Commodity investing is a fantastic way to build wealth. However, for those who aren’t sure what the best strategy is or whether the risks are worth it, Casey Cain discusses what individuals should consider when investing in commodities for a portfolio.
According to industry experts, the tangible goods that investors can place funds into in order to create a profit can be beneficial because they can create profits in short terms of time and protect against the dangers of inflation. However, some of the disadvantages to commodity investing include the high volatility and decline in prices over long periods of time.
Below, information regarding foundational understanding of commodity investing is discussed. Building on that foundation, the benefits and considerations to commodity investing are reviewed. By the conclusion, it should be possible for an investor to have the peace of mind that comes with making an informed decision with their funds.
What is Commodity Investing
Perhaps one of the few considerations to commodity investing is the fact that it is not an easily understood concept at first glance.
Commodities, simply put, are assets that come from raw materials, which go on to make goods for consumers. Investors then put their funds into the production of these materials for a profit.
Some of these materials include energy-related assets, such as oil for transportation fuel, plastic and natural gases, and of course, gasoline. Others are metal, such as silver, gold, and copper. Another might be agriculture assets like coffee beans, sugar, or even wheat. Livestock also counts as a commodity, since so much use can be made of hogs or cattle.
To invest in commodities, those interested have two options. They can either purchase the raw commodity itself (such as a piece of silver or a few hundred head of cattle) or invest in the stocks of the product itself. Companies that produce cattle or gold allow investors to contribute their funds.
Benefits of This Type of Investing
- Short Term Profits Are Generated – Timing a market, even a commodity market, is unpredictable. But if such assets are invested in and then sold when the price rises, a considerable short-term profit can be made!
- Portfolio Diversification – Possibly the best advantage of investing in commodities is the diversification of an investor’s portfolio. Commodities often have negative or low correlations with asset classes such as stocks, creating diversification that is beneficial for the outlook of the portfolio.
- Protection Against Inflation – When inflation is high and the dollar value drops, commodities tend to actually rise in the markets, sometimes as much as 9%.
What to Consider
- Lengthy Declining Price Periods – Although short term profits are possible with commodity investments when prices for that commodity are high, there is no denying that commodities have their low-price periods. These usually last quite a while, meaning little chance of short-term profits like the ones discussed above.
- High Volatility – Commodities can be risky because their price movements are unpredictable. Everything from weather effecting agricultural production to geopolitics when it comes to oil or other types of fuel can affect the prices.
- No Income Generated – Investments in real estate and other types of stock can produce income on a regular basis for stockholders. However, commodity investing is notorious for only turning a profit when they are sold.
In Conclusion
Commodity investing is defined as any raw asset that an investor may choose to put their funds toward. In doing so, investors have the opportunity to make a short-term profit. Their portfolio is diversified, and they are even protected against some of the evils of inflation. However, when investing in such commodities, it is important to remember that this type of investing can be highly volatile. There’s no income generated, and long price declines.
A wise investor can weigh each of the risks mentioned above against the many benefits. With enough understanding to make an informed decision, there’s no reason an investor cannot make the most of the option to invest in commodities for their portfolio!
