For investors with appropriate risk tolerances, the measured inclusion of commodities can offer an additional dose of diversification.
Diversification is a cornerstone of thoughtful, long-term focused investing. Incorporating assets and asset classes that don’t always move in tandem – that is, their returns aren’t strongly correlated – can help temper stock and bond market risk.
For investors with higher risk tolerances and access, options to diversify beyond the traditional trio of stocks, bonds, and cash may be appropriate. Along with other forms of non-traditional or alternative investments, this is sometimes pursued via the measured inclusion of commodities.
Commodities, clearly defined
Commodities are basic goods such as energy products, precious metals, and agricultural products – things that are essentially uniform in utility and interchangeable with other goods of the same type.
There are hard commodities that require mining or drilling, such as metals like gold and aluminum, as well as energy products such as crude oil, natural gas, and unleaded gasoline. Then there are soft commodities, those that are harvested or ranched, such as corn, wheat, soybeans, and cattle.
Copper is an industrial commodity that is looked at as a gauge of growth in the economy.
Investors and traders have several ways to buy and sell commodities: in the market at today’s price called the Spot Price or via forwards, futures, and options which allow delivery in the future instead of today. Commodities can be bought and sold on exchanges and derivatives markets, and there are also commodity ETFs and mutual funds.