Diversification with long-term bonds and commodities

Lately, I've been looking to increase the diversification in my retirement portfolio by investing in both commodities AND long-term bonds.

Crazy? Aren't these diametrically opposed views? Commodities love inflation, just like long-term bonds hate inflation.

It's hard to say where inflation is headed, although at least relative to now it seems likely to go up. But how much more inflation can we expect, and more importantly, now much of that is already priced in long-term bond prices.

Well I don't know, but I'm pretty confident that I can increase long-term returns and lower volatility by investing in both commodities and long-term bonds. Here's a good article how this can be achieved in practice :


It shows how a "long-termed-bonded, commoditized" portfolio can beat a "conventional" portfolio of 60 percent stocks, 40 percent 5-year Treasuries. In this study, the "extreme" portfolio swapped the 5-year Treasuries for 20-year Treasuries, and replaces 5 percent of the equities with commodities.

Over a period from 1991-2009, the "extreme" portfolio had a higher return (8.2 percent vs. 7.2 percent) and less volatility.

There are also several pages on diversification on MoneyHop.com :