Whether Investing in Commodities is Right For You

Commodities are currently the "hot" investment thing. Magazines and business cable channels are constantly talking about them. The whole thing bears an uneasy resemblance to the dot com craze of the late 90s. Commodities are a legitimate investment and there is a purpose for them. However, not everyone should be putting their money in them. There are several things you need to consider to determine whether commodities are right for you.

For one, be aware that commodities are extremely volatile compared to stocks and bonds. There are several reasons behind this. For one, commodities such as steel and copper are used in industries such as automotive, construction and shipping. The fortunes of these industries closely follow the broader economy. Also commodities by definition are commodities. The global marketplace is extremely competitive. The vast majority of companies involved in this field have very little pricing power. For some, this volatile pricing is a huge advantage. A high amount of price fluctuation potentially means a lot of profit potential if you have a good idea of when to buy and sell. However, the price movements can be stomach-wrenching for others.

Second, do be aware of the benefits of portfolio diversification. Commodities are somewhat uncorrelated with stocks and bonds. So buying them will diversify your investment returns (not to mention act as a nice hedge against inflation.) For example, right now with the "Great Recession" US companies are not doing well. But commodities are doing very well because of the growth of overseas markets such as China and India. An individual investor with allocations to both investment types would have suffered a lower loss compared to his peers.

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