Investing in Commodities 101

Diversifying your portfolio is always a good idea. So you have your 401k, possibly some real estate, maybe you even dabble in the stock market. You are now considering adding yet another level to your investments… commodities. Not all commodities are created equal so it is important to do your research same as with any other investment.

Historically

The correlation between the stock market and the commodities market is that if one falls, the other is not necessarily affected giving a set off for a portfolio. Buying directly from a commodity company or indirectly with an investment fund. Buying directly from a commodity company may lower costs associated with having someone manage the portfolio for you, however with commodities you do need to watch market closer than you might with other investments. If a commodity loses value the days it gains might not be enough to bring your investment back. When buying through a fund your commodities are generally more diversified so you do not have to watch the market as close as you would if you bought directly from the commodity company.

Investing in Commodities – How to Get Started

When buying from a commodity company you will only be buying what they sell. If you buy through an investment fund you are able to buy some of multiple commodities and when one commodity decreases another may increase so your diversification works better for you. However buying through a fund there is likely an investment manager who usually monitors the accounts and you will pay a commission to for their services.

What Commodity Types to Invest In

Energy: Oil, Coal and Natural Gas, while environmentally speaking their use should be decreasing, however they are very much still used everywhere. A speculative market predicted OPEC to raise prices but they quickly decreased by the same spike after learning of the US and other possible EU countries dipping into their oil reserves to keep prices down for consumers. This is very much a game between countries who need oil and countries who have it.

Agriculture: Unpredictable weather can be the detriment of a crop harvest, however it would bring a bull to the market. If the wet season is too wet it can harm crops. On the contrary if it is too dry it also can harm crop harvests. With anyone following global climate change you would have to believe that either will be a factor thus lowering the supply of the agricultural commodity and raising prices. While not quite praying for a natural disaster agricultural commodity investors believe that prices will increase due to one of the above reason and plan on profiting from it.

Precious Metals: Gold, Silver and Copper et al have long been the standard by which countries manage the value of their money. These metals are increasing in value due to environmental mandates to get away from the use of plastic. These were once the standard metals for production and with plastic being cheaper they quickly went by the way side. Now that plastic is out, bringing back the base metals will likely continue to increase in the market.

Live Commodities: Livestock and meats are also commodities. This market produces leather, meat, milk and even labor. The weather plays an important role in this commodity, same as agriculture, the extreme summer and winter conditions can wipe out a farmers herd. Health is always a concern with livestock as well, because if there is an outbreak within the herd it can contaminate them and make their use for meat unfit for consumption.

Is Investing in Commodities Your Next Move?

Having a diversified portfolio is important and you are ready to add another level to your investments, commodities. Consider how you much you want to manage your own portfolio. If you are constantly checking the market and love spending time learning about it, buy directly from the commodity companies. Buy from one to start and after you have your feet wet considering buying from other commodities to expand your portfolio. Try not to buy all in one sector. Buy in energy, precious metals, livestock and agriculture.

If you are not as hands on as that, you should consider using an investment fund to buy into your first commodity fund. This will allow for immediate diversification of the commodity market and you will not have to spend as much time watching the ebbs and flows of the market.