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Page 1 of 2 Editor's Note: Robert Levin is a good reporter and a smart guy, but before he started writing for HAI, he knew very little about commodities. In fact, that's why we hired him. One of the defining features of the current commodities boom is that it is bringing a wide array of investors into the commodities market for the first time. Our challenge to Levin: Starting from square one, try to figure out if and why he (and others) might add commodities exposure to a portfolio ... and then report back to us. What follows is the fourth installment of a regular feature, "Investor In The Woods," where Levin explores the importance of having - and sticking to - a strategy when operating in the commodities market. Previous "Investor In The Woods" columns are available here: While entry into the world of commodities has been mainstreamed and simplified over the past couple of years, the ease of gaining exposure to real goods in no way guarantees a profitable return. To increase your chances of having that happen, you've got to work on developing a set of tools to know when to get into an investment, when to stay with it and when to run away as fast as you can, according to financial manager and writer Tom Lydon. Lydon is a big fan of exchange-traded funds (ETFs). These investment vehicles, which allow retail investors to gain exposure to commodity futures without actually purchasing the futures contracts themselves, are a big part of the reason entry into commodities has become so simple. But this simplicity, combined with the mouse-click power of online investing, could easily have the effect of pulling good money away from people who confuse the investment vehicle, and the ability to get into it so quickly, with a solid investment strategy and plenty of knowledge. That's what "Investor in the Woods" is all about. Because Lydon, president of Global Trends Investments, of Newport Beach, Calif., really likes ETFs, we'll stick with reviewing that type of fund for this column, and take a closer look into how some buying and selling strategies might come into play. That's not to say that exchange-traded notes (ETNs), total return assets contracts (TRAKRs) and other relatively new commodity vehicles aren't as interesting for the retail investor; a review of those certainly deserves merit in due course. Invest Like A Pro According to Lydon, some of the investment strategies used by the pros must be learned and used by the would-be retail investor. Otherwise, the notoriously volatile world of futures trading could contribute to what many have referred to over the years as a classic result of commodity exposure: You get caught with your pants down and end up losing your shirt. He frequently stresses the need for a strategy on his company's Web site, ETF Trends, and in his new book, "iMoney: Profitable ETF Strategies for Every Investor," just out this summer. "ETFs are great for retail investors because of how simple they are to use. Since they replicate indexes, you always know what you own, making asset allocation a snap. They also give instant diversification, spreading risk over dozens or even hundreds of stocks, instead of just one or two," Lydon told me. The catch, though, is that, just as with anything that's market driven, ETF values - whether they're based on a single commodity, such as copper, wheat or oil, or on an index containing a number of things - are subject to price swings. The movements can be steady, building over time, or volatile and fast, catching many by surprise. "Sometimes," as Charles Hackett of Access Futures and Options Trading said, "things move so fast they wind up eating themselves." So, as Kenny Rogers once famously sang, "You've got to know when to fold 'em, know when to hold 'em, know when to walk away, and know when to run."
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