One of the investment asset classes that gets a fair bit of press coverage is commodities. What are commodities you ask? Basically they are raw materials that are mined, grown and used in construction and manufacturing items like cars. The definition is any material or produce that is consistent in quality and type. It doesn’t matter where you buy your copper from – it is all the same stuff.
Let’s look at a few examples:
- Natural gas
- Metals (ie nickel, copper)
- Raw food ie milk, corn, soybeans, wheat
Why do I want to invest in commodities?
Commodities by themselves are a fairly risky asset class – they either do really well or they don’t! One of the benefits of owning some commodities is for diversification.
How do I buy commodities?
Commodities are an investment type where you can literally buy the actual material – cows, milk, soybeans etc. However there are mutual funds which focus on commodities which are probably an easier way to participate in commodities.
Should I buy commodities?
Most investors will do just fine without ever owning commodities directly. If you are more of a passive investor and buy broad-based indexes such as ones that cover the S&P500 then you probably already have enough exposure to commodities and don’t need to worry about it. It’s good to know what you are invested in however. The purpose of this post is for information only – it’s not intended to encourage anyone to go out and invest in commodities.
Investing in commodities or commodity trading is very risky and should only be attempted if you know what you are doing. Foreign exchange trading is another risky pursuit where you can lose a lot of money very quickly if you don’t know what you are doing.
For more information on how to invest in commodity funds, I recommend signing up for a free Morningstar membership which enables you to research different commodity investments.