Resource Stocks provide long-term gains and inflation hedging

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Including good stocks for long-term investment gains from the Resource section can be especially helpful in times of inflation. Learn more below.

For most investors, resource stocks should make up only a limited portion of their portfolios. That means that while we think you should maintain some exposure to resource stocks, you should still aim to balance your portfolio across most if not all of the five economic sectors.

If you want resource stocks in your diversified portfolio, then you need to know how to find good stocks in that sector for long-term investment gains.

Resource stocks, though volatile, tend to rise with inflation and can be good stocks for long-term investment gains

The resource sector is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits at resource companies. When the economy slumps, resource prices fall, and this drags down resource profits and stock prices.

In addition to rising and falling with the business cycle, however, resource stocks have a history of rising along with long-term inflationary trends. This gives them a rare ability: they provide a hedge against inflation.

Back in the inflationary 1970s and 1980s, investors used to see this hedge-against-inflation ability as the main reason for buying resource stocks. But until recently, they rarely thought of it. That’s because inflation had waned for three decades.

Inflation peaked at a yearly rate around 13% in the early 1980s. It fell by two-thirds from that level by the middle of the decade. It went through a series of peaks and valleys, but had been working its way downward ever since.

However, after years of relative stability, inflation has come back to levels not seen in decades.

While the cost of just about everything has gone up, nobody can predict trends in inflation or interest rates with any consistency. And we disagree with investors who think we are on the verge of a huge outburst of never-ending price increases.

Even so, adding top Resource stocks to your portfolio lets prosper two ways: you can profit even without inflation — and these stocks will also provide an added boost in inflationary times.

It’s important to know your risk tolerance when investing in good stocks for long-term investment gains — including Resource stocks

There are several considerations that go into a successful growth investing strategy. Still, many investors overlook a number of important factors that can lower their risk.

In the end, there’s no such thing as risk-free investing. The tips below for lowering your growth investing strategy risk have long been part of the Successful Investor approach.

  • Balance your cyclical risk
  • Be skeptical of companies that mainly grow through acquisitions
  • Don’t overindulge in aggressive investments
  • Keep an eye out on a growth stock’s debt
  • Keep stock market trends in perspective
  • Look for growth stocks that have ownership of strong brand names and an impeccable reputation
  • The best long-term growth stocks should have the ability to profit from secular trends

Meantime, we continue to recommend that you cut your risk in the volatile resource sector by investing mainly in stocks of profitable, well-established mining companies with high-quality reserves. And as mentioned, resource stocks (and this includes oil and gas, of course) should make up only a limited portion of your portfolio.

Use our three-part Successful Investor approach for all of your investments, including good stocks for long-term investment gains

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

Bonus tip: Teck Resources Ltd., Toronto symbol TECK.B, remains a buy for investors seeking good stocks for long-term investment gains from the Resources segments of their portfolios.

The company is a leading producer of metallurgical coal, a key ingredient in steelmaking. It also produces copper and zinc. Teck also owns 21.31% of the Fort Hills oil sands project of northern Alberta.

Teck is now building a carbon capture and storage facility at its zinc and lead smelting and refining complex in Trail, B.C.

If this pilot project is successful, it could ultimately capture 100,000 tonnes of carbon dioxide annually. That would help Teck meet its goals of cutting its carbon intensity 33% by 2030 and reaching net-zero emissions by 2050.

Teck has not said how much it will spend on this project. However, subsidies from the B.C. government will help offset the cost. Teck Resources remains a buy.

Would you feel more confident investing in resources associated with steelmaking as opposed to ones associated with other types of mining, like gold or silver?

How do you think current inflation concerns will impact Resource sector stocks?

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was published on Aug. 9, 2022 and is republished on the Hub with permission.

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