Do Commodities Belong In Your Portfolio?
Copyright 2006 Rafael Velez
Although it may sound frightening and risky to many investors, if handled correctly, commodities could be the missing piece of an investor's portfolio. What exactly are commodities? Commodities are any mass goods traded on an exchange or in a cash market including: cocoa, coffee, eggs, lumber, orange juice, soybeans and sugar just to name a few. Industrial metals are also included with copper, aluminum, zinc, nickel, silver, and lead ranking among the most popular industrial metals holdings.
Finally, the most widely followed commodities include oil, natural gas and gold.
The diversification benefits equal or surpass those of other asset classes like fixed income and real estate. The primary reason for this is their correlation, or lack thereof, to the stock market as represented by the S&P 500 (Correlation describes how similar the price movement is between two investments).
Commodities have historically exhibited absolutely no correlation to the stock market or any of the bond market indices. In fact, they have a negative correlation. This non-similar pattern of performance allows an investor to minimize volatility and protect capital in down markets. Overall, these factors help to decrease overall risk in a portfolio of investments.
In short, commodities have historically been a good compliment to a traditional stock, bond and real estate portfolio.
When commodities are utilized as a stand-alone investment, commodities are relatively volatile, exhibiting wild price swings.
At times, they are also illiquid, prohibiting the investor from exiting a position that is dropping rapidly. Another factor to be aware of when investing in commodities is the unusual income taxation. Most notably, investors are taxed each year on their share of the profits, if there are profits, regardless of whether the investment has been sold. This is a significant disadvantage compared to investments in stocks, because one does not pay income taxes until the stock is actually sold. Finally, fees to implement a commodities strategy are significantly higher than for those of traditional mutual funds, for example.
For these reasons, it is best to only consider 5-20% of one's portfolio for this strategy.
At a time when stocks and bonds are predicted by most academics and investment gurus such as Warren Buffet, Bill Gross of PIMCO, and Jeremy Grantham of Grantham, Mayer, and Van Otterloo, to produce 5.0% returns or less over the next decade due to historically high market valuations. On a historical basis, commodities are inexpensively priced and substantial upside potential is possible. U.S. inflation is historically low right now but with the effects of massive fiscal, monetary policy and already robust consumer spending, raw goods prices will inevitably increase. When they do, commodity indices will follow.
As inflation gradually rises in 2006 and beyond, industrial metals prices will rise as investors begin to direct large amounts of money into these hard asset commodities. The high correlation between commodities and inflation provide an important hedge against considerable losses in traditional financial instruments such as stocks and bonds.
In his recent book "Hot Commodities", author and renowned investor Jim Rogers summed it up this way:
The 1980's and 1990's saw a bear market in commodities.
Prices had fallen to levels (adjusted for inflation) not seen since the Great Depression.
For 130 years, stocks and commodities have alternated leadership in regular cycles averaging 18 years.
The long bear market in commodities has created a sharp reduction in capacity ? and thus large supply-and-demand imbalances.
As economies in Asia continue to grow, there will be a strong worldwide demand for all commodities.
Historically, the prices of commodities show a negative correlation to the prices moves of stocks, bonds and other financial instruments.
Commodity prices can rise even when the economy is stuck in reverse and their returns outpace inflation.
The U.S. Federal Reserve and other banks in the world have been pursuing a policy of debasing their paper currencies.
The U.S. Federal Reserve's policy of monetary stimulus and rapid credit expansion will continue to push up the prices of hard assets such as precious metals and other commodities.
History shows that war and political chaos only push commodities prices higher.
Commodities also provide a tactical play on the current weakness in the U.S.
Dollar. As other currencies such as the Euro and Yen appreciate versus the dollar, foreign buyers can buy less goods with the same amount of currency. This artificially increases demand, and subsequently drives up the prices of commodities. Currently, effects of this phenomenon can be seen best in the gold and silver markets as prices have risen dramatically over the past year.
Commodities provide a play on globalization by their ability to aid in the improvement of the global economy. This is due to the fact that prices for industrial materials will increase as demand for industrial goods increase.
