Preparing Your Portfolios for the Ride Ahead

Being a commodity bull could still be worth your while.

Since 2003, editors and analysts of Lombardi Financial have been strong proponents of investing in resource stocks, particularly gold. We have also warned our subscribers that resource stocks are cyclical and prone to corrections. Over the past four years or so, commodities, especially precious metals, have enjoyed the expansion part of the cycle. It is only logical to expect that a correction is just around the corner, if for no other reason than profit taking.

So, what can an investor do to protect his or her portfolio? If the Street has its head screwed on properly, the secular commodity uptrend is expected to run for at least another 15 years, at which point the bear is likely to rear its ugly head. As it happened so many times in the past, the moment there is even a hint of a bear market, many investors stampede for the exits. But as true commodity buffs, while we are believers in defensive strategies when called for, we are also believers in holding a steadfast course ahead.

Here is how economists are charting the macroeconomic cycle in the years ahead. At the moment, the energy and metal sectors offer a nice and comfortable ride. Prices do not go up every single day, but they are going up just the same. For example, crude oil is currently hanging on to the $65.00-per-barrel level. However, oil producers feel quite snug at prices of $50.00 per barrel as well. This is quite a cushion if we ever saw one.

Generally, commodity prices depend on strong economic growth. So far, North America’s growth rates leave much to be desired. However, 2008 is an election year. Historically, a year before the elections and the election year itself prove to be excellent growth propellants. Of course, most of it is based on political promises, which, as we all know, may or may not pan out. Regardless, the bottom line is that the economies are going to pick up the pace.

We can expect some form of a recession developing around 2010. After a couple years of recession, we can expect more strength in the commodity markets, particularly in the energy and metals sectors. That strength will be fueled particularly by emerging economies. Why emerging economies again? The answer is simple: demographics. We will end up with about 3 billion more people, who will have just as many dreams and hopes as we did. Someone or something will have to satisfy their needs.

On a microeconomic level, investors can do much to plan and prepare their portfolios for the ride ahead. The first order of the day is to evaluate your exposure to resource sectors. Take into account your risk tolerance, as well as your investment horizon. As already explained, knowing the twists and turns in the cycle could save you quite a headache. Just ask investors who lost thousands of dollars when the tech bubble burst.

Once you have determined how much of an exposure to resource stocks you can afford, make sure you are properly diversified – both globally and within various commodity sectors. Finally, if and when commodities hit that anemic, sideways trading stage, try to avoid speculative plays. Historically speaking, established companies with steady production and global presence have outperformed their junior counterparts. Most importantly, don’t give up on your oil and metal stocks. Ups and downs in a cycle cannot be avoided, but about 15 years of a secular bull run should not and must not be missed.