Investing a little money in commodities is supposed to make it easier to stomach stocks and bonds when inflation is posing a threat.
But now, as investors experience their first inflation scare in years, commodities are looking like anything but a safe haven.
For three years, commodities - everything from oil to copper and nickel - have been on a tear, as China, India and other developing nations in Asia have had an insatiable appetite for building materials and energy. Over the past three years, the Dow Jones AIG Commodity Index has climbed 59 percent.
Typically, when returns are that powerful, investors need to be cautious.
"There is an enormous risk if you buy anything after protracted run-ups, and that's true with commodities," said Peter Anderson, chief investment officer at RCM Capital Management LLC.
For the long term, Anderson thinks commodities will be a profitable investment, as emerging Asian economies continue their growth spurt. But in the short term, he said, it "looks like we might be in the early stages of a correction."
In October, the Dow Jones AIG Commodity Index fell almost 7 percentage points, as investors worried less about rising inflation and more that inflationary pressures would cause the Federal Reserve to raise interest rates and slow the economy.
Commodities are notoriously volatile, rising when investors are expecting the economy to grow, but nose-diving when slowdowns are expected. Consequently, professional investors often make a practice of trading in and out of commodities, rather than holding on for the long term.
According to research by Merrill Lynch economist David Rosenberg, in the typical commodity cycle, prices run up about 55 percent over 30 months and then head down.
The possibility of a sharp correction has made Harris Private Bank chief investment officer Jack Ablin leery of commodities. He predicts the commodity cycle will end this year, unnerving investors who have been chasing a hot sector.
Investors who simply put their money in a safe money-market fund may do as well, if not better, he said.
Ablin recently explored a popular assumption that has prompted investment managers to put money into commodity investments during the past few years: that commodities are a necessary part of a portfolio at all times.
Underlying the assumption is the idea that commodities are a diversifier, rising when stocks and bonds are struggling and providing a hedge against inflation.
But Ablin came away unconvinced.
He compared the Commodity Research Bureau index with the Consumer Price Index over the past 30 years and found commodities providing an average annual return of only 2 percent.
To justify an investment in commodities, he said, he would have had to see average annual returns of 6.5 percent.
"History is just not compelling," he said. "To invest in commodities now, you would have to believe that the future will be different than the past as China and India develop."
There might be validity to that argument, he said. But Tim Parker, an oil analyst for T. Rowe Price, doesn't believe that Asian development will make commodities a sound investment in the near term.
Although he thinks investing in oil producers still makes sense given long-range development, investing in commodities themselves "is a very dangerous game," he said.
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