Along with investing in stocks, bonds, CDs, and real estate, you may want to put money into commodities. Before you add commodities to your investment portfolio, it is important for you to understand what these stocks are and what impact they can have on your finances. You can make the best decision for your portfolio by discovering the pros and cons of investing in commodities.
The Advantages of Investing in Commodities
Investing in commodity stocks can benefit you as an investor in numerous ways. The upsides found with commodities include:
It is important for any investor to diversify his or her portfolio. Commodities provide the diversification you need to back up your own portfolio.
Because they are markedly different than other types of investments like stocks, bonds, and CDs, commodities could hold up in value if your other investments fail or falter. They also could be offset in value by your other investments.
Commodities can also raise substantially in value if the demand for the product or services increases. These investments respond to the law of supply and demand arguably more than any other type of asset in your portfolio. If you are in tune with the market, you may even be able to predict when the demand for the commodities in which you have invested will go up or down.
Commodities can be traded anytime day or night. You do not have to wait for the market to open to trade or sell your commodities.
You can even trade or sell them online from the comfort of your own home. You can also hire a financial adviser like James Dondero to buy, sell, or trade your commodity stocks for you at any time.
The Disadvantages of Commodities
Commodities also come with numerous disadvantages about which you may want to learn before you invest your money. These downsides include:
As noted, commodities significantly respond to supply and demand. Because of this, they are at a greater risk of failing particularly in volatile market conditions.
This risk comes even if your commodities investment has performed well for months or years. After they fail, commodities can take months or year to rebound in value.
If you buy commodities as part of a mutual fund, you may find that they are concentrated in one industry, such as pork, corn, or utilities. This concentration can work against you if that particular industry falters or crashes. You do not get the variety or market exposure as when you invest in individual stocks, bonds, CDs, or real estate.
Unless you have a knack for being able to predict the commodities market, you must be on guard constantly for changing market conditions. Your monitoring may include having to pay attention to foreign policy, the economy, and politics in general. However, you can also rely on the advice of financial professionals like James Dondero when it comes to knowing how your commodities may perform in the stock market.
About the writer: As the co-founder and president of Dallas-based Highland Capital Management, L.P., James Dondero has a career in the financial industry that spans more than 30 years. He serves as the chairman of the boad for NexBank and HCM Acquisition Company. He graduated with top honors from the University of Virginia McIntire School of Commerce.