Where to Invest with Stocks at Record Highs

Putting money to work in the market now is no easy task because it is at a record high. At the same time, bond yields are miniscule. Those with available money are wondering “Where can I invest?”

Though there is no absolutely secure answer, one possibility to consider is commodities. Since inflation is low, stocks in this group aren’t doing well (traditionally they flourish when prices increase). Commodities are languishing while other investing categories are at or near an all-time high.

For example, let’s take a look at one of the commodity funds I profiled in “Commodities: Now, Never, When?” published Nov. 05, 2009 on PMD.

Click to enlarge image

From Yahoo! Finance 11/10/13

GSG in blue above is the abbreviation for I Shares S&P GSCI Commodity-Indexed Trust. It is production weighted to reflect the relative significance of 24 different commodities to the world economy: 67% energy, 16% agriculture, 7% industrial metals, 7% livestock and 3% precious metals. GSG has basically gone nowhere since 2009 whereas the S&P 500 index (in green), the NASDAQ (red) and the Dow (purple) have all increased substantially.

The thrust of my 2009 piece was that holding commodities for a part of a portfolio can be profitable, but deciding when to buy them can be problematical. The chart above proves that in spades. Investing in GSC in 1999 would have led to less than market returns. Now, however, may be a better time to invest in them, because our enormous sustained government spending has to lead to inflation so the government (really us) can pay back debt with cheaper dollars. The question is not if this will happen; the real enquiry is when.

For those who think it will be sooner rather than later, William Baldwin listed some individual commodity stocks (Nov. 18, 2013 issue of Forbes) from the filings of Grantham, Mayo and Van Otterloo, a Boston money management firm:

P/E and yield from Yahoo.com 11/11/13

These stocks are very different in their characteristics. Two are headquartered outside the United States — BUN in Peru and VALE in Rio de Janeiro — subjecting them to political risk and suggesting to me that investors could sleep better at night if they selected between the remaining two stocks that are headquartered in the U.S.: CVX and SCCO. Between these two, CVX has a healthy yield, 3.3%, which is appealing to investors both in upturns and down. This means it should not only increase in price during an inflationary cycle, but also is less likely to decrease in value if an unexpected market fall were to occur.

Therefore, based on this micro-analysis, CVX would be the most prudent of these four commodity stocks in which to invest. Though it is not diversified, energy covers approximately 67% of the world commodity market.

For readers who are willing to take considerably more risk for the possibility of a greater gain, Minas Buenaventura (BVN — Peruvian gold and silver) might be an option as explained in the linked Seeking Alpha column.

Stocks are not funds. Some would consider buying one stock to represent commodities a risky strategy. Therefore, for those looking for greater diversification than stocks offer, I should say that the funds I mentioned in my earlier column are simply illustrations of some of the possibilities. Before investing in any of them, the buyer would have to do considerably more research, a drill-down so to speak. This is because some commodity funds are not what they seem. They are partnerships, really, and therefore the return to the investor can be less than she or he anticipates because of a split with management on some positions. Also, because the tax bite can be high, some advisors suggest putting these funds into tax-advantaged accounts.

However, for investors who are careful and patient, commodity stocks and funds will almost certainly offer a reward when the Fed raises interest rates. Then, owning commodities can be expected to hedge against the bite of inevitable price rises. As to CVX, in the meantime, an investor in that stock can enjoy its rich yield (3.3%).

This information and content is offered for informative and educational purposes only. MyMoneyMD, LLC is not acting as a Registered Investment Advisor, Investment Counsel, Tax Advisor, or Legal Advisor.