Commodity investments: The 2 worst ways to invest in rising resources

The rebounding global economy has pushed up commodity prices in recent months. But with the exception of gold, which has recently hit record highs, most commodities remain below their 2008 peaks. Still, resource demand should continue to improve with the global economy.

Here are two profit-killing strategies to avoid when buying commodity investments. (We’ve also included our preferred approach, which you can read about below.)

1. Futures trading. Rising resource prices will likely tempt more investors to trade commodity futures. These include metals and minerals, fertilizers and agricultural products.

You can only profit in futures-linked deals by out-guessing other futures traders by a wide enough margin to offset commissions and other trading costs. When you dabble in commodity futures, you are betting against professionals who make a full-time occupation of studying these markets, who have better access to information than you do, and who pay far lower commissions.

Most futures traders start out with a planned limit on how much they are willing to lose before they quit. In six months or so, most lose that amount, and quit trading. What’s more, because futures traders tend to trade often, a surprisingly large number find that the total brokerage commissions they pay during their trading career is close to the total losses on their commodity investments.

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2. Structured investments. There are various structured products sold by brokers that give you exposure to commodity investments, while limiting risk. Most participants will ultimately lose money in these investments, as well. Or they will make a poor return in relation to their risk.

The difference between these products and futures trades is that the losses won’t happen so quickly; in addition, more of the money you lose will flow into brokers’ fees and commissions, while you’ll typically lose less on the commodity investments themselves.

Stick with shares of resource firms when adding to your commodity investments

We feel that investing on the basis of price changes for commodity investments instead of in commodity stocks is more of a gamble than an investment. These activities don’t earn income, but instead consume funds for storage fees, insurance and so on.

A far better way to profit from rising commodities is by investing in the stocks of resource firms. That way, you benefit from increases in commodity prices, and give yourself the potential for capital gains and income. You also save on the higher brokerage fees and commissions associated with other types of commodity investments.

In the current issue of Stock Pickers Digest, our newsletter covering more aggressive investments, we’ve looked at 11 firms like these that would be suitable for the part of your portfolio that you devote to aggressive resource investments. These companies operate in industries from across the resource sector, including energy, precious metals and oil and gas.

If you’re looking to invest in commodity firms with the potential to capture gains of 50% or more in 6 months or less, you shouldn’t be without the latest Stock Pickers Digest. Click here to learn how you can get one month free when you subscribe today.