Beat And Battered

I spent the last post talking about stable biotech investments. The majority of these investments are in the pharmaceutical sector. In general, stable biotech investments are few and far between, as biotech investing is seen as one of the more risky investment strategies available. Fact is, many biotech firms fail: they fall quickly and fall hard. The flipside is that there is also a huge potential in biotech investment, but if you don’t have a fallback plan with other types of investments, don’t be surprised if you lose a mint.

What makes biotechnology such a risky investment is that the investor has to know how to read scientific reports. It’s not enough to read sales reports – for new biotech opportunities, these may not even be available. The trick is to not get too excited too quickly when you see that a drug or scientific discovery has passed a hurdle, such as a successful clinical trial. It can take the talents of statistician to understand a clinical trial: how many people are represented in the trial, what age, what gender, etc. Even a good sample size does not necessarily guarantee that a product is going to sell well or even work effectively.

If the stock market falls overall, you can expect biotech to fall even lower: it’s just that volatile. Also, it’s expensive to run a biotech company. Clinical trials cost a fair sum, so if the biotech company is testing out something new – and doesn’t have another high-performing product – the company’s going to take a major hit: and so are you. Though there’s a higher payout for stocks that aren’t rich with other investors, you are in greater danger of taking a fall. So riskier stocks are those companies that don’t have a diversified product base.

The Riskiest Biotech Investments

They say, “You can’t rush art.” Well, you can’t rush science either, so if you are an impatient investor who likes a simple form of investment, biotech is not the way to go. Some forms of biotech are wide open with limitless possibilities, but also seem to take forever to enter the mainstream. How long have we heard about “virtual reality” but there is no mainstream application of this technology. The same goes for something like Nanotechnology. It’s a hugely open field, but also in its infancy. You’re likely not going to see a return on your investment by next Wednesday. As fast as the world of technology moves, some investments could take decades to materialize, albeit for a whole lot of money.

Another shaky investment possibility is genetically modified food. Though the industry touts genetic engineering as potentially a way to solve world hunger, there is a limited – and dwindling – consumer base for these types of products. Put simply, there’s a backlash against GMO’s, as people become more health-conscious and more concerned about the safety of GMO’s.

Genetically-engineered medications are also problematic. Though they have great potential and the possibility of cutting down on clinical trials, the reality is that it can take 10 to 15 years for a genetically modified drug to gain FDA approval. Gene therapy has not yet panned out as a stable money-maker after being heralded as a revolution in medical biotechnology. Many gene therapies replace current drugs with a differing list of side effects, which has cut into their earning potential.

The trouble with biotech is that you cannot begin to predict how a new advancement will perform. So while in this day and age, green technologies offer great possibilities, there is the prospect that one green product will succeed and another will fail. This is true for every wing of biotech: pharmaceutical, agricultural, environmental, and so on. Not all biotech investments have the long-term prospects of nanotech. Some are plenty volatile in the short-term.

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If you read my primer yesterday on biotechnology investing you found out the basics of what comprises biotech and probably thought, “That’s great, but where do I put my money?” I’ll tailor this to those investors who aren’t independently wealthy or otherwise come to investing with a lot of capital. Those investors can’t afford to fail. Obviously, no one wants to lose money, but there’s a certain caliber of investor who’s more risk-averse than others, and because biotech investment is a particularly risky sort of investment, it can be a difficult prospect for a lower-roller investor.

Let’s take a look at the top biotech investments out there: good places to start if you’re an investor who’s a little gun shy. For every hot investment in biotech, there are countless poor-performers, so these stocks are a good way to get your feet wet. One thing to mention is that biotech is a pretty narrow field for investment. In no form of investment is “buzz” so important. At any one time only a few companies are performing or overperforming, so you’ve got to be extra careful.

Medical Biotech

Pharmaceutical biotech investing is the most stable of all the biotech fields, so this is where you should start. Though Genentech had some negative press recently which investors feared would send the stock tanking, it remained stable. Generally, Genentech is considered the standard-bearer for medical biotech investing, and the projections for the second quarter are healthy.

