Since the start of the new millennium, more investors have begun to move into commodity investments. These investments have a number of advantages over regular stocks and bonds. While the SEC recommends that you not put all your money in only one asset group such as commodities, adding some commodity investments to your portfolio could add a nice boost to your total returns by using these benefits.
Commodities are any natural resource that is sold and traded. This covers products including oil, gold and even orange juice. There are a few ways to invest in commodities. One way is to buy the actual good. This works well with smaller items like gold but is not practical with others. You don't want to store hundreds of oil drums in your home. You can also buy stock in companies that work in a commodity industry, like oil or mining companies. Lastly, you can buy commodity-tracking exchange-traded funds. These funds are built to track the price of a commodity by buying stocks and options based on the commodity.
Commodities are considered risky investments. This means they have big swings in prices. Commodity companies tend to either hit it big on a resource discovery or they get hit with a big loss. This creates the chance for very high returns in the commodity market provided you time your investments right. This high risk is the reason why you should balance your commodity investments with safer assets. However, if if your research is good and your stock picks work out, your commodity returns will be some of the highest in your portfolio.
Another advantage commodities offer is added diversification. Diversification is when you invest across a wide range of industries that react differently to changes in the market. This keeps your annual return steady and avoids big losses. For example, investing in both oil and car companies protects you against losses from rising oil prices. In this case, the oil companies will go up in value while the car companies will go down. Commodity investments tend to move in the opposite direction as regular stocks and bonds. They give the advantage of steadying your portfolio when the rest of your investments are tanking.
Inflation is bad news for regular investments. As the dollar goes down in value, American stocks and bonds earn less and fall in value compared with the rest of the world. As the dollar becomes less valuable, it also takes more dollars to buy goods from around the world. Therefore, commodity prices usually go up during periods of high inflation. These prices also go up because other investors sell off their stocks and bonds to buy up commodity investments. By holding some commodities in your portfolio, you'll be able to take advantage of this upswing.
David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.