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Crisis Investing 101: How to Protect Your Portfolio With Commodities
2/15/2013 11:00:00 AM
I'll never forget my first meeting with uber-investor andhedge fund manager , Jim Rogers. He was mymarket hero of sorts, having founded the QuantumFund with George Soros. He has explored the world by motorcycle and automobile, all while writing about his adventures and being a fixture on financial news TV shows. I have met some quirky characters in thefinancial markets , but he was the first to chat with me while jogging on a treadmill.
Rogers is known as being a huge proponent of commodities. His new book,commodity investments extensively.
He has reinforced the notion that commodities are different fromstocks in that they represent life's necessities rather than simply a company's profits. Commodities are all around us and are far simpler investments than stocks -- they're purely driven by supply and demand.
This is particularly true regarding the so-called "soft" or agricultural commodities such as wheat, soybeans, corn, sugar, cotton and coffee. These items are among life's few necessities and therefore possess constant demand from an ever-growing global population. Soft commodities are uncorrelated to thestock market, so theyoffer excellentdiversification for a crisis portfolio.
How to allocate
That's why a well-diversified portfolio designed to withstand an economic crisis should have between 5-25% allocated to soft commodities. During times of low interest rates such as the Federal Reserve's "easymoney ," for example, investors should allocate at the lower percentages. As soon asthe Fed starts to tighten policy and raise interest rates, ramping up your exposure to soft commodities up to the 25% weighting has traditionally been a smart move.
[See also: "Crisis Investing 101: Everything You Need to Know About Gold and Oil"]
Remember, the Fedwill start to tighten policy as soon as it believes theeconomy has recovered enough to eliminate recessionary fears.
How to invest
Let's look at the three most popular soft commodities -- sugar, cotton and coffee -- and a few ways to invest in them collectively or individually...
Investors who want to invest individually into one of the three largest soft commodities, these ETFs fit the bill...
Risks to Consider: Agricultural commodity investing is very speculative and risky. Although there are long-term price trends, trying to time the bottom or top can be an exercise in futility. Commodities can be extremely volatile and take much study to be able to completely understand their movements.
Action to Take --> Most investors would be wiser to simply add a small percentage of the combined soft ETNs such as GRWN and JJS as way tohedge their stock portfolio against economic crisis. Attempting to time the individual softs is time consuming and overly risky for the average investor. Although soft commodities have been downtrending overall, they are reaching levels that are considered to be "buy" zones among professional investors.