In pharmaceutical investing, cancer treatment is a big avenue for investment. However, there are some biotech companies, such as Northfield Laboratories, that focus on one type of therapy. Though this could be lucrative, you should be looking at a biotech firm that has a diversification in the medical field – as not all therapies take off and some can even be met with lawsuits. So not only should your own investments be diversified, the investments themselves should be diverse.

Genentech is a diverse company, and with the pickup of cancer drug Avastin, it is expanding at a healthy clip. Avastin is set to take in 0ver $660 million in sales. As mentioned, not all pharmaceuticals pay out to such a degree, so Genentech does have its share of underperformers, but this is balanced by the success of other drugs and new acquisitions.

Another solid investment is Biogen Idec, which had first-quarter earnings that exceeded expectations. Another pharma stock, Biogen is selling a lot of pharmaceuticals. Partly the profits are due to prices going up, but not entirely – this is true across the board for the big pharma biotech corporations. In a fairly unstable investment sector, you can feel confident that people are always going to want to find ways to stay healthy and new advancements in the industry are guaranteed.

Rounding out the top performers: Genzyme, aka Isis Pharmaceuticals, and Cephalon. Amgen has recently fallen on some harder times, as has Gilead Sciences.

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What on earth is biotechnology? Think of it as ways that man controls nature. That could be read negatively, but it doesn’t have to be. Biotechnology comprises all of the ways that humans try to overcome natural limitations be more cost-efficient. Examples of biotechnology are pest-resistant crops, new animal breeding, or pharmaceutical research. Certainly some wings of the biotech industry are controversial – such as cloning – but humans can “manipulate” nature in positive ways as well: producing more nutritionally-complete crops on a larger scale, aiding third-world countries. Really, something so simple as fermenting grapes into wine is a form of biotechnology, so biotech casts a wide net. It’s not all about playing God with nature and trying to turn a profit.

Of course, what’s a burgeoning industry without talk of profits. Biotechnology is also one of the fastest-growing forms of investment. Chances are that a new investor wants to get involved in the new developments in the biotech industry. Sure, investing in wine can reel in some money, but that’s not what is commonly referred to in biotech investment. True biotech investment is based around new technologies, such as gene manipulation. Some of these methods are already being used and some are yet to be discovered: which is why it’s so wide open for investment.

Where is Biotech Today

The new wave of biotechnology is mainly centered around health issues and extending human life, though agricultural advancements are also a large part of biotechnology investing. But whereas the issue of manipulating crops is fairly straightforward and understood, human life extension via gene manipulation has a much larger ceiling. For instance, imagine a product that would reverse aging – this would be hugely profitable in a short amount of time. So while agriculture biotechnology (green biotechnology) is potentially lucrative, medical biotech (red biotechnology) has even more potential, as so many techniques have yet to be discovered. Gene therapy is in its infancy.

Other forms of biotechnology are white biotech, which is biotechnology applied to industrial practices – such as creating and utilizing an enzyme that will break down harmful chemicals. Blue biotechnology refers to ocean and water-based biotech, but this type of biotech is less prevalent. Put that all together and you get the Bioeconomy.

Investing in Biotech

Like all forms of investing, there are riskier forms of biotech investing than others. Generally, biotech investing is higher risk overall than other types of investing – but again, like other investing, the higher the risk also means the higher the payout. Are you interested in stock investing or becoming a major venture capitalist in the biotech industry? There are penny stock options available that can be found through a broker, or you could do this yourself if you’re not a newbie. It depends on the investor, but you’re going to want to choose a biotech company based on location, industry, proof of concept, niche market, good history, and lucrative potential.

The less risky stocks are established companies, like large pharmaceutical companies. This is recommended if you’re also going to be investing in riskier ventures, as big pharma stocks are a more stable investment. Investing in biotech does take some significant research. A biotech research company is likely dealing with some very technical information. You want to make an informed decision about an investment and you need to make sure that a biotech’s company’s goals are achievable. They could rattle off a long list of technical details that sound impressive, but may actually be far-fetched. You need to be able to know what you’re reading, so a partnership with a science-minded investor may be necessary.

