How and Why To Invest In Commodities

The best assets to add to an investment portfolio are those that increase the portfolio expected return while reducing the total volatility. To find such assets, investors seek those whose returns are not perfectly correlated with the returns of the existing portfolio. This is diversification. In other words, although the asset may have returns that are expected to vary wildly from one period to the next, as long that variation is not perfectly in tandem with the variation of the returns on the existing portfolio, then the asset may be a good investment and reduce total portfolio return variation.

Enter commodity markets. Though volatile, these assets may offer diversification benefits to portfolios of stocks and bonds.

This video explains commodity investing and the related diversification benefits.

For discussion:

How can an investor participate in the commodity markets?

What is hedging, and how does an investor hedge risk in commodities?