The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Conclusion: The Use and Misuse of Real Asset Exposure

Enthusiasm for real assets comes and goes over the years for reasons that are sometimes rational and sometimes not. For example, investors who believe in Malthusian principles will tend to see human population growth and its associated resource use as inevitably driving up prices of real assets. Investors who fall into the Julian Simon school of thought will tend to see human ingenuity as driving down real asset prices over time.

I don't intend to get myself in between these two groups, both of whom make strong points. Suffice it to say that whoever is right, the effect tends to occur over periods of time much too long to be of much use in investing capital.

On a shorter-term basis, real asset enthusiasts point to the emergence of rapidly growing middle-income populations in the emerging markets, arguing that the buying power of this group will inevitably drive up prices. Others point out that in the short term the production of many commodity-like assets is elastic, as technological improvements keep prices more under control than not, and that in the long term, the middle classes in Asia and Latin America won't be “emerging” any more.

Practice Tip

Investing in commodities can improve the performance of family portfolios, especially those at the more aggressive end of the risk spectrum. Unfortunately, there are many behavioral problems with commodity allocations.

As noted above, disciplined rebalancing is required, and ...