How to Invest During Economic Downturns: Commodities Vs. Stocks

In an article published yesterday (23 January 2008) in the Financial Times, George Soros said a U.S. recession is now more or less inevitable. A growing number of economists, fund managers and analysts began warning that the recession may be dcheap nfl jerseysifficult to avoid in 2008. In addition, recent data indicate an increase in inflation is driven by high prices for commodities like oil, wheat and maize.



Given the growing concern about the future of the economy, I thought it would be very useful to the readers a little story about how products and stocks have performed over various economic cycles.





To understand how commodity and financial stocks performed during downturns, let’s look at past trends.

In a revolutionary study from the Yale School of Management’s Center for International Finance entitled Facts and Fantasies About Commodity Futures, research revealed very important differences in how commodities and stocks perform over time. The research team analyzed how commodity investments performed compared to stocks and bonds over the last half century.

Below are some key highlights of the research findings over various investment horizons:

* Stocks and bonds are negatively correlated with inflation. In other words, as inflation increases, stocks and bonds tend to move in the opposite direction. Commodities futures, in contrast, are positively correlated with inflation. When inflation rises, commodity futures tend to rise as well.

* Commodity prices can rise even during economic downturns. Commodities can serve as a hedge against stock market and economic risk.

* Commodities and stocks have a negative correlation. In other words, commodities and stock perform tend to perform oppositely over time. When stocks go down, commodities, over time, tend to move up and vice versa. Thus, a portfolio invested in stocks and commodities is likely to experience less volatility than a portfolio that is comprised of only stocks.

* From 1959 to 2004, commodities futures produced comparable annual returns to stocks and greatly outperformed bonds.

* Commodities have had less risk than stocks over time. The volatility (i.e., fluctuations in portfolio returns) of the returns of commodities futures over a 43-year period was less than the volatility of the S&P 500 index over the same period.

While no one can be certain if the looming recession will be global or more or less confined to the developed world, one thing is clear: ignoring commodities in a declining stock market is irrational.

Every investor can benefit by learning how to invest beyond stocks and bonds. A properly diversified portfolio that includes commodities can enhance return and reduce risk. To learn more, visit www.powerpathtomoney.com

In a recent interview with Bloomberg (January 7, 2008), Jim Rogers, known by many as the world’s expert on commodities investing, reaffirmed his positive outlook on commodities. He stated that ``All commodities are going to be in much shorter supply for another decade.'' Rogers indicated that in the event of a global recession, agricultural commodities may be the best investment among commodities.

The findings of the Yale study and others have triggered huge changes in the financial industry---many which affect you. Investment companies are increasingly creating new invenfl jerseysstment vehicles to enable individual investors to participate in commodity investing. Today there are easily accessible ways for you to invest in commodities and to find which investment vehicle is right for you. Anyone can now invest in commodities in low-cost and easy ways that were not available during the last commodity bull market.