theSkimm on Investing in Commodities

Published on: Feb 4, 2021fb-roundtwitter-roundemail-round
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The Story 

There’s more to investing than just stocks, bonds, and cash. Meet commodities.

And those are...?

A commodity is a basic good or raw material that you can consume or use to make other products. Some examples: 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 them?

There are a few different ways you can buy in:

  • Directly in their physical form. Think: 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: good, old-fashioned supply and demand could set a reasonable price for OJ. And then Mother Nature might blow through and say 'no oranges for you this year.'

Also, if you're buying a physical commodity, you also have to consider storage fees and insurance costs – extra charges that 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.

theSkimm

Shiny stuff like silver might be popular today, but chasing anything that glitters isn't a good investing strategy. Understand the unique risks that come with investing in commodities before adding some to your portfolio.

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Skimm'd by: Ivana Pino, Stacy Rapacon, and Elyse Steinhaus