To get you started, here’s a list of the top 100 biotech companies, ranked by revenue. Here are the top biotech buzz stocks for 2008. As mentioned, you may want to invest in a start-up because these have the most earning potential per dollar (and also the greatest risk) but this of course means that the company does not have an established history. If this is the case, go with a biotech company run by people who have had proven success in the past. As with other forms of investing, diversification across industries and types of companies is recommended.

Check back tomorrow when I’ll talk about where to start investing in biotech.

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When it comes to commodities investing there are an unbelievable number of scams out there.

I am not kidding when I say that there are literally hundreds of companies out there just waiting to railroad you through the door, part you from your money, and happily send you straight to the gas chamber.

I know we’ve talked a little bit about how to decide what a good commodity investment might be.

So, I wanted to conclude this series by giving you the information you will need to avoid the evil villains of the investment world, and hopefully, get your financial happily ever after.

The secret to spotting commodity scams:

There is one major test that every single commodity scam will fail:

They will promise to make you a lot of money fast, with little to no risk.

• Penny stocks to make you rich!
• The next Berkshire Hathaway!
• The price of Gold/Wheat/Oil is going to skyrocket, get in on the ground floor!
• They all boil down to one simple thing: Get rich quick! No risk!

Now, frankly we are all smart enough to realize that there is no such thing as “get rich quick”. You wouldn’t be here reading this blog if you weren’t. However, there are not many things in the investment world that are as risky as commodities. Particularly commodity futures. If someone is telling you there is little to no risk involved, turn around and run the other way as fast as you can!

There are also a few other notable ways to spot a scam.

1. Long “squeeze” pages - We’ve all seen these. They are single page advertisements on the internet designed to keep you reading and convince you to act against your better judgment. If you land on one of these pages, click away as quickly as possible. Nothing good can come of it.
2. They are in a hurry to get your money – “Prices will skyrocket in the next few days!” or “Invest now before it’s too late.” Seriously, we’ve probably all bought enough junk off of infomercials that we should know better by now! I still have that stupid Ab belt from the 1990’s. You know the one I mean – the one that delivers low grade electrical shocks and promises a 6-pack. Didn’t work for me! And these basic commodity and futures scams are no different.

   Legitimate companies and investment opportunities don’t need to come and beat your door down to get your money. They are already making enough profit on their own. That brings me to my third and final point.

3. If they appear to “need” your money in any way, shape or form - Run away. Far away. If they are calling you at home, emailing you, or cyber-stalking you in any way, drop them like a crazy ex-girlfriend and head for the hills!

Always take these steps before you invest your money:

• Find a legitimate broker, and make sure that you get a risk disclosure document. Your broker is required to give it to you by law. Anyone who tries to tell you it’s “just a formality” is scamming you.
• Explore your options carefully.
• Sleep on your options. At least overnight, maybe several nights, before you invest your money.
• Only invest in funds that have a minimum of 3-5 years of solid performance.

Follow those rules and you are far less likely to wind up on the bad end of a commodities deal. There is so much risk involved in commodities anyway, why choose a risky company to invest with?

For more information on commodity scams you can check out The U.S Commodity Futures Trading Commission web site.

I hope that you have enjoyed this series on commodity investing as much as I have enjoyed writing it for you. If you liked it, you can offer your feedback here for a chance to win $50. Thanks!

The Princess Bride photo is © Twentieth Century-Fox Film Corporation 1987.

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Last time I filled up my gas tank it cost me $64.28. As I was standing there at the pump I started thinking.

I realized I had absolutely no idea why the price of gas was so high.

I mean sure, I get emails from MSN money every day telling me that oil hit a new record high.

I hear mutterings about China, and problems in the Middle East.

But, when it came right down to it, all I really understood was this:

I’m getting squeezed at the pump – and I want to know why.

So, with that in mind, I thought I’d do a little digging, and share with you what I learned.

