Commodities a high-risk investment? The opposite–if you’re smart about it.
Investing in commodities used to be: Make a fortune, or lose your shirt. But commodity investing has tamed in recent years through broad-basket ETFs, and almost all investors should have commodities in their portfolio.
“Commodities are volatile—but volatile in a good way,” says Jerry Miccolis, CFA®, CFP®, MAAA, Senior Financial Advisor with Brinton Eaton Wealth Advisors. “They tend to zig when your equity positions are zagging, and can lower the overall volatility of your portfolio.”
Commodities can not only improve the stability of your overall portfolio, they can boost returns over the long-term, provided you periodically rebalance—adding to your position when prices are down, and trimming back when they’re up to keep your allocation steady.
Do invest in a broad basket of commodities via an ETF, ETN (exchange-traded note) or mutual fund that tracks an established broad index, covering metals, livestock, textiles, food, and energy, he advises.
Don’t invest in single-commodity niche instruments such as gold or oil. Even pros have a poor track record in forecasting one commodity’s movements. “It’s too risky to put your all your commodity eggs in one basket,” Miccolis says.
Do start slowly. Start with 5% to 10% of your portfolio and watch the behavior of your overall portfolio–not just the commodity portion–as the pieces all act in concert.
Don’t go too far too fast. If you happen to invest in commodities at just the right time, you might rack up a very nice short-term profit and be tempted to add more. But that is often exactly the wrong move, as a sharp increase in prices may mean it’s time to trim your holdings, or at least stop adding to them.
Conversely, you might see a sharp price drop and be tempted to sell your position—an equally bad move. Remember, rebalancing imposes a discipline on yourself to systematically buy low and sell high.
One of America’s leading authorities on asset allocation, Miccolis, CFA®, CFP®, is a senior financial advisor, Chief Investment Officer, and co-owner of Brinton Eaton, a boutique wealth advisory firm in Madison, N.J., serving individuals and institutions throughout the U.S. He is also author of Asset Allocation For Dummies® (Wiley 2009).
About Brinton Eaton
Based in Madison, NJ, Brinton Eaton is a boutique advisory firm with a long history of serving affluent individuals and their families across multiple generations. The firm helps its clients protect, grow, administer and ultimately transfer their legacy of wealth through a full range of integrated services, including lifetime cash flow projections, financial/tax/estate/retirement planning, investment management, charitable giving, and business succession planning. Brinton Eaton’s clients tend to be corporate executives, professionals, entrepreneurs, and retirees with investable assets over $2 million. For more information, visit www.brintoneaton.com.
