Variety Can Mean Vitality For Your Portfolio
They also provide inflation protection, since the price of raw materials tends to rise when inflation is accelerating. But they can be volatile—very volatile—and subject to boom-bust cycles.
The S&P GSCI Commodity Index, for example, is up more than 9 percent so far this year, but down nearly 50 percent over the last 12 months. Its three-year return is off by 36 percent.
By comparison, the S&P 500 has returned better than 15 percent year-to-date, but is down roughly 18 percent for the year, and off 15 percent over the last three years.
Despite their dismal performance in 2008, however, Morningstar analyst Arijit Dutta writes in a recent report that “a limited allocation [to commodities] to serve as an inflation and a market risk hedge is still quite justifiable. Don’t lose sight of the asset class’ fundamental merits because of what happened last year.”
He adds: “There are a few good, reasonably priced natural-resources funds where management can identify solid companies, but your best bet for long-term strategic allocation to commodity prices is through a futures fund.”
Indeed. At one time, investors seeking commodity exposure were forced to purchase futures contracts, an agreement to buy or sell a commodity at a specified price in the future, or to buy an option on a commodity futures contract, which gives you the right to convert your option into a futures contract.
Today, there’s an easier way.
Index funds, like commodity exchange traded funds (ETF), are traded like stocks and track the price of either a single commodity, such as wheat or oil, or a bundle of commodities, like a mutual fund, making it easier to buy and sell for a smaller minimum investment.
You can also purchase commodity exchange traded notes (ETNs), which are not funds at all, but 30-year debt securities with track the major commodity indexes. Investors can buy and sell them through a broker on the New York Stock Exchange.
Morningstar’s top pick in the category? Elements S&P CTI ETN.
Real Estate (REITs)
Real estate investment trusts (REITs) represent yet another alternative for investors looking to balance out the bumps in their portfolio—and they’re typically less volatile than commodities.
Equity REITs are companies that own and operate income-producing properties, like apartments, industrial spaces, shopping centers, offices and warehouses.
Mortgage REITs, meanwhile, provide debt financing for commercial and residential properties through their investments in mortgages and mortgage-backed securities.
REITs are traded like stocks, allowing investors to add commercial real estate to their portfolios without having to commit a huge down payment or sacrifice liquidity.
They are also required to distribute at least 90 percent of their taxable income each year to shareholders through dividends – creating a reliable income stream.
According to the National Association of Real Estate Investment Trusts, the All REIT Index is up nearly 9 percent so far this year through Aug. 24, up significantly from its 37 percent decline in 2008, and 18 percent drop in 2007.
“We have a neutral outlook on the REIT industry in general,” says Bob McMillan, a REIT analyst for Standard & Poor’s. “People were pricing [REITs] as if they were going to go out of business [during the last two years] and there are definitely challenges facing the industry, but over the longer term we think there are also opportunities for some of these companies, in particular retail REITS, to improve from both an operating perspective and a share price perspective.” Currently, S&P has Simon Property Group as a “strong buy.”
“We think [SPG] has a good portfolio of properties that have held up well in this recession, including regional malls, community shopping centers and premium outlets,” says McMillan.
“Even in this economy people are still shopping and looking for value, and their outlets cater to that segment, but eventually as the economy recovers other segments of their portfolio will also benefit.”
Collectibles
For the very brave or adventuresome investor—especially the tactile kind—there's an alternate universe of investment out there, known as collectibles. There's real money in these real objects, and you almost always have something to show for your investment—gain or loss. From art to coins to stamps to wine, these investments present opportunity—and risk, of course, for the knowledgeable investor.
As you tally up your losses from Wall Street’s latest meltdown, it helps to remember there’s a world beyond stocks and bonds.
Funds that focus on alternative assets are giving investors more tools to diversify than ever before, enabling them to better manage downside risk.
Just be sure you know what you’re buying, the risks involved, and how it fits into your overall investment goals before jumping in.
