Never heard of commodities? They are one of the financial instruments in which you can invest. In this #ABCfinance we will see What are and what are the pros and against their use as an investment tool.
WHAT IS THE commodities
Le commodities are the raw material, i.e. primary goods, also used to produce final goods, i.e. intended for consumption.
Le commodities They include:
. agricultural products, such as wheat or livestock;
. energy products, such as oil and gasoline;
. the metals, for example gold, silver and aluminum.
Then there are the soft commodities such as sugar, cotton, cocoa and coffee.
The commodity market has evolved over time. Bargaining was initially physics e limited in time. More recently it has found development on futures markets (although for some commoditiescurrently do not exist or are underdeveloped). Today on the stock exchange it is in fact possible to negotiate a wide range of agricultural products, metals, energy products and soft commodities.
Commodities have become a real one asset classes for investment choices: think, for example, of the development of indexes future commodities or the introduction of investment vehicles that track commodity indices, such as ETFs. Do you want concrete examples? Access the AdviseOnly website for free and click the "Classifications" button, then select "ETF & ETC" and "Commodities", you will get different lists of these instruments classified according to various criteria.
The pros of investing in commodities
1. Better portfolio diversification
We at Advise Only have repeatedly stressed the importance of portfolio diversification. As explained in our blog, in a diversified portfolio, the assets do not always move in the same direction (up or down), which allows the overall risk of the portfolio to be reduced – bearing in mind that diversification is not everything . The concept of diversification is intimately related to that of correlation, or the measure of how much two or more investments move in unison.
We take thegold. As shown in the example of the article on portfolio diversification, represents one of the few financial assets that shows low correlation measures with respect to other financial instruments, both with positive and negative markets or even shows a reduction in correlation when markets are under stress. And here we come to the second advantage offered by commodities.
2. Event risk protection
Commodities can offer a hedge against "event risk", i.e. the risk that a financial crisis (think, for example, of the 2008 financial crisis), a war or other geopolitical events can cause declines in other financial assets.
Gold offers protection to your savings in the presence of extreme risks (tail risk).
3. A hedge against inflation
In the case of cost inflation, for example inflation of goods and services generated by an increase in the price of raw materials, the investment in commodities can hedge portfolios against rising prices.
Indeed, in this case, the inflation rate, other conditions being equal, increases in proportion to the rate of change in the price of raw materials.
The cons of investing in commodities
1. Volatility
Historically commodities have highlighted a volatility almost equivalent to the stock market.
2. Specific knowledge
Some segments of the commodity market (think of the agricultural or livestock sector) require specific knowledge related, for example, to seasonality or the product cycle. Do you remember the scene from the movie "An armchair for two"?
3. No coupons or dividends
In the case of commodities (but also of currencies), to the investor no coupons are distributed (as for bonds) or dividends (as for shares).
Naturally this disadvantage could represent a limitation for an investor whose investment objective is tointegrate income over time (think of the Objective Rendita portfolio).
A balance sheet of the investment in commodities
To conclude, we can say that raw materials represent aasset classes on its own that offers benefits but also several disadvantages. Having an exposure to commodities in your portfolio helps to diversify your investment, reducing risk. However, for the majority of savers, exposure to this asset classes must be contained, taking into account the risk profile of the portfolio.
If you wish to invest in commodities, or integrate an existing portfolio in a risk diversification logic, AdviseOnly offers the free possibility to view, save, modify and monitor the portfolio Commodities.