As countries such as China and other emerging market economies develop, they will require more raw materials. This is especially true for industrial metals. China continues to develop at a rapid pace and consequently, their demand for raw materials continues to rise. In fact, China's iron ore demand has increased from 5% of the world's supply to almost 50% over the past twelve years.
Commodities have proven to be excellent investments over the last few years. There are a number of types of investment vehicles to take advantage of this great diversification play.
Many of our client portfolios have benefited from this recent performance.
With only small allocations to hard assets, most client portfolios have delivered returns that were twice the performance of traditional stock and bond portfolios.
Many experts agree that U.S. stocks and bonds will, in all likelihood, generate significantly lower returns over the next decade. Commodities on the other hand may have the potential for the highest returns since the 1970s due to a worldwide economic expansion especially from emerging market countries.
.
SFA provides independent, coordinated and customized planning and investment advice to successful families in the San Francisco Bay Area.
They specialize in developing tax-efficient strategies for retirement income, concentrated stock positions and education planning. To learn more about their services, go to: http://www.summit-advisors.com
Marathon Walking a Growing Trend - Charity Programs Help Average People Achieve Remarkable Goals
Fort Lauderdale (ContentDesk) September 30, 2003 -- While less than one tenth of one percent of Americans has ever completed a marathon, that number soon may be changing.
Due to the growing trend of marathon walking, many people who otherwise thought completing a marathon was out of their reach are getting their shot at achieving a lofty personal fitness goal while helping millions of Americans at the same time.
Many people used to think a marathon was not for them or that completing a 26.2-mile event was an impossible feat because they were not seasoned runners.
However, with the advent of charity programs like the Arthritis Foundation's Joint in Motion program, marathon walking is becoming not only acceptable, but also popular.
In fact, of the more than 2,000 participants annually in the Arthritis Foundation's Joints in Motion marathon training program, 60 percent are walkers.
"I never thought I could complete a marathon," said PAM BELEY,...
Marathon Walking a Growing Trend - Charity Programs Help Average People Achieve Remarkable Goals
Hedge funds > Marathon Walking a Growing Trend - Charity Programs Help Average People Achieve Remarkable Goals
Panama Law Firm Adds Alvaro Aguilar as New Partner
(ContentDesk) June 14, 2006 -- Attorney ?lvaro Javier Aguilar joined the Panama law firm of Lombardi Cambra & Co. as a partner. Mr. Aguilar has advised multinational and local clients in real estate purchases and development, international mergers and acquisitions, tax planning, real estate investment funds, joint ventures, trusts, foundations, software licensing, e-commerce, and electronic transfer of funds.
Transactions where Mr.
Aguilar has advised include the purchase of real estate by a US retailer, purchase by a US finance entity of a stake in a Central American bank, tax arrangements and sale of a property to a Panama-US joint venture and the structuring of a real estate joint venture for US investors.Mr. Aguilar has published articles on intellectual property, taxation of low-tax transactions, banking law, as well as other business law matters in several international publications.
He has lectured before the Panama and New York Bar Associations and the...
Hedge funds > Panama Law Firm Adds Alvaro Aguilar as New Partner
NASCAR Busch East Driver Ryan Seaman to Sell Sponsorship with Sponsorstock.com
Roselle Park, NJ (ContentDesk) July 27, 2006 -- Sponsorstock.com today announced that it has joined forces with NASCAR Busch East Series driver Ryan Seaman from ERS Motorsports to sell low-cost pixel sponsorship. The Sponsorstock.com website is a pixel advertising web portal that sells what it calls the lowest cost sponsorship in motorsports.
Sponsorstock.com sells advertising space on a virtual racecar at a rate of $25 per 100 pixels.
Viewers of the Sponsorstock.com website can view the collage of advertisements that link directly to advertisers websites. Ryan Seaman and ERS Motorsports know what its like to race up front on a limited budget, said Robert Zeglarski, President of Redline Entertainment Group, the company that created Sponsorstock.com, Sponsorstock.com was made for drivers like Ryan Seaman because although his talent is obvious its difficult for teams to find sufficient sponsorship funds. Last year in NASCARs Busch East Series, Seaman garnered four...
