in risk. These results were similar during the high-inflation periods of the late 1970s and early 1980s.

 

A 20% allocation

 

When we turn to the 50/30/20 portfolio, where we are adding a 20% position to commodities, we see a similar result. Since 1979, the 50/30/20 portfolio delivered an average return of 8.05% with volatility of 9.25%. Compared with the 60/40 portfolio, this amounts to sacrificing 0.93 percentage point in return a year in exchange for reducing volatility by 0.37 percentage point.

 

If we isolate periods of high inflation, we find that the 50-30-20 portfolio performed well, with an average annualized return of 2.03% and volatility of 11.73%. This amounts to a 4.28-percentage-point increase in returns (as compared with the 60/40 portfolio) with a slight reduction in risk as well.

 

A 5% allocation

 

When we consider a 5% commodity position, which might be more palatable for some investors than a 20% or 10% allocation, we still see some of the benefits of diversifying into a new asset class but they are on the smaller end.

 

For a 57.5/37.5/5 portfolio, we find that the average return over the 45-year period was 8.74% a year and the average volatility over the period was 9.51% a year. This amounts to a 0.24-percentage-point reduction in returns a year and a 0.11-point reduction in volatility when compared with the 60/40 portfolio.

 

During high-inflation periods, we see a 0.88-percentage-point increase in the average annualized returns with a negligible reduction in volatility versus a 60/40 portfolio.

 

Ultimately, adding commodities to a portfolio can reduce risk over the long run while sacrificing some returns, but the allocation really shines during periods of high inflation when both stocks and bonds may decline.

 

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Derek Horstmeyer is a professor of finance at Costello College of Business, George Mason University, in Fairfax, Va. He can be reached at reports@wsj.com.” [A]

 

 

 

For most retirement savers, the easiest and safest ways to buy commodities are through

exchange-traded funds (ETFs) and mutual funds within a standard brokerage or self-directed IRA account. This approach provides diversification and avoids the complexities of direct ownership or futures trading.

Methods of Commodity Investing for Retirement

Here are the primary ways to incorporate commodities into your retirement portfolio:

1. Commodity ETFs and Mutual Funds

This is the most practical method for individual investors.

 

    How it works: These funds pool money from many investors to buy commodity futures contracts or stocks of companies that produce commodities (e.g., mining or energy companies). You could look into ETFs that focus on specific sectors like energy or broad commodity baskets, such as the Invesco DB Commodity Index Tracking Fund (DBC) or the Bloomberg All Commodity Strategy K-1 Free ETF (BCI). Most major online brokers, such as Fidelity, Charles Schwab, and E-Trade, offer commission-free trading for US-listed stocks and ETFs. Some gold ETFs hold the physical metal in a secure vault.

    Pros: Offers instant diversification, high liquidity (easy to buy/sell), and can be purchased in a regular brokerage or IRA account. They avoid the storage costs of physical commodities and the complexity of futures trading.

    Cons: Funds that use futures contracts may have unique tax implications (though this is avoided within a tax-advantaged retirement account).

 

 

2. Physical Commodities (Mainly Precious Metals)

Owning tangible assets provides a sense of security and a direct hedge against currency fluctuations.

 

    How it works: You can buy physical bullion (bars and coins) of precious metals like gold and silver through a dealer.

    Pros: Provides direct ownership of a tangible asset.

    Cons: Involves significant costs for secure storage and insurance, and selling large bars can be less liquid than other forms of investment. For retirement accounts (IRAs), the IRS requires that physical metals be stored in an approved, secure depository, not at home.

 

 

3. Stocks of Commodity Producers

You can invest indirectly in commodities by buying shares in companies that produce or process raw materials (e.g., gold mining companies or oil producers).

 

    Pros: Easy to buy and sell through a regular brokerage account.

    Cons: The stock price is also influenced by company-specific factors (management, operations, etc.), so it may not perfectly track the price of the underlying commodity.

 

 

4. Futures Contracts

This is the most direct way to invest in commodity price movements.

 

    Pros: Allows for leveraged positions and direct exposure to price changes.

    Cons: Highly volatile and complex, involving significant risk of loss. This method is generally not recommended for the average retirement saver and requires a specialized margin account and a thorough understanding of the market dynamics.

 

 

Key Considerations for Retirement

 

    Diversification and Inflation Hedge: Commodities offer diversification benefits because their prices often move independently from stocks and bonds, and they can act as a hedge against inflation.

    Risk: Commodities are highly volatile, and prices can be dramatically affected by geopolitical events, natural disasters, and supply chain issues.

    Allocation: Many financial advisors suggest allocating a small percentage, often around 5% to 10%, of a portfolio to commodities to reduce overall portfolio risk.

 

 

For beginners and most retirement savers, commodity ETFs and mutual funds within a tax-advantaged account like an IRA or 401(k) are the most accessible and prudent approach. Ensure you open an account with a broker that offers the specific funds or futures you are interested in.

 

A. Investing Monthly (A Special Report) --- How Commodities Can Buoy 60/40 Portfolios: Stocks and bonds suffer when inflation spikes, but an allocation to commodities would cut risk and boost returns, research finds. Horstmeyer, Derek.  Wall Street Journal, Eastern edition; New York, N.Y.. 08 Dec 2025: R6.