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Investment Committee Meeting: Commodities Inclusion in a Portfolio

Raffa Wealth Management’s Investment Committee convened on February 3rd 2011 to discuss the inclusion of commodities in the firms overall investment strategy.  The meeting covered the many issues surrounding investing in commodities and was a lively and thoughtful discussion.

The topics covered included the viability of commodities as an investment and as an asset class, whether a commodities allocation provides improved returns, better diversification, an inflation hedge and a hedge against event risk.  Issues related to taxes and fees, practical problems with ETFs and funds, the change in market dynamics, behavioral considerations, and indirect commodity investing were also assessed.

The following committee members were in attendance and participated in the discussion:

Bill Snider, CFA, Co-founder and Managing Partner at BroadOak Capital Management

Philip English, Ph.D., CFA, Assistant Professor American University, Department of Finance and Real Estate

Alexandre M. Baptista, Ph.D., Associate Professor of Finance, Dean’s Research Scholar, at The George Washington University School of Business

Robert J. Willen, CFA, Portfolio Manager at Wagner Bowman Management Corp.

Andrew Kline, CPA, CFP®, Managing Member of ARK Financial Services

Gergana Jostova, Ph.D., CFA, Associate Professor of Finance at the George Washington University School of Business

Steven K. Heger, CLU, President of Raffa Financial Services, Inc.

Investment Committee Outcome

After weighing the merits of the issues the Investment Committee was able to reach a consensus.  Commodities are an asset class – if only in practice and not necessarily in fact.  Their returns will provide diversification benefits to a portfolio of stocks and bonds – namely that they will reduce overall portfolio volatility and in some cases provide hedges against significant event risk and inflation. The challenge, however, is that while they may provide these benefits, their inclusion will almost certainly decrease the portfolio’s return over time and this will likely include short periods of dramatic underperformance due to the extremely speculative nature of investment in this class.  Such speculative behavior will cause the class to be significantly overbought at times – evidenced by the current contango effect.

Our conclusion, therefore, is that commodities may be recommended on a client by client basis after a collaborative judgment is made that the benefits to that client outweigh the cost.

In an effort to determine an ideal commodity allocation RWM has back- tested their inclusion as part of the RWM strategy and evaluated other studies on preferred commodity allocations.  We have determined that the optimal level for commodities in an investor’s portfolio is from 10% to 12.5% of an investor’s allocation to equities.  The investment to commodities would reduce the portfolio’s allocation to U.S. Stocks.

You may visit to download the white paper titled “For and Against the Inclusion of Commodities” and review the comprehensive analysis of this subject.


Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at