Hedge funds > NASCAR Busch East Driver Ryan Seaman to Sell Sponsorship with Sponsorstock.com
Health Savings Accounts Receive Help from Mini-Meds
(ContentDesk) August 15, 2006 -- William Short, Senior VP at First Horizon Msaver (http://www.firsthorizonmsaver.com) recently published this essay on mini-meds and their effects on HSA usage for the The Flint Hills Center for Public Policy:A universal fact that plagues every business from nuclear switch manufacturers to widget producers is the rising cost of providing health benefits to their workforce. The cause of this rise in healthcare costs can be attributed to over utilization, unhealthy life styles, and a third party payment system that does a poor job of managing the payment cycle.
Employers cannot continue to shoulder the burden associated with the rising cost of healthcare. As a result, they have begun to investigate more consumer-centric solutions designed to reduce cost by engaging the individual in his or her own health care decisions.
The Health Savings Account (HSA), enacted as part of the...
Hedge funds > Health Savings Accounts Receive Help from Mini-Meds
Gingerbread Homes for Animals - December 1st-5th at the Dana Discovery Center in Central Park - A Benefit for NYC's At-Risk Animals
(ContentDesk) November 26, 2004 -- A celebrated group of New York's foremost Pastry Chefs will kick off the 2004 holiday season with GINGERBREAD HOMES FOR ANIMALS, an exhibition and fair at Central Park's Dana Discovery Center, to benefit New York's at-risk animal population. The event, set from Wednesday, December 1st through Sunday, December 5th, will feature each pastry maker's creation of a unique gingerbread house, inspired by an animal he or she loves. The one-of-a-kind edible sculptures will be sold by raffle. Admission to the exhibition and fair is free.GINGERGBREAD HOMES FOR ANIMALS is presented by Rational Animal and hosted by a list of prestigious city gourmets and animal-related organizations. Held during the holiday season, its goal is to illuminate the plight of the city's most needy four-legged inhabitants and raise awareness and funds for them.
In addition to the edible sculpture exhibit, the fair will feature a list of daily activities including animal-related...
Gingerbread Homes for Animals - December 1st-5th at the Dana Discovery Center in Central Park - A Benefit for NYC's At-Risk Animals
Hedge funds > Gingerbread Homes for Animals - December 1st-5th at the Dana Discovery Center in Central Park - A Benefit for NYC's At-Risk Animals
Panama Law Firm Adds Alvaro Aguilar as New Partner
(ContentDesk) June 14, 2006 -- Attorney ?lvaro Javier Aguilar joined the Panama law firm of Lombardi Cambra & Co. as a partner. Mr. Aguilar has advised multinational and local clients in real estate purchases and development, international mergers and acquisitions, tax planning, real estate investment funds, joint ventures, trusts, foundations, software licensing, e-commerce, and electronic transfer of funds.
Transactions where Mr.
Aguilar has advised include the purchase of real estate by a US retailer, purchase by a US finance entity of a stake in a Central American bank, tax arrangements and sale of a property to a Panama-US joint venture and the structuring of a real estate joint venture for US investors.Mr. Aguilar has published articles on intellectual property, taxation of low-tax transactions, banking law, as well as other business law matters in several international publications.
He has lectured before the Panama and New York Bar Associations and the...
Hedge funds > Panama Law Firm Adds Alvaro Aguilar as New Partner
How Travel Board Games Make The Journey A Little Easier
Ever go on a family vacation that no one enjoyed because of the tedious travel time? Your next vacation doesn't have to be that way. Travel board games can keep the kids busy in the back seat while the the miles quietly disappear.
Board games have always been a wonderful way to get family and friends to spend time together. They encourage communication, imagination, and teach children about winning and losing. In today's world of video games and online games, board games make for...
Hedge funds > How Travel Board Games Make The Journey A Little Easier
toyo tires Do Commodities Belong In Your Portfolio? Hedge funds