Let us share a strange thing with you all today. A couple of years back also a very less number of individual investors were aware of the investment vehicle called commodities. They mostly used to opt for equities, mutual funds and bonds and keep commodities as their last choice of resource. Wasn’t that strange? But now with the passage of time, the game is turning around. People (investors) have become much more aware of commodities investment than before and even willing to indulge in it due to the recent volatility in the stock market.
Besides this, many individuals are also investing in commodity Exchange Traded Funds (ETFs). Commodity ETFs either invest in a single commodity or in futures contracts that track the performance of a particular commodity or a group of commodities. This means, when an investor purchases a commodity ETF, he does not own a physical asset but owns a set of contracts instead that is being backed by the commodity itself.
Now coming to the point that why investing in commodities is a good idea for an individual investor, the prices of commodities like crude oil, gold, and silver tend to go high during the time of inflation or when the nation’s currency loses value. Since the prices of commodities are no way related to the prices of stocks and real estate, they tend to operate differently. An Investment portfolio consisted of 5% to 10% commodities can overcome any losses incurred by equities, mutual funds or any other financial tool.
However, investing in commodities too has its own set of pros and cons because of which it is essential to be a little more cautious, especially, during deflation, because the prices of commodities tend to fall during such situations.
Having said that, let us now take a look at a few things that you must keep in mind while investing in commodities.
Invest as a part of a diversified portfolio: Investing in commodities is likely to provide you with a potential gain along with equally large potential for losses. Hence, it is advisable to invest in commodities with a long-term goal or just consider it as a part of a diversified portfolio. Commodities can reduce the risk of losses as a part of a diversified portfolio since their movements are not directly related to the fluctuations of other types of securities in the portfolio.
Decide how much money you want to invest: As we just said in the aforementioned point that commodities investment has a high potential for losses. So, analyze your risk appetite first and then invest in commodities. Decide how much money you want to invest or how much money you can bear to lose should there be any adverse situation.
Seek for advice: Like any other financial tool, investment in commodity market requires an extensive research, knowledge and expertise. If you do not have the time or inclination for it, then it’s best to hire the services of a professional who would guide you through every step of investment and provide with the best possible solutions.
Invest in exchange-traded funds: Exchange traded funds are consisted of shares that trade like stocks and allow investors to invest in a more diversified portfolio of other securities. Since the commodity funds, ETFs are generally comprised of futures contracts that track the value of commodities, they allow the investors to invest in fluctuations of commodity price without the risk of holding futures contracts.