Basically the price of gas breaks down like this:

• Federal, State and Local Taxes account for about 15% of the price per gallon.
• The price of crude oil accounts for roughly 55% of the price per gallon.
• The cost of refining the oil is about 15% of the total price per gallon.
• Advertising costs also make up about 15% of each gallon of gas.

This is just an average breakdown. The actual numbers vary from year to year and company to company.

Now, the taxes I understand. I’m not happy about it, but I get it. I also understand the refining costs and the advertising costs. Based off of these numbers, I decided that the main reason I am getting my pocket picked twice a week when I fill up has to be the base price of crude oil, which is at an all time high.

So, what’s going on with crude oil?

High Demand:

Right now there is a booming commodities market where there used to be hardly any at all. Namely, all over Asia – especially China and India. They are demanding all types of commodities in quantity, especially oil. Over here in the U.S. much of the way we live our lives also depends on oil. Not only do we put the refined version of it into our cars as gas, but it’s used in everything from plastic bags to Styrofoam. Even though oil prices are at an all time high, our demand is not really decreasing.

Low Supply:

There have been disruptions in the supply of oil all over the world in the last few years. Nothing that would normally make much of a difference, but when you couple it with record demand for oil and oil based products, it is pushing the price up. Here are a few specifics:

• In April of 2008, Nigerian rebels launched attacks on Exxon Mobil. They temporarily stopped production of 800,000 barrels of oil a day.
• On July 18,2008 Eni SpA (Italy’s largest oil company) also stopped production in Nigeria because of faulty pipelines. They will lose 47,000 barrels a day until the problem is fixed.
• Saudi Arabia (which claims to own about 21% of the world’s oil) isn’t exactly falling all over itself to increase production – but they are finally going to. The good news is, they are planning to increase oil production by as much as 500,000 barrels per day starting this month. (July 2008)

Fear of a Limited Supply:

Many economists buy into a theory that we are reaching “Peak Oil.” That’s the theory that the world’s oil reserves are limited and that we will eventually hit a point where we reach a maximum output. A place where companies will begin to cut back on production to avoid running out of oil.

While there’s no arguing that oil reserves are limited, exactly when we will reach “Peak Oil” is anyone’s best guess. With the increasing demand from Asia, this theory is getting more and more attention.

Some people even speculate that Saudi Arabia has refused to produce more oil because they are afraid of reaching a “Peak Oil” phase sooner than anticipated.

War in the Middle East:

Obviously, things aren’t looking too good over there. If Iran is attacked and they actually back up their threats by closing off Straits of Hormuz then they would effectively cut off one fourth of the worlds oil supply. If that does ever happen, oil prices at $200 a barrel will seem generous. The threat of that alone is probably driving oil prices higher than they have to be.

The Declining Dollar:

In some ways, it appears we can thank the housing bubble for the rise in oil prices too. The price of oil is measured in U.S. Dollars. When our dollar value declines compared to the rest of the world, then the price of oil goes up because it takes more dollars to reach the actual value of a barrel. (Gotta love that logic!)

It’s our fault too:

Yeah, I know, that’s a hard one to swallow. Still, some economists believe that as the U.S. economy takes a dive, most investors start looking for “safe” places to put their money. Usually, they turn to commodities. This actually drives the price of those commodities up because of the sudden increase in demand.

So, what do I think about all this?

There are some investors who believe that oil prices are in a bit of an unnatural bubble right now. While I do agree that prices are at record highs, I also believe that this is just a natural part of the commodity process. Commodities run in cycles. When demand outstrips supply, prices rise. Usually there is a short period where supply stays low, and prices stay high.

Eventually, more and more companies with $$ signs in their eyes jump in and increase production. In the mean time, we (the consumers) simply find ways to do without whatever it is as often as we can. So, eventually the increased supply and decreased demand helps the price to “right itself”.

There are a couple of wild cards in this scenario. Mainly the increased demand from developing countries and the threat that we may be running out of oil sooner than anticipated. Still, I believe that eventually the price will right itself (though I don’t think the price of gas will ever return to it’s pre-cycle lows).

