Commodities Trading Investment Funds

People are individuals, and this applies to investors as well. Whether they have the capital to lose or not, some are bold while others are cautious, and regard capital preservation, with a slight return over a long period, as the most important purpose. Most investors tend to fall more closely to the latter.

To indulge in serious, regular investing, you must have the resources and the time to turn trades over often. Most traders don't have the time, the expertise, nor the risk capital to be in and out of the market so regularly. The perfect solution for such people are funds - in particular, mutual funds.

But stocks, bonds and other purely financial instruments aren't the only items worth investing in. While true that on average, over long periods, the stock market performs better than most other investments, roughly in the range of 12% annual return, depending on the period chosen. There are, however, shorter periods, sometimes extending for several years , where other investments surpass these markets. Recently, that has been commodities and for this reason, the popularity of commodity trading has risen.

Commodities have risen dramatically since early 2000. Oil has nearly doubled and gold has increased over 25%. Double-digit returns on commodity funds have also been seen during this same time frame.

As an example, Pimco has over $12 billion under management in their commodity fund and from mid-2004 to mid-2005 derived a return of 14.5%. Oppenheimer, their next nearest competitor, with around $1.77 billion under management earned 19.5% during the same period.

Stocks and commodities usually tend in opposite directions. That was true for the period from 1974-2000, when the Dow Jones Industrial Average rose, while the DJ AIG Commodity index fell. However a reversal of that historical trend has been seen the past few years.

There is no way to predict how long it will last. As financial advisers always say: 'past performance is no predictor of future gains'. But during the last year the S&P 500 fell 0.5%, while the Dow Commodity Index rose 6.5%. Viewing a longer period, from May 2000, the AIG Commodity index rose 47% as opposed to a 15% decline for Standard & Poor's 500-stock index, assuming reinvested dividends.

While it could end anytime, the pressure on oil and other energy source prices - which affects the price of everything else – means that it doesn't seem likely to happen soon. Most commodity funds are not selling short, indicating agreement from the experts. Selling short would indicate that speculators are betting on a decline in prices.

And some commodities are more unusual than others. Commodity funds often have large investments in items that would not normally be considered a commodity - like U.S. Treasury securities. An example, with over 90% of its assets in T's, is Pimco.

Financial instruments can also act like commodities in some markets, as they trade in the form of futures contracts on some of the exchanges. Along with the instruments themselves selling as futures, the indexes that tract the instruments do as well.

Included in a commodity fund may be direct commodities investments, or the futures contracts that cover them, or even indexes that track them. The profits are real even if the latter may be three steps removed from something of substance.

By investing in commodities, you diversify your portfolio and do not rely simply on stocks or bonds to garner a profit.