Aside from watching the 1980s comedy, Trading Places, most people have little experience with commodities investing. For some physician investors, however, putting some of their money in commodities may be a smart way to add diversification to their portfolio.
Unlike investing in stocks, which is the purchase of a share in a company, investing in commodities is investing in a raw material or agricultural product. Types of commodities include precious metals, oil, natural gas, wheat, corn, hogs, coffee, and lumber. Investing in these items may seem simple, but the cost fluctuations associated with each of these sectors can be wild.
Unpredictable factors such as war, weather, supply, and demand can have devastating effects on price. And according to Bankrate.com, most commodities move independently of one another in terms of value, so you truly have to keep an eye on the details of each one.
The following are some of the ways in which you can invest in commodities.
Futures. This is usually reserved for hardcore investors. Investing in futures is high-risk and high-reward. You must be able to pivot quickly to leverage a win, or lose and a novice can quickly see their fortunes evaporate. This is usually thought of as classic commodities investing, but it is far from easy to manage.
Purchasing the physical commodity. This most often applies to precious metals (ie, bullion). Investors purchase gold or silver, for example, to hedge inflation. One of the risks in keeping precious metals in your possession is the possibility that they could be stolen. Be sure to keep your physical investments in a secure and well-guarded location.
Mutual funds. According to Investopedia, one of the easiest ways to dip your toe in the commodities market is to purchase shares in a commodity mutual fund. These funds typically include the stocks of companies involved in the commodities such as mining or lumber companies, as well as some stake in the physical commodity as well.
Since there is a historical tendency for commodities to behave in a manner opposite to the movements of the stock market, diversifying your portfolio with some exposure to commodities can help you balance your investments during times of economic woe. However, because commodities can be so unpredictable and complicated, it is very important to work with a financial advisor who has experience in this type of investment strategy.