Time and time again, our discussions always return to diversifying your portfolio to make sure your wealth is protected. Another investment type to consider when you allocate your assets is commodities. Many will tout commodities as one of the main ways to hedge against rising inflation.
“Commodities are more than buying gold bullion or investing in a cattle ranch,” says Richard Cayne of Meyer International. “Many people may think to the orange juice sell-off at the end of Trading Places – commodities can be complex, but they are another option the everyone should keep in mind.”
Types of commodities
Commodities are the basic raw materials that are used every day, be it for industry or individual use. They are usually categorized as metals (e.g. gold and silver), energy (e.g. oil and gas), livestock (e.g. pigs and cattle), and agriculture (soybeans, sugar).
And while the value of these commodities usually doesn’t rise and fall in tandem with stocks, which many consider a good hedge for your portfolio, this does mean that there is another set of factors that you may have to add to your watch list. Often, commodities are thought of as a riskier investment, but sometimes it is well worth the risk, so you should know about them.
How to invest
You could explore buying the actual commodities, but you must realize that the only gains would be if the thing itself increases in value from supply or demand. It’s not suggested that you go out and buy tonnes of oranges – where would you keep them? What happens if you can’t sell it before it rots?
To be honest, when discussing buying the thing itself, most will think of gold. And many people look to the gold market as a safe haven during times of economic volatility. But remember, that gold bar will not grow if you leave it be, nor will it pay you any dividends. Also, you will have to pay to store it and, most likely, insure it. So, will this outlay outweigh any profit you might expect?
Commodity futures are an option, but it is still highly speculative. Since you probably won’t have the time to analyse potential crop yields or geological surveys to predict price movements, you’ll probably have to rely on a specialist adviser who you better believe will charge you a fee to handle your investment.
For a possibly less risky management option, there are specialist funds, such as exchange traded funds that focus on commodities, which typically will track a single commodity, like sugar, or a commodity group, like precious metals. They can even spread their risk further be investing in futures as well as in actual commodities.
You may already be investing in commodities
Before launching into a career as an amateur commodities trader, have a look at your current portfolio. You may be surprised how much of it is already invested in commodities. Oil and exploration companies, mining outfits, agricultural conglomerates – all these are affected directly by the commodities market.
Richard suggests, “Depending on the size of your portfolio, the commodities exposure from your equity investments may be enough to hedge you risk.”
To help you decide if you need to take a more direct approach to diversification with commodities, or if you have any questions about which type of commodities investment to pursue, feel free to contact Meyer International.
