For around half a decade, things have been pretty tough on commodities – with prices of raw materials and foodstuffs halving. Once a key factor in the investing market, commodities are now being shunned more than ever before by investors. But it might be time to go back and consider adding commodities such as energy, metals and grains into your investment pot. There are many reasons for investors to consider doing this, and we’ve explored some of them here, based on valuable input from Louis Hernandez Jr.
Reduce Risk
Firstly, there’s the main reason to invest in commodities, which is to reduce your level of risk. Since the prices of commodities tend to usually be uncorrelated with the prices of various other assets such as bonds and stocks, the overall volatility of an investment portfolio tends to be lower when commodities are included. As most investors tend to see volatility and risk as being one and the same, having less of it also means that there is less risk. This can be particularly appealing for investors nearing retirement, thousands of whom are even putting physical precious metals in their retirement accounts.
How to Buy Commodities
Investors who feel that their portfolio is underweight when it comes to commodities should begin by topping it up slowly. But, even those who do not already have a position in the commodities market should be careful to avoid acting in haste when making new investments. Experienced investors recommend a practice known as dollar-cost averaging, which involves adding a sixth of the target position each month. This means that while you may not hit the bottom of the market, you are much less likely to get the worst prices.
Individual Investors
Experts suggest that individual or first-time commodity investors tread the market very carefully. This is because commodities tend to be very difficult for individual investors to play, according to Terry Gardner Jr., the senior managing director at C.J. Lawrence, a resident investment advisor in New York. He advises commodity investors to be fully aware of when to get in and when to get out, which he explains is partly because futures contracts typically tend to have a finite life, while theoretically stocks can live forever.
Stocks Benefit from Commodity Improvement
Another thing to consider when investing in commodities is how various stocks will be improved due to this. One group to take into consideration are mining companies, for example industrial metals miner BHP Billion Limited (BHP), metals miner Freeport McMoRan (FCX) and agricultural chemicals seller Monsanto Co. (MON). Some of the risks of investing in stocks are involved with the price of commodities, although there are other reasons as to why risks present when investing. CEO and president of asset management firm Mount Lucas Management Tim Rudderow says the commodity price downdraft has brought about some bargains where stocks have been marked down, sometimes unfairly. This move down has subsequently created various opportunities for refiners.
For those who aren’t ready to invest in futures but don’t feel that the stock market is right for them, now is an ideal time to consider investing in commodities.