In fact, I think that if you truly understand the principles of supply vs. demand, as well as how the economy, and government factor in, then you can apply that knowledge to any commodity. The same rules are still going to apply, whether you are talking about oil, or oranges.

Allright. I’ve told you what I thought – It’s your turn!

Do you think we are about to see a turn around in gas prices? Do you think now is a good time to begin investing in oil, or a good time to start selling your shares?

Let me know – you can use the comment form below! And, if you loved (or hated!) this article, then this post explains how you can offer your feedback for a chance to win $50. Thanks!

Photo © Connie Brooks

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This may sound crazy but I haven’t looked at the peformance of our investments in quite some time.   When one of the Money Writers suggested we all do an overview of our of holdings I realized how long it had been and was afraid of what I’d see when I logged into our accounts.

My fears were well-founded, it’s been an ugly year so far for our investment portfolio.

401k Losses
The largest percentage of our investments are in my 401k, which is down 8.68% year to date.   The largest holding, about 60%, is an S&P 500 index fund, so this account tends to track the market.  The next largest holding is a bond market index fund and then there are two international mutual funds.  All of which are down : (

Vanguard 500 Index (VFINX) – Large Blend
Vanguard Total Bond Market Index (VBMFX) – Bond Index
American Century Intl Growth (TWIEX) – Foreign Large Growth
Dodge & Cox International (DODFX) – Foreign Large Value

403b Losses
My wife’s 403b is down a miserable 14.25% year to date.  Luckily it’s under half the size of my 401k investments so it’s 14.25% of a much smaller dollar amount. All of these funds are with American Century, the Ultra Fund is the one that’s hurting us the worst, down 16.7% this year according to my numbers.

American Century Equity Income (TWEIX) – Large Value
American Century Ultra (TWCUX) – Large Growth
American Century Heritage (TWHIX) – MidCap Growth

This is the investment where we noticed the biggest dollar amount drop, simply because we’re no longer contributing to the account.  With all of our other investments, as the market drops I keep reminding myself we’re buying new shares at cheaper prices which should (hopefully) appreciate over the next few decades.

However, since no new money is going into the 403b, the portfolio value keeps dropping along with the market.  I can see how this downturn would be stressful for someone living off of their retirement savings.

IRA Losses
Our IRA investments have lost the least in 2008 so far, mine is down 5.35% and my wife’s 6.48%.  The Small-Cap Index Fund Inv has been our biggest detractor for these accounts, year to date down about 7.6%

Vanguard Small-Cap Index (NAESX) – Small Blend
Vanguard High-Yield Corporate Fund (VWEHX) – High Yield
Vanguard REIT Index (VGSIX) – Real Estate

Misc Losses
We also have a little money in Oakmark International (OAKIX) which is classified as a foreign large value fund.  I’m having issues with our site login so I don’t have our specifics but the fund in general is down 17.52% year to date so that’s probably our biggest loser so far.  Luckily it’s our smallest holding : )

Other than a few other shares of stock here and there I didn’t include, that pretty much sums up our investment performance so far this year.  In two words, “Really BAD”.

Money Writer Investment Performance
I heard a rumor that Million Dollar Journey has managed to squeak by with just over a 1% loss in their portfolio so far this year.  Who would have thought a few years ago I’d be envious of a portfolio with a 1.35% loss!

Here are the investment returns of the other Money Writers:

• My Dollar Plan -7.8%
• Generation X Finance -13.32%
• The Digerati Life
• Lazy Man & Money
• Brip Blap
• The Sun’s Financial Diary

Six years ago my wife and I decided to purchase a home just before our wedding day. After a few months of looking we decided to build a starter home close to my work. It seemed like the perfect decision to make at the time. Interest rates were low, around 5.5% for a 30 years fixed [...]

In our last post on commodities investing we talked about why you might want to start investing in commodities, and what a few of the investment options were.This time around we’re going to take a closer look at commodity Exchange Traded Funds (ETF’s.) and how to research them.

