Commodities are perceived as high risk, but in reality they should reduce volatility in your portfolio. They are more difficult to own directly as you probably do not have a place to store a thousand bushels of wheat or cotton or pounds of gold and silver. Options in commodities can be traded by individuals through brokers having a commodity license. There are two approaches; own the companies that deal in commodities like Chevron or Newmont Mining, or invest in the commodity itself (oil, gold copper, wheat etc.) through a mutual fund intermediary. Two funds we know of that do this are Pimco Commodity Real Return and Oppenheimer Real Asset, and we are sure there are more. Funds maintain the cash backing necessary for option trading. Typically, 95% of the holdings of these funds are in Treasuries or cash. They take the remaining 5% and leverage it in commodity futures. A large cash backing is required to do this safely, thus these funds have invested in bonds and pay a dividend besides creating the potential for gains in the options. We try to balance this portion of our allocation between energy stocks and raw materials.

Bonds come in short maturity for stability, and longer maturity for better return but more volatility. They are foreign or domestic, bank grade or junk. They are available as individual bonds in $1,000 units. Often, there is a minimum buy of 10 bonds or $10,000. Mutual fund share purchases or ETFs allow for smaller purchases and provide diversity. Since bonds pay only interest, fees are an important consideration. ETFs is maybe the best bet. Review the bond chapter to help decide your allocations in this portion of your portfolio.

Foreign Stocks, in our view, are becoming more and more important, both for opportunity and stability. We hear less about foreign investments here in the United States because perhaps because they do not sponsor business shows and do not trade on our exchanges except for what are called American Depository Receipts (ADRs). It follows then that as investors; we should diversify first between developed and developing countries, for example, investing in Europe and Asia. Then use the same system as with other stocks, this is small, medium, large, growth and value. We like using mutual funds and ETFs as we have less detailed information. Remember, you add currency risk with this part of your portfolio. The following graph illustrates the growth of the world market. A balance between foreign and domestic will offer another measure of stability to the portfolio.