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Commodities Funds Add Portfolio Diversity and Risk

"The demand for commodities from markets like China and India and other emerging markets have really started boosting prices, and there is no sign of that slowing down," he says.

Before Pimco offered its broad-based commodity fund, which is linked to the Dow Jones Commodity Index, Stegent favored using oil and gas funds, such as those run by Invesco and State Street.

"Studies show that over 30 years having this exposure will decrease the level of volatility in your portfolio as well as increase the level of return," he says.

But how much exposure is enough? How much is too much?

Toal, in Maryland, suggests a cautious approach -- no more than 5% of a $250,000 portfolio should be in commodities, and even investors with a much higher tolerance for risk shouldn't go above 8%.

Stegent takes a more liberal approach, but qualifies that by saying an investor must be open to much greater risk with an allocation of 10% to 15%. The reward, he says, may be worth it.

"Is it better to go with an index fund, or a manager that has a proven record of generating alpha," or market risk adjusted outperforming returns, he asks. "If you've got a hedge fund manager who can do better than that, it certainly is worth the added fee."

Roge, in New York, disagrees with the benefits of commodity investing. "You're buying contracts that are betting on the direction of prices," he says. "It's got to be someone who has a propensity to gamble who would be attracted by this."
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