Money Magazine recommends commodities (kind of)

It's only six percent and it's not really commodities, but commodity stocks instead, however, it is indeed one giant step forward for the nation's number one magazine on personal finance - a magazine that, to date, has generally been pretty clueless about investing in natural resources.

Now about seven years into what will likely be a 10 or 15 year secular bull market in commodities, Money Magazine has finally produced an investment portfolio pie-chart with a slice labeled ... wait for it ... Commodities.

Perhaps the editors were asleep or away on summer vacation already.

And were Jason Zweig and Michael Sivy consulted for this issue?

This report in Money Magazine came years earlier than anyone could have reasonably expected, though, since it technically falls short of recommending the purchase of commodities themselves and the allocation really is pitifully small, it can't really be interpreted as a "magazine cover" indication of a top.

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2. Commodities: Profiting from rising costs

One way to beat inflation is to own the stuff that's going up in price. Between 1973 and 1981, when inflation averaged 9%, the Goldman Sachs Commodity Index, which tracks oil, metals and food futures, averaged a 13% annual return. In just the past five years, commodity-driven mutual funds have gained an annual average of 30% vs. 10% for Standard & Poor's 500-stock index.

But those sizzling performance runs are matched by long periods of lousy returns - during the '80s and '90s, for example, returns were flat. And today these assets are trading at or near historically high levels.

"There are signs of a speculative bubble," says Jeremy DeGroot, chief investment officer at Litman/Gregory in Orinda, Calif. It's difficult to time when such a bubble might burst, but anyone who buys commodities should be prepared for steep setbacks. In 1998, when markets were hit by the Asian currency crisis, natural-resources funds lost an average of 25%.

Still, by gradually building up a 5% stake in commodities, you can lower your overall portfolio risk, says Lou Stanasolovich, a financial adviser in Pittsburgh. That's because commodities move out of sync with stocks, smoothing out your returns.

How to invest: The best approach is to buy funds that hold shares in energy companies and other stocks that benefit from inflation, such as T. Rowe Price New Era. You can also consider an ETF such as iShares S&P North American Natural Resources (IGE), which tracks an index of commodity-producing firms.

Treasury Inflation-Protected Securities (TIPS) topped the list with real estate and blue chip stocks placing third and fourth in what is generally a good first step in addressing how the investment climate is rapidly changing.

Of course, recommending a much bigger slice of natural resource investments a few years ago would have served their readers much better.

When Money Magazine starts talking about commodities like they talked about real estate back in the summer of 2005 (see Money Magazine Does Real Estate and don't miss the cover story about San Diego's hot market - Boomtown USA), then you'll know it's time to start thinking about paring your positions in natural resource investments.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.