In times of economic and political uncertainty, I often see investors turning to commodities. Types of commodities can range from precious metals like gold, to agricultural products, to energy resources. Their prices are all tied to something physical, whereas the stocks in other sectors may not be. If you’re an investor looking to grow your assets over time, it’s critical to understand were commodities may have a place in your portfolio.
Why Investors Like Commodities
Here are some reasons investors like to include commodities in their portfolios:
Inflation
Because commodities are generally tied to a physical asset, they are traditionally seen as a hedge for inflation. In environments investors predict to be highly inflationary, where the price of goods is increasing rapidly, commodities may be considered to at least keep pace with inflation.
Diversification
Any asset class that is not 100% correlated with another asset class adds diversification benefits. If we look at the classic commodity example of gold, it has a low correlation with both US Equities and Treasury Bills. If you have several commodities, like cattle, soybeans, coffee, crude oil, and gold, your overall risk level decreases even further and the diversification benefits are enhanced.
Sustainability
Investors who favor sustainability efforts may look to specific commodities to put money towards things like clean energy and ethical sourcing of various natural resources.
Geopolitical Shifts
Conflicts and political instability can greatly impact the price of various commodities. One of the most obvious examples occurs around the price of oil. When there are wars in oil-producing countries, global oil prices can be affected.
Technological Advances
Technological advances can alter the commodities landscape. When there is a groundbreaking invention or new extraction technique of a resource, investors may see this as an opportunity.
Speculation
Lastly, investors may feel they have knowledge about the workings of a specific commodity that gives them an edge. For example, you may predict a drought in almond-producing regions leading to a spike in the prices.
Asset Allocate To Risk Tolerance
When you are investing, it’s critical to understand your investment goal. If you’re in your accumulation phase, you may have a future goal like a major purchase or retirement funding. From that goal, paired with how much time you have and your feelings about risk, we can derive your risk tolerance.
Let’s say you are 35 years old, are comfortable taking on risk, and have a goal of tapping into retirement income starting at age 65. In this case, you would have a high tolerance for risk and you might be in a portfolio of 100% equity investments. Conversely, a person currently relying on their portfolio for income might only have 20% exposure to stocks.
How Much Of Your Equity Exposure Should Be In Commodities
Once you’ve figured out your investment goal and the appropriate asset allocation for your risk tolerance, it’s time to consider how much of your portfolio should be allocated in commodities. There are immense dangers in allocating too much of your portfolio to any one asset class.
I’ve seen investors with as much as 80% of their portfolios in gold, which has an average return of 7.98% since 1971 compared with the US Stock market’s average return of 10.7%. However, experts advise an allocation of 5-10% of the equity portion of your portfolio should be in commodities, no matter what is happening in the market.
Conclusion
In conclusion, commodities can serve as a vital component in a growing investor’s portfolio, offering benefits such as inflation hedging, diversification, and opportunities aligned with sustainability and technological advancements. However, it’s crucial to balance commodity investments with overall portfolio goals and risk tolerance. By understanding the unique characteristics and market influences of commodities, investors can purposefully incorporate them into their portfolios to enhance stability and growth potential.
This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-7491277.1 (1/25)(exp. 1/29)
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