By Sarah Morgan
Inflation is always a worry for investors, but it’s a particular concern now, as food prices and gas prices (up 33% in the past year) continue to rise. And as the recent SmartMoney story “Do Commodities Fit In Your 401(k)” reports, some 401(k) plans are starting to add some alternative options like commodities to help hedge against inflation.
The pitch is fairly simple: Commodity prices tend to rise when inflation is rising. Plus, commodities aren’t very closely correlated to the stock market, so they can be a good way to diversify a portfolio by adding an asset that might rise when stocks are falling. Nearly 9% of retirement plans offer a commodity fund now, up from 5% in 2007. And even if you haven’t taken advantage of an option like that, you may still have commodity exposure in your 401(k) if you own a target-date fund. Fidelity, T. Rowe Price, and Principal have all added commodities to their target-date products.
That exposure does bring some risks. Commodity prices are very volatile, and not all investment professionals are convinced that they’ll generate long-term returns. Those who do favor the sector say it should be a small portion of your portfolio, maybe 5 to 10%, and certainly not more than 10%.
Retirees or savers close to retirement may want to scale that back even further. Mihir Worah, the portfolio manager of the PIMCO Commodity Real Return Strategy fund (PCRAX), which is widely distributed in 401(k) plans, says the asset’s volatility means anyone investing in the fund should have a long time horizon. “For someone who’s close to cashing out, it’s probably not the best bet,” Worah says. He says he does, however, own the fund in his own 401(k) plan.
Readers, are commodities an option in your 401(k)? Would you consider putting some of your retirement savings in a commodities fund?