Got milk?
No, not in your fridge. I mean in your portfolio. If not milk, then how about corn? Orange juice? Sugar? Pork bellies?
No? Okay then, how about gold or oil?
Most investors are at least dimly aware that they can buy and sell commodities like these (and many others) using tools like futures contracts and ETFs. But aside from maybe taking a position in a gold or oil ETF, most investors haven't really waded into the land of commodities.
But here's the thing: Investing in commodities is easier now than it has ever been. And even if you're a conservative, retirement-focused, buy-and-hold investor, there are very good reasons to take a closer look at the commodities markets right now.
Does this mean I have to jump into the pits?
Not at all! When many folks who think about commodities investing, they think about the futures markets, a daunting arena with its own rules and lingo -- and one where novices can get burned in a hurry. Visions of the frantically waving traders in the "pits" at old-school futures exchanges are accurate -- those pits still exist, and despite the apparent chaos, they're actually orderly exchanges -- but we don't need to wade in to take positions on the future price movements of commodities.
In fact, there are a lot of ways to approach commodities investing. Taking oil as an example, if you think the price of oil is likely to rise in the future, you could:
- Buy an oil ETF. Exchange-traded funds like United States Oil Fund (NYSE:USO) and Goldman Sachs Crude Oil Total Return seek to go up (and down) in line with a particular crude oil price benchmark. There are also ETFs that track certain oil futures prices -- what the market thinks the price of oil will be in a year, for instance -- various oil-derived products (home heating oil, gasoline), and so forth.
- Buy an oil-business stock. The profits -- and stock prices -- of companies such as BP (NYSE:BP) or ExxonMobil (NYSE:XOM) rise and fall with the price of oil to some extent. Buying one of these -- or a group of them, via a sector ETF -- gives you some exposure to oil-price movements, along with the benefits of owning a great company that pays dividends, which are always worth having. Their stock prices may be less volatile than an oil ETF, which could be good or bad depending on your perspective. Alternatively, you could buy shares in oil-services companies such as Nabors Industries (NYSE:NBR), a well-drilling specialist, or Transocean (NYSE:RIG), an offshore-drilling firm, that see big increases in business when oil prices are on the rise. They might give you more of a boost -- but with somewhat more downside risk.
- Buy something else that will rise with oil prices. Who stands to benefit if oil prices rise sharply? How about companies linked to solar power, like silicon-wafer specialists MEMC Electronic Materials (NYSE:WFR) or ReneSola (NYSE:SOL)? Mass-transportation innovators? Ethanol producers? You get the idea.
I've used oil as an example, but some of the same sorts of opportunities exist with other commodities -- copper, potash (a key fertilizer ingredient) -- even those pork bellies, if you look hard enough.
But why do I need to do this now?
Foolish retirement guru Robert Brokamp recently examined the pros and cons of commodities for retirement-focused investors. In the new issue of the Fool's Rule Your Retirement newsletter, available online at 4 p.m. ET today, Robert notes the two big reasons to take a hard look at commodities now:
- Inflation. Experts are divided on how big the risk of a big inflation spike in the next few years is, but the risk is definitely out there. As anyone who remembers the disco era knows, inflation has a way of making you feel broke even if you have a lot of cash on hand. But commodities prices tend to rise with inflation -- remember the 1970s gas spikes? -- typically outperforming stocks during high-inflation periods.
- Correlation. Okay, this one's a little obscure, but it could be important to you: Recall that the idea behind asset allocation is that different corners of the market move in different ways at different times. If bonds tend to go up when stocks go down, owning both can reduce your risk and lower your overall portfolio's volatility over time. Simple enough, right? Well, as Robert points out, commodities tend to move differently from both stocks and bonds, giving your portfolio another leg of diversification to stand on, and possibly more stability and upside over the long term.
But before you invest...
…make sure you understand what you're buying. You wouldn't buy a stock without understanding its financial position, business, competitors, and so forth, right? Likewise it's not enough to think, "Hey, oil prices will go up eventually, I'll just buy this ETF."
You don't need to be a professional futures trader to understand the different forces at work on a commodity's price, but you do need to put some effort into learning exactly what you're buying -- both at the commodity level (what's really going to happen with silver in coming months?) and at the level of the investment vehicle you're using. (How well has this particular ETF tracked price movements through periods of high volatility?) It's not harder than analyzing a stock, but it is different.
If you'd like a simple way to get started, and a closer look at the pros and cons of commodities investing, take a look at Robert's article on page 7 of the new issue of Rule Your Retirement. If you're not a Rule Your Retirement member, just grab a free trial for 30 days of full access, with no obligation to purchase.
