Posted: September 10, 2012
Investing in “stuff”
The world economic engine is revving up-Ron Phillips
Despite all of the bad things happening in Greece, Spain and other parts of Europe, the world economy will grow. Eventually. Right now we're like a six-cylinder car running on just four cylinders.
There are several ways to drive a booming economy. The most-popular is buying stock and stock mutual funds. You can get U.S.-based companies or the riskier and better potential, emerging market stocks. Another less-used way is to buy what every person, company and country has to have: stuff. How do you invest in "stuff"? The basic material of everything is some kind of commodity.
FASTEN YOUR SEAT BELTS
The UN estimates that by 2020, world population will increase by 11 percent. That means more demand for stuff. As emerging economies like China and India become more affluent, they change their diets and lifestyles. These changes result in using more basic commodities. Things like corn, copper, heating oil, natural gas and cattle.
They're also growing quickly. This quick growth requires more energy, metals and agricultural products. More stuff.
THE EXOTIC SPORTS CAR
As an investment, commodities are on the highest end of risk. They can be very volatile. Some forms, like futures contracts, offer dangerous leverage. I wouldn't touch these with a 10-foot stickshift. I would look at commodities mutual funds instead. They come in many flavors. You can get individual commodities like oil, gold, sugar or even livestock. Still too much risk, though.
THE PRACTICAL VEHICLES
Any of these turbo-charged investments should be a very small part of a smart allocation. These commodity funds should be researched thoroughly and make up maybe 4-7 percent of your investments. Maybe.
One balanced fund to look at is iShares S&P GSCI Commodity Fund (symbol: GSG). It's made of 24 commodities, 72 percent is energy and it's based on a well-known index. Another broad basket is the iPath Dow Jones-UBS Commodity Fund (symbol: DJP). It only has 10 commodities but none are more than 31 percent of the total. It's spread among agriculture, energy and industrial and precious metals.
REV UP THOSE ENGINES
When the world starts moving again, today will be a memory. We won’t have low interest rates. Inflation will rear its ugly head again. We’ll be looking for risky investments that grow and keep pace with inflation.
So get ready for the global economy to barrel out at 90 miles-per-hour. It may not be this year. Or next. But we will get back to six cylinders.
Ron Phillips is an Independent Financial Advisor and a Pueblo, Colorado native. He and his wife are currently raising their two sons in Pueblo. Order a free copy of his book "Investing To Win" by visiting www.RetireIQ.info or leaving a message on his prerecorded voicemail at 924-5070. Simply mention Promo Code #1001 when ordering.