There’s more to investing than just stocks, bonds, and cash. Meet commodities.
And commodities are...?
A commodity is a basic good or raw material that you can consume or use to make other products. Some examples: wheat, corn, milk, coffee, orange juice, silver, gold, oil, and natural gas.
Because commodity prices move independently of traditional assets like stocks and bonds, investing in them is one way to diversify. Read: when stock prices drop, commodities may still perform well and help prop up your overall portfolio.
How do you invest in commodities?
There are a few different ways you can buy in:
Directly in their physical form. Think: buy a silver coin or gold bar.
By investing in stocks and bonds of commodity companies like ExxonMobil (for oil and gas) or Barrick (a gold and copper mining company).
By buying an ETF that invests in commodity futures and tracks an index of one or more commodities. (Hint: futures are pre-arranged agreements between traders who promise to buy or sell a commodity for a specific price later.)
Is there a catch?
Yep. While all investments carry some level of risk, commodities are often considered riskier than others. That’s because they tend to be sensitive to more factors — from economic conditions and geopolitical issues to weather to trade policies — than other investments. Making them more volatile options.
Example: The conflict between Russia and Ukraine. The former is the world’s largest exporter of natural gas and wheat and the third-largest producer of oil. If it invades Ukraine, the US and allies could bring sanctions against Russia, leaving the world to lean on other sources for those commodities while supplies have already been running short. Oh, and it would send the value of those commodities for a ride. Hello, volatile markets.
Also, if you're buying a physical commodity, you have to consider storage fees and insurance costs, too. Those extra charges can put a dent in long-term returns.
Anything else I should know?
Investing in commodities can be complex. Which doesn't make them a good first stop for new or hands-off investors. But if you're ready to give it a try, make sure you’re only using money you don't plan on needing for a while. Even then, many experts recommend keeping commodities to just 10% or less of your overall investment portfolio.
There's nothing basic about investing in basic goods. Understand the unique risks that come with investing in commodities before adding some to your portfolio.
Updated Feb. 17 to include the Russia-Ukraine conflict's impact on commodities.
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