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You've probably heard that putting all your bags in the same basket is a bad idea. The same is true when it comes to investing. Even if it does not totally remove risk, diversifying your investment portfolio can help you reach your investing goals by optimising your returns.
Stocks, bonds, mutual funds, futures, and currencies are just a handful of the investment options you have. Assets with comparable characteristics can be grouped together to further break them down: Large-cap equities, financials, and government bonds are just a few examples.
Don't overlook the importance of commodities. These are the raw materials that are utilised to create other commodities and services. There are a range of commodity investments to consider for both novice and experienced traders. However, there are a few things you should know about commodities investing before you take the leap, including the benefits and drawbacks.
Commodity investing can be done in a variety of ways. Purchasing varied quantities of physical raw materials, such as precious metal bullion, is one option. Investors can also buy futures contracts or exchange-traded products (ETPs) that directly track a specific commodity index. These are high-risk, high-complex assets that are often recommended exclusively for seasoned investors.
Another way to get exposure to commodities is to invest in mutual funds that invest in commodity-related businesses. An oil and gas fund, for example, might invest in energy exploration, refining, storage, and delivery businesses' stocks.
Commodity Investing Benefits Diversification
Over time, commodity stocks and commodities have a different return profile than other equities and bonds. Having a portfolio with assets that don't move in lockstep with the market can help you deal with market volatility better. Diversification, on the other hand, does not ensure a profit or safeguard against loss.
Individual commodity prices are influenced by supply and demand, exchange rates, inflation, and the overall health of the economy. In recent years, increased demand due to massive global infrastructure projects has had a substantial impact on commodities prices. Increases in commodity prices have benefited the stocks of companies in related industries in general.
Protection Against Inflation
Inflation can cause commodity prices to rise by depreciating the value of stocks and bonds. While commodities have outperformed other assets during periods of rising inflation, investors should keep in mind that commodities are significantly more volatile.
Commodity Investing's Drawbacks Principal Risk
Commodity prices can be extremely variable, with global events, import prohibitions, global competition, government policies, and economic situations all having an impact. Although there is a possibility that your investment will lose value, this risk can be mitigated to some extent if you plan to invest for the long term.
Foreign and emerging market exposure
In addition to the risks of investing in commodities, commodity funds face the hazards of investing in foreign and emerging markets, such as volatility caused by political, economic, and currency instability.
Concentration of Assets
Commodity funds can help with diversification, but they are considered non-diversified since they invest a major portion of their assets in a small number of particular securities that are usually focused on one or two industries. As a result, larger share price movements may result from changes in the market value of a single investment than in a more diversified fund.
Any asset class investment should be done with due diligence and discipline. Furthermore, investing should be done in accordance with your risk appetite and investment objective. An investment advisor can assist you in investing by doing a free risk profile analysis and making suggestions based on research.
Good luck with your investments!