Volatility and Commodities (go together like a horse and carriage)

Contributed by: Matt Trujillo, CFP® Matt Trujillo

There has been a lot of press lately about the recent volatility in the crude oil markets.  Every smart person with a microphone is making predictions about how low it could go or where it ultimately might end up. I can’t open a financial website, magazine, or journal without seeing some sort of headline declaring that Oil is going to $10 a barrel!

All of this sensationalism would lead one to believe that this price behavior is something unusual for commodities and oil specifically. It’s a constant reminder how short sighted the media is and why it’s best not to make financial decisions solely based on what you hear on CNBC or Yahoo Finance.

Historical Perspective on Commodities

In fact, try going back over the last 100 years and study not just oil, but all commodities. You’ll see that large double-digit gains and large double-digit losses are quite common and almost expected in these types of markets.  If you have that kind of time (and that level of interest) click here to browse through all the various commodity prices and historical price data.

For those of you that don’t have that kind of time, let’s focus mainly on the last 10 years.  For illustrative purposes, we’ll use the annual performance data found here. This interactive chart shows the historical pricing performance for oil as well as several other commodities over the last 10 years. Using this data, let’s say I invested a hypothetical $10,000, and earned the returns illustrated on the chart. My original $10,000 would have grown to $12,351 after 2014.  This is equivalent to roughly a 2.3% average annual rate of return.  Not really anything to get overly excited about, but the path to get that 2.3% was quite dramatic. A few notable years: 2005: +40.48%, 2007: +57.22%, 2008: -53.53%, 2009: +77.94%, and 2014: -45.58%.  Quite the volatile rollercoaster ride…especially if you end up with a paltry 2.3% for enduring all of the swings!

As you can see, when it comes to Oil price volatility is nothing new. Commodity markets are not for the faint of heart and might make sense as a part of a well-diversified portfolio. If you are considering adding oil or any other commodity to your overall investment plan, please talk to a qualified professional first to make sure that it is a suitable investment for your risk tolerance and time horizon.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matthew Trujillo, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance may not be indicative of future results. Hypothetical example provided in this article is for illustrative purposes only. Actual investor results will vary.Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.