You must have heard that you should never put all your bags in the same basket. The same goes with investing as well. Diversifying your investment portfolio can help you achieve your investing goals by optimizing your returns, even if it does not completely eliminate risk.
Stocks, bonds, mutual funds, futures, and currencies are just a few of the various investment vehicles available to you. These can be further broken down by grouping assets that have similar characteristics: Examples include large-cap stocks, financials, and government bonds, to name a few.
Don't forget about commodities. These are basic items that are used to manufacture further goods and services. For both beginner and seasoned traders, there are a variety of commodity investments to consider. But, before you take the plunge, there are a few things you should know about commodity investing, including the advantages and disadvantages.
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Investment in commodities
Investing in Commodities
Investing in commodities can be done in a variety of ways. One option is to buy various amounts of physical raw materials like precious metal bullion. Futures contracts or exchange-traded products (ETPs) that directly track a single commodities index are also available to investors. These are high-risk, high-complex investments that are usually only recommended for experienced investors.
Mutual funds that invest in commodity-related businesses are another option to obtain exposure to commodities. An oil and gas fund, for example, might invest in equities from companies involved in energy exploration, refining, storage, and delivery.
Advantages of Commodity Investing
Diversification
Commodities and commodity stocks have a different return profile than other equities and bonds over time. You can better handle market volatility by having a portfolio containing assets that don't move in lockstep. Diversification, on the other hand, does not guarantee a profit or protect against loss.
Returns
Supply and demand, exchange rates, inflation, and the overall health of the economy can all affect individual commodity prices. Increased demand due to huge global infrastructure projects has had a significant impact on commodity prices in recent years. Commodity price increases have had a beneficial impact on the stocks of companies in connected industries in general.
Inflation Protection
Inflation, which can depreciate the value of stocks and bonds, can lead to rising commodity prices. While commodities have performed well during periods of rising inflation, investors should keep in mind that commodities are far more volatile than other investments.
Disadvantages of Commodity Investing
Principal Risk
Commodity prices can be extremely volatile, and world events, import bans, global competition, government laws, and economic conditions can all have an impact on commodity prices. There's a danger that your investment will depreciate in value, however, the risk can be reduced up to an extent if you plan to invest for the long-term.
Exposure in Foreign and Emerging Markets
Commodity funds, in addition to the risks associated with commodities investing, also carry the risks associated with investing in foreign and emerging markets, such as volatility induced by political, economic, and currency instability.
Asset Concentration
While commodity funds can help with diversification, they are deemed non-diversified since they invest a large amount of their assets in a small number of individual securities that are typically focused in one or two industries. As a result, changes in the market value of a single investment may generate bigger share price swings than in a more diversified fund.
Conclusion
Investment in any asset class should be done with proper research and discipline. Also, investment should be done inline with your risk appetite and investment goal. An investment advisor can help you in investing by conducting your free risk profile analysis and providing you research based recommendations.
Happy Investing!
