Diversification is one of the most important rules of investing. If you invest in a range of different asset classes, such as stocks and bonds, losses in one may be offset by gains in another. Investing in commodities--whether it's oil, gold, or pork bellies--is yet another way to achieve broader diversification.
"We believe they have a role in just about every client's portfolio--aggressive, conservative, or anything in between," says Jerry Miccolis, coauthor of Asset Allocation For Dummies and principal and chief investment officer of wealth management firm Brinton Eaton. "The reason is that they typically zig when the more traditional investments zag."
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Many advisers recommend commodities funds to their clients, in part because it's easier than ever to invest in commodities. The emergence of investing options like exchange-traded funds has made what was once an exotic asset class more accessible. "Commodities are now more broadly recognized as an asset class that investors and advisers have access to, and everybody is trying to figure out how much they should allocate to them in their portfolio and in what form," says Tom Lydon, editor of ETFTrends.com.
For many investment advisers, the case for commodities goes further than diversification. Commodities are commonly used as a hedge against inflation, which some experts say could become an issue over the long term. Rapidly growing emerging economies including China and India will increase demand for commodities as well. Some advisers recommend a portfolio allocation of 5 and 10 percent to commodities, depending on clients' investing time horizon and risk tolerance. It's important to be cautious, though, as commodities can be an extremely volatile asset class. (more)
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