How Investing in Commodities Can Be a Hedge Against Uncertainty
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What is the main topic discussed in this episode?
and how they may affect your finances and portfolio. Listen at schwab.com slash Washington Wise.
Here's your money briefing for Thursday, January 2nd. I'm J.R. Whelan for The Wall Street Journal. Many people select stocks as their main investment option, but financial professionals recommend those managing their portfolio or 401k also include commodities like gold, oil, or corn, especially as inflation is creeping higher.
Commodities reflect current prices as opposed to stocks, which may reflect future earnings potentials. So commodities will reflect what's going on now. And that is one of the reasons why it can be an inflation hedge, because as demand for commodities goes up, the prices goes up.
We'll talk to Wall Street Journal contributor Debbie Carlson after the break.
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What does 'commodities' include and why are they different from stocks?
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Why do financial professionals recommend adding commodities to a portfolio?
