Commodity Investing over Stock Investing?
Create Profitable Portfolios with Commodity ETF's
Sep 27, 2009
For those who shifted their investing theme from stocks to commodities, these “bad years” between 2000 and 2009 could have been very good indeed!
Commodity Exchange Trade Funds (ETF's) Create Opportunity for Stock Investors
Commodity investments are focused on things used everyday such as oil, corn, beef, iron, gold, silver, etc., for food, electronics, and infrastructure. Commodities were definitely not the place to be from 1980 until 2000 losing money or treading water for 20 years. Now commodity ETF's allow a stock investor to buy commodities like they would a stock.
Examples of commodity ETF's include:
- GLD for gold
- SLV for silver
- RJI Rogers Commodity Index fund
- JJA Agriculture commodities
There are hundreds of ETF's for almost every sector. Not only must an investor know if and when to switch from stocks to commodity ETFs, but also which ETF's offer the best potential returns.
Select Company Stock Shares or Commodity Funds?
Answering this question correctly means recognizing the difference between stocks and commodities. Stocks shares are almost unlimited. Companies can issue more stock with a public offering, while producing more commodities takes real work. Commodities are limited. Discovering an iron, gold, silver, or copper deposit is hard work. Building a mine is even harder. Growing corn, soybeans, cotton, and other agricultural products takes years of big investments and hard labor. Commodities then, require significant ongoing investments for production.
By monitoring how much or little the companies producing commodities are investing back into production, investors can tell when they become good investments.
Until 2001, the mining companies, the farmers, and the commodity processors had starved their companies of investment because the prices for commodities were too low for them to profit. Many had gone out of business. All hope was gone for commodities investors.
With so many mining companies, farmers, oil companies, and ranchers going out of business, commodities had reached a bottom and were ready to launch a bull run in 2000.
What to look for when analyzing when to switch out of stocks and into commodities ETF's:
- The trend for the commodities in general with the CRB Index. If it has been going down, or been flat, for 8-10 years or more, then get ready for it to come back to life.
- Many commodity companies have gone out of business, farmers have quit, and the prices for the basic items of life such as food, energy, and metals have been low for a long time. This means a rebirth may soon begin.
- If almost everyone is invested in the stock market, no one is talking about investing in commodities or thinks anyone who does is crazy, then it may be a good time to switch from stocks into commodities.
Deciding on switching out of commodity investments and into the stock market works the same way, in reverse. Too many mines, too many farms, too many commodities coming to market, and too many people investing in commodities signals that time for selling commodity investments has come. Stocks have probably been beaten down by the stampede of people shifting their investments out of stocks into commodities. The stock market probably has become cheap relative to earnings or dividends.
While this explanation appears too simple, there is not much more to this key decision. Make the right decision, and profits will come in the long term. Miss the opportunity for shifting investments correctly, and losses could be severe- as much as 80% adjusted for inflation over a 10 year period. No one can afford that hit to a net worth. Follow the above criteria for switching between stocks and commodities to help capture the profits and avoid the losses.
Options can also be used to supercharge the commodity ETF returns.
 |
 |
