Boost your share portfolio returns with this smart resources play

Interested in boosting your portfolio returns? Consider this advice on how to play the bottom of the resources market…

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The prices for bulk energy and metal commodities have been battered, along with the value of the companies producing them.

Over the past two years, the market capitalisation of world giants such as BHP Billiton Limited (ASX: BHP)Rio Tinto Limited (ASX: RIO), and Woodside Petroleum Limited (ASX: WPL) has plummeted around 50%, 35% and 30% respectively.

Some people think the best and easiest way to earn a quick buck is to pick the bottom of the market, just as things turn around.

Is now that time in the resources industry? If you listen to market commentators suggesting we have reached the bottom or look at the 5-year commodity index chart below, you could think it is the right time.

Commodity index 2011 - 2015
Commodity Index. Source: Indexmundi.com

However, when you look further back in time, the commodity price index looks remarkedly different. Compare the same index during the 1992 to 2015 period.

Commodity index 1992 - 2015
Commodity Index. Source: Indexmundi.com

Have we hit the bottom? Who knows, but I wouldn’t risk my portfolio returns by taking a random punt on it.

In fact, this commodity index traded in a tight range between 40 to 70 from February 1992, the earliest data I could access, until December 2003 when the Chinese-driven mining boom started gathering pace.

That is more than 10 years where average prices were relatively stable when compared to the recent 2004 to 2014 boom.

Today, there is a supply glut across many key commodities and consumption growth is slowing in China which could lead to another long period of “normal” prices. The question is, are commodity prices currently within the new range of normal or will they head lower?

BHP

A few years ago, if shares of BHP Billiton Limited (ASX: BHP) were trading below $35, you might have considered them good value. Below $30 and they were ridiculously cheap.

Then, when they plunged below $22 in September and following a small uptick in commodity prices, investors piled back in, thinking they had picked the bottom.

After a short rally to $25 they probably felt like geniuses, but shares are now trading around $17.50 which is a 20% loss and could get worse from here.

BHP 6 month price chart
BHP Billiton 6-month price chart. Source: Commsec

Boost your returns with this resource play

I have no idea where the commodity prices are heading now, next month or next year, but I can tell you how to improve your portfolio returns using this knowledge:

Don’t try and pick the bottom of the market for a turnaround opportunity. It will more than likely end in disappointment and poor returns.

Instead, consider investing in companies that operate in growing industries, have pricing power and enjoy competitive advantages such as REA Group Limited (ASX: REA)XERO FPO NZ (ASX: XRO) or Seek Limited (ASX: SEK).

By investing in these companies, your portfolio will enjoy the power of compounding returns over many years, not the chance of a cheap buck over a few months.

Wondering where you should invest $1,000 right now?

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*Returns as of August 16th 2021

Motley Fool contributor Mitch Sonogan owns shares of REA Group Limited, Xero FPO NZ and SEEK Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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