When you decide to invest in a commodity ETF, there are a few things you need to consider:

• Do I want to invest in a single commodity like gold, or multiple commodities like oil and natural gas?
• Do I want to invest in commodities within a single country like the USA or China, or several countries at once?
• Do I want to invest in an ETF that actually holds the commodity (like gold) or an ETF that simply buys stock in the companies that hold the commodity?

The more research you do, you are going to find that there are nearly limitless ways to add commodities to your portfolio.

For simplicity’s sake we are going to pick just one, the iShares Dow Jones US Energy Sector Index Fund (IYE) and do a quick walkthrough of how you would decide whether or not it’s a worthy place to invest your money. The IYE tracks the energy sector of the Dow Jones Index.

Please do keep in mind that I am not a financial advisor – I don’t even play one on TV. I am giving you the method I use when I start to research a potential ETF.

It is worth saying that your financial adviser should also be able to answer all of these questions for you before they ever invest your money. Print this out, take it with you if you like. The more informed you are about where your money goes, the better off you will be.

ETF criteria generally looks like this:
The IYE:
(All screenshots are from ShareBuilder.com)

How long has the ETF been around? If you are using commodities to offset the risk in your portfolio, then you are going to want to choose an ETF that has been around long enough for you to get a good idea of how well it has performed in the past. Now, exchange traded funds are a pretty new phenomenon in the market, so as long as they have a history going back at least three to five years you can get a general idea of where they stand.

How much does it cost to run the fund? This is called the ETF’s expense ratio, and it’s the amount that they take off the top, just like a mutual fund’s management fees. You’re going to be looking for an amount around .25% and not more than .50%

You can see from the screen shot above that they IYE has an expense ratio of .48% - That’s a little high, but still within an acceptable range. If this is difficult for you to read, you can click here to open up the same information in a new window.

How are the ETF’s assets allocated, and what are they worth? Start by looking at ETF’s that have a total worth of at least $200 to $500 million dollars. (IYE fails this test) You are also going to want to look at how many shares they trade a day. A minimum of 100,000 to 200,000 shares traded each day is a good place to start. (IYE fails this test too!)

As far as asset allocation, that is going depend on what your goals are. In my opinion, IYE fails the diversification test. They are invested in several major oil companies, but I do not like that Exxon Mobil is 23% of the entire portfolio. I would prefer the main holding to be around 15% of the overall portfolio. In fact, the more diversified the better, because it exposes me to less risk. However not all investors are as interested in that as I am. You may find there are times where you willingly accept a little more risk in the hope of making a better profit.

How well has the fund done in the past? If you are planning on long term investing, the look at the performance of the fund since it started. If you are looking to invest short term, I’d look at how well the ETF did for the last 6 months to a year.

How high are the highs and how low does it go? Again, for stable long term investing, look for an ETF that’s worth stayed relatively stable, without huge peaks and valleys. This chart shows the ups and downs of IYE over the last month - It’s on a downward trend.

The Price to Earning Ratio - The P/E ratio is basically the share price divided by earnings per share. I mention this here because it is important, but I want to note that the P/E ratio for an ETF is not calculated in the same way that a P/E ratio for an individual stock is. So, while you may look at this first when considering an individual company, it is not really the best indicator for an ETF. For more information on why that is, you can check out this article.

Once you take all of these factors into account, and the investment still looks good to you, then you will want to request a prospectus from the company. This will go into far more detail than just what you see here, and it should answer most of the other questions you have about the stock and the management company.

What do you think? Based off this outlook would you consider IYE a good investment? You can give us your opinion in the comments section below!
The Beverly Hillbillies promotional photo is ©CBS Television. ShareBuilder screen shots are © ShareBuilder.


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What does investing in natural resources mean?

When you choose to invest in natural resources (also known as commodities) you are investing in the building blocks of civilization.

In other words, commodities are materials that we use to make the finished products that we buy. Fritos are not a commodity, but the corn they are made from is. Jewelry is not a commodity, but the metal it’s made from is.

