Most stock analyst will agree that it is a sound financial idea to diversify your stock portfolio with some type of commodity investment, such as commodity mutual funds. However, few will make that recommendation to you because they do not study or analyze commodities.

Commodities operate in a little different fashion than stocks. Buying a commodity means you actually own something, or in the future you will own something, whether it be so many bushels of corn, pounds of gold, or barrels of oil. You are dealing with real goods, not the performance of a company. Typically, you are buying a contract for a future buy or sell of these goods. And it is a contract you never expect to complete.

So why will commodities be good for my portfolio? You know when the bottom falls out of the stock market and all stocks are dragged down with it, not so with commodities. The price of commodities reacts more on the good old supply and demand principal. The fewer the products available, the higher the price goes. If there are more products than buyers, the price will go down.

If you have a small percentage of your portfolio (around 10% is recommended) in commodity mutual funds, then you have some protection from a downward swing in the stock market. Commodities also do well during times as of inflation. And they are a good hedge during times of a weak dollar.

People that buy and sell commodities say three things about them. They offer high risk and the chance for high return. And third, that commodity markets are easy to understand. I agree with the first statement. There is high risk in buying commodities direct. That is why we should leave them to the people who have the time and resources to do the needed research. The high risk outweighs the high return to me. And I feel commodity markets are difficult to understand, enough so that I do not go near them.

To take advantage of the diversification benefits of commodities there are other choices available, such as commodity mutual funds. They are similar to stock mutual funds in that there are many types to choose from, just as there are many brokers to buy them from. Do a little research on the funds and brokers and put some diversification into your portfolio.

    Posted in Investing from Investor on 12. Jun. 2010