What are commodities and should I invest in them?
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That’s the question of the day for me. The short answer for the immediate term is, no, I shouldn’t invest in something that I can’t even define. I want to at least have some clue about the things I’m investing in. So the place to start is with a little research.
Plopping “define: commodities” into Google gives me a starting point, telling me that (for the most part) commodities are basically unprocessed goods. Examples would include oil, grains, gold, cotton, sugar, livestock, etc. These are traded on commodities exchanges such as the Chicago Board of Trade, the London Metal Exchange, and more.
In doing more research, I found that there are (at least) two indexes that track commodity prices: the Goldman Sachs Commodities Index and the Dow Jones AIG Commodity Index. Commodities appear to be up when stocks are down, and down when stocks are up. I also saw mentions of commodities doing well during periods of inflation, which makes sense. (After all, commodities are things that you need to buy, and so if prices are going up due to inflation, it stands to reason that commodities would be going up as well.)
I’m still not sure if I should invest in them, because they seem sort of flaky (and therefore risky) to me. But maybe they would be a good way of continuing to diversify, which I badly need to do.
March 22nd, 2008 at 7:47 am
Commodities are risky. I recently wrote about them on my blog. I tend to only buy commodities (usually an oil ETF such as XLE or OIH) as a hedge and limit my exposure to 5%-10% of my portfolio. Good luck. Check out my site as I explain that many people tend to chase performance when it comes to commodities and get burnt by buying at the top.
March 22nd, 2008 at 9:29 pm
Great post, thanks.
I prefer to reserve the word “invest” for something that appreciates AND provides an income. I use the word “save” for something that just appreciates. I use the word “speculate” for something that does neither … commodities fit that description (unless you buy and hold for the very long-term … but most people hedge/trade with them).
Just semantics, I know … but, sometimes the principles behind ’semantics’ can be important!
March 24th, 2008 at 6:54 am
When I studies investments in college, we went over commodities. I remember the exact quote was… “If you ever have a lot of money that you want to lose really fast, consider “investing” in commodities.” They can be a hedge against inflation, but because they are controlled by so many varying factors and they are so speculative…they are not a good option for an ordinary investor.
March 24th, 2008 at 7:37 am
I bought commodities for Palm oil stock , but market situation are not doing that well globally , still waiting for the right time to go ,
Great post , appreciated it .
Thanks
tracy ho
wisdomgettingloaded
March 24th, 2008 at 4:42 pm
Based on these comments, it sounds like my suspicion that commodities are flaky/risky was right. Thanks for the input :)