Other examples of commodities include: Oil, wheat, sugar, coffee, cocoa, orange juice, natural gas, and precious metals.

Just think of all the things that our ancestral traders traveled far and wide to acquire! Today we are not much different. We still need many of the same things, and as long as we do, there will always be a steady market for commodities.

So, how can commodities save my assets?

Adding commodities to your investment portfolio performs one simple (but valuable!) task. It offsets your risk. There will always be a market for wheat, corn, and gold. There may not always be a market for the next big Dot.Com, and that brand new cure-all drug could turn out to cause Jekyll and Hyde symptoms. When you have commodities safely in the backseat of your portfolio you are free to take a little more risk in other areas.

So, how do I start investing in commodities?

Investing in commodities can be as hard, or as easy as you want to make it. You can take on large amounts of risk and hope for a quick profit, or you can take very little risk at all and use commodities to stabilize your overall portfolio.

Here’s a rundown of some of the ways you can add commodities to your portfolio:

Commodity Mutual Funds:

A Commodity Mutual Fund is a professionally managed fund where investors pool their money and buy stock together. Because mutual funds are professionally managed, they have to pay the manager. Sadly, the management fees alone can eat up your profits pretty quickly. Also, in order to invest in most mutual funds you required to have at least $1,000 to invest. Because of the high fees, low yield, and high price of getting into the funds, I typically prefer Exchange traded funds.

Exchange Traded Funds (ETF’s):

ETF’s also buy groups of stocks. However, instead of a group of individual investors pooling their own money, ETF’s usually have backers with deep pockets who put up the money for the funds. Then, they give investors the ability to buy shares in the fund itself, rather than it’s individual stocks.

It’s kind of like buying into someone else’s pre-diversified portfolio. This way, you don’t have to take the risk, or have the money, to invest in all of the oil companies in America. The fund does it for you, and you buy into the fund. It’s cheap, and instant diversification. ETF’s also have very low management fees, so you have more of a profit margin when the fund does well.

This is the type of commodity investing that I believe will save your assets in the long run. You may never make an enormous profit quickly, but you can usually expect reasonably solid, steady performance.

Of course, I am not an all-powerful wizardess that can predict the future of the market, and I can’t leap tall buildings in a single bound either. Your mileage may vary. See your doctor before beginning any exercise program.

For a list of just a few of the Natural Resource ETF’s available you can visit this site.

Individual Corporations:

Now, we are talking about a lot more risk with this one. Always remember that when you put your money into a single company, you had better be sure it’s a worthy investment. After all, if the company goes under, so does your money!.

That said, there are an unbelievable variety of individual companies you can buy into. In fact, if you pick a commodity; let’s say, oranges, you can invest in companies that handle nearly every stage of their growth and production. You can choose to invest in the orchards themselves, or in the companies that distribute the finished products to your local supermarket – whatever sounds most attractive to you.

Futures Contracts:

No article on commodities would be complete without a mention of Futures. This is an extremely high risk method of investing. Not too many brand new millionaires walk out of Vegas, and for every person who makes a mint buying futures there are thousands if not hundreds of thousands of people crying all the way to the bank. So. Be warned. Don’t expect this type of trading to offset the risk in your portfolio. This would be the risk in your portfolio.

How it works: Futures contracts are speculations, pure and simple. When you purchase stocks or bonds you do actually own something tangible, even if it is only a small percentage of a company or a debt. When you purchase a futures contract you do not actually own anything at all. Instead you are betting that the price of a given commodity (like coffee) is going to rise in the future. If you thought the price of coffee were going to fall in the future, you would sell your contract.

So why would anyone do this? The Reality Based Trading Company has an excellent example on their web site.

On one side of a transaction may be a producer like a farmer. He has a field full of corn growing on his farm. It won’t be ready for harvest for another three months. If he is worried about the price going down during that time, he can sell futures contracts equivalent to the size of his crop and deliver his corn to fulfill his obligation under the contract. Regardless of how the price of corn changes in the three months until his crop will be ready for delivery, he is guaranteed to be paid the current price.

