Looking for a new investment strategy to diversify your portfolio? Commodities may be the perfect investment opportunity for you, but what can you gain or lose from investing in this market? This pros and cons list can help you make an informed decision.
Pros of Investing in Commodities
- Growth Opportunities: Unlike some other investment opportunities, it’s possible to see growth in a commodity price very quickly. For example, the price of a particular commodity rises and you purchase the good in bulk. Later, you can sell it when the demand is quite high. This is exactly what happened in the iron ore rush of 2008-2010 thanks to China’s massive need for the commodity.
- Diversification: For the most part, commodities remain steady year after year unless there is a huge demand for a certain good. The market can be volatile, but it offers a chance for you to diversify and decrease your chance of loss. Commodities can be a way for investors to hedge against stock and bond investments that are less certain.
- Inflation Protection: Anyone who participates in the stock market knows that inflation can heavily affect profits and returns on investments. However, commodities have the chance to benefit from inflation. As the price of goods and services rises, the commodity price will also rise. This gives the investor plenty of opportunity to make a profit due to demand for the product.
- Securities: For those who choose to go through a broker, they are protected by the National Commodities Association and the United States Commodity Futures Trading Commission against fraud, manipulation, and abusive trading practices. Agents are monitored, and it’s easy to research whether a broker has had violations in the past and if they’re even licensed to practice.
Cons of Investing in Commodities
- Volatile: Out of any other asset, commodities are some of the most volatile. Some experts may even suggest that they’re twice as volatile as stocks. It may not necessarily be a bad thing, but it can make commodities a risky investment for some individuals. The upswing of commodities can offset the losses during times when demand is low, but this isn’t always the case.
- Rules and Regulations: The commodities markets have some of the strictest rules and regulations of any market. Brokers need to be registered with the National Commodities Association, and all goods must reach a specific quality to trade in the market later. Some have the opinion that it deprives the buyers’ and suppliers’ power of choice because they are bound to obey these regulations.
- Long-term: Participating in the commodities market isn’t a short-term investment. To get the full benefit of diversification, investors should keep their commodities for 10 years or more. This means that the investment must be maintained throughout highs and lows with the hope that they can gain profit at a later date.
- Research: Not all commodities are created equal. Energy, agriculture, livestock, and metals have completely different benefits and drawbacks, and each has varying supply and demand. Some goods determine future interest rates based on speculation while other prices, like agriculture, are not traded on the exchange and remain much more steady. So, investing in commodities takes more than sitting back and watching for profit. You’ll need to know where it’s smartest to invest your money, and how to do it depending on the specific commodity.
