subject: Commodity Strategy [print this page] Enjoying the benefits of commodities can be satisfying to the average investor. The diversity, stability, and return keep the commodity investor in commodities. For other investors they want to get the most out of commodities and wont settle for anything less than getting the maximum out of the benefits that are available.
In the past, investing in physical commodities like oil, livestock, wheat, or coffee beans was a bit impractical. It still is. Investors who knew the benefits of commodities searched for an alternative. Futures accounts that are actively managed or commodity related equities were alternatives that made much more sense to get involved and to invest in commodities. The trouble is the full potential of commodities isnt always used.
The reason that the full potential of commoditys benefits is not realized is the commodity-related equities dont always reflect changes in the price of commodities. For example, an oil producer who sold his supply on a forward basis will have a stock price that may not fully benefit if the price of oil goes up. The financial structure and unrelated business can affect the returns on a commodity-related equity returns. An actively managed commodity futures accounts does not always show the benefits of commodity exposure suggested by past commodity index performance. The reason this happens is because these accounts tend to be dependent on the managers skills at choosing commodities.
Another option for investors is to gain exposure to commodities is to use investment vehicles that track commodity futures index, this may help capture the full potential of the benefits of the asset class. The difference between commodity futures index and actively managed futures accounts is that commodity index returns will provide a passive exposure to a large number and varied range of commodities. It is not determined by a managers judgment call, but by 19 different commodities that are track and are determined by preset rules.
The commodities are not tightly tied together with each other and index returns tend to be less volatile than the returns on commodities individually. Another advantage is that commodity indexes themselves have existed for decades, so that there is extensive historic data for asset allocation studies and research. This is just another option to create a varied portfolio and to make full use of commodity benefits.
There are several benefits of broad commodity exposure for investors, but the risks dont disappear and need to be considered and to be managed. When consumer and industrial demand slows, commodity returns are going to slow as well. Investments averaged over 10 years should show positive returns. It should be kept in mind that short-term returns may not be as reliable to determine the true return of commodities.
Just as an over-all portfolio needs to be diversified, so should the commodities that are in the portfolio. Commodities should be from the different types of commodities. Avoid just one category. Some of the categories of commodities:
Having a diversified commodities investment portfolio will provide stability with commodities as well as adding to the over-all diversity of an investment portfolio.
To manage commodity investments and their risks it should be remembered that commodities are assets with tangible properties (oil, metals, energy sources, and agricultural products). Commodities and commodity-linked securities can be affected by the following:
* Overall market changes
* Interest rates
* Disease
* International influences
* Political developments
* Embargoes
* Trading in underlying commodities
Even the most informed can be caught off guard with unforeseen changes that affect the returns on commodities. There is no way to control the above conditions and the affects on commodity investing. Stocks and bonds are also affected by certain conditions that cannot be controlled by the investor. Both rely on each other to provide diversity and to provide the opportunity for returns under different conditions. Neither will type of investment can stand alone very successfully.
There is no strategy that is going to provide guarantees or protect complexly against loss. There are different strategies that fit different investors. Each investor should calculate the ability to absorb a loss and ability to manage the risks before investing. Creating hedges against changes in the economy doesnt guarantee that the stability will result in positive returns, but it will certainly increase the opportunities for positive returns while risk is managed. For many investors, commodities are the investment of choice.