On the other side of the transaction might be a producer such as a cereal manufacturer who needs to buy lots of corn. The manufacturer, such as Kellogg, may be concerned that in the next three months the price of corn will go up, and it will have to pay more than the current price. To protect against this, Kellogg can buy futures contracts at the current price. In three months Kellogg can fulfill its obligation under the contracts by taking delivery of the corn. This guarantees that regardless of how the price moves in the next three months, Kellogg will pay no more than the current price for its corn.

For more information on the buying and selling of futures contracts, you can visit this site.

In the next article we’ll talk a little about how to research potential investments step by step, so stay tuned!

What do you think is the best way to invest in natural resources? You can give us your opinion below!

Trading Places promotional photo courtesy of Paramount Pictures. 1983

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In our final part of this three part series covering ETF investments, we’ll look at different strategies for investing with exchange-traded funds. Have I bored you? I hope not! Actually taking the time to learn about the hundreds of different investment products on the market is tedious, but the reward will be great. If you take the time to educate yourself about investing, budgeting, insurance, and ways to save money, you will be a wealthy person in your later years. To recap, the ETF has all of the diversification of a mutual fund, it’s sometimes cheaper than index funds, trades like a single stock, and you can buy funds that target certain sectors and/or markets.

Here are four different strategies for investing with exchange-traded funds:

The Primary Method

The primary method is the approach that the ETF would be your primary investment vehicle in your portfolio. The exchange-traded fund is designed so you can get exposure to a broad range of securities at a low expense. Instead of buying a 100 single stocks, you could buy a commodities ETF that targets the entire commodities sector. This is a risky method to only use ETFs for your primary investment strategy. it’s risky because many ETFs don’t have a track record longer than 10 years. If you want to buy and hold an ETF, it’s hard to judge its performance based on one or two years of performance.

Dollar-Cost Averaging Method

If time is on your side, let the power of compound interest take over for you with this method. Dollar-cost averaging is a great method to use for investing in ETFs, mutual funds, and bonds. The idea is that you invest a fixed amount of money at a given interval such as every month. This eliminates the need to time the market. You will buy less shares when the price is high and more shares when the price is low. Over a long period of time, the average cost that you purchased the shares will outperform a method of trying to time the market. If you want to experiment with an ETF, this is the method for you. This is the best method for those of you who don’t want investing to be your full-time job. Let the money pull automatically from your checking account and watch it grow over a long period of time. it’s a beautiful thing.

Sector Rotation

For those of you who are more active traders, this could be the method for you. If you read the Wall Street Journal religiously and keep track of market trends, then you should consider sector rotation for your exchange-traded funds. The idea for this strategy is to rotate in the ETF that targets the hottest markets and rotate out the markets that are declining. For instance, in today’s market you would want to rotate in an energy ETF and rotate out a real estate market ETF. This method is very risky. It’s a method that relies on timing the market correctly. You need to know what you’re doing if you choose this method. Although, it would be a fund strategy to experiment with using less than 10% of your investment portfolio.

Asset Allocation Method

The idea of the asset allocation method is that our investment strategy changes as we age. When you are young, you can invest aggressively with equities, but as you grow older, you want to shift your investments to more steady, income-producing investments. Using an ETF to shift your assets can save you money, because it takes less trades to do it. You can rebalance your portfolio with a few changes in the ETF’s that you invest in, rather than switching out mutual funds for bonds and dividend producing funds.

The Bottom Line

Have I convinced you to try out the exchange-traded fund? I bought my first one recently in my 401(k). Our company complained enough that there were no exchange-traded funds or index funds in our plan to choose from, so they finally granted us a few ETF options. I am eager to see how it performs. It tracks the Russell 2000 index. The bottom line is that the ETF is a great alternative investment that can easily be implemented into your portfolio to provide diversity with low costs. They offer broader exposure to markets and sectors that index funds do not track. Speak with your financial advisor or other financial professional about your options to start trading exchang-traded funds.

When you get the chance, please comment on your thoughts, experiences, and questions about the ETF.

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