Commodities should never make up the bulk of your retirement accounts, but there's a place for them in investment strategy. Since there's potential with commodities for big wins and big losses, think of this part of retirement savings as gambling money. You can have a larger percentage of your funds in commodities when you're young, but as you get close to retirement commodities are too risky an investment because there isn't as much time to make up any losses.
Commodities
Commodities consist of agricultural products and raw materials. They run the gamut from oil and cattle to gold and corn. These items are traded, and in effect you are betting on the future price, whether up or down, of the commodity. Commodities are "real" assets, while more conventional retirement investments, such as stocks and bonds, are financial assets. Investing in commodities helps diversify your portfolio, especially in volatile times for stocks. While some employer-sponsored 401(k)s offer options to invest in commodities through mutual or exchange-traded funds, most don't.
Risks and Rewards
Trading commodities is speculation. You're betting on the "future" of the commodity in question. You can make a lot of money this way -- and you can lose your shirt. Before venturing into the commodities market, do your homework. You need a sound investment strategy. Never put more money in your commodities trading account for retirement than you can afford to lose. Just how much of your retirement portfolio you should put in such trading depends on your overall financial status. If there's ample money for retirement, risking some of it in commodities is doable. If you don't have much in retirement savings, it's safest to steer clear. For most investors with decent retirement portfolios, financial planners advise putting between 3 and 10 percent in commodities, reports Tara Siegel Bernard in The New York Times.
Self-Directed IRAs
If your 401(k) plan doesn't offer a commodities option, you might want to open a self-directed IRA to buy and sell commodities. With a self-directed IRA, you make your own investment decisions for the account. Your contributions to either a Roth or traditional IRA account is limited to $5,000 annually, or $6,000 if you're over 50. If you don't want to speculate on futures yourself, you could open an IRA in a mutual fund that trades commodities.
Prohibited Items
The Internal Revenue Service does not permit self-directed IRA investment in certain items, including art, antiques, rugs, gems, life insurance, stamps and wine. It also doesn't allow investments in metals, with the exception of certain types of bullion and coins. However, you can invest in gold, silver or platinum futures in a self-directed IRA. Investing in commodities such as gold serves as an inflation hedge. You can invest in commodities funds with any type of IRA.
References
Writer Bio
Jane Meggitt has been a writer for more than 20 years. In addition to reporting for a major newspaper chain, she has been published in "Horse News," "Suburban Classic," "Hoof Beats," "Equine Journal" and other publications. She has a Bachelor of Arts in English from New York University and an Associate of Arts from the American Academy of Dramatics Arts, New York City.