It is true that commodity investments can be extremely volatile. At the same time, investing in commodity mutual funds can be a way to minimize the risk of other instruments. They offer a unique form of protection, which can greatly enhance a diverse portfolio.
The Paradox of Commodity Investments
Why is it wise to invest in commodity mutual funds if the commodities market is associated with so many financial dangers? Imagine how much easier it is to lose money on an expected return from cattle futures than from a municipal bond, for example. The cattle futures contract depends on a host of different factors, some predictable, and some not, that could affect the actual price of the product, while the municipal bond is backed by the credit of a local government. Investors must accept plenty of risk with commodities. This risk is healthy for an investment portfolio because it is a completely different kind of risk.
The distinct nature of commodities trading actually buffers the innate risks of an investment portfolio. Commodity mutual funds are not tied up in the stock markets, so they help to balance the risks involved with equity investments. Revolving around actual goods, they are not dependent on currency values, but the actual value of corn, hogs, petroleum, or other goods. In this way, they are an ideal investment to offset the effects of inflation, which can diminish the value of long term bonds and money market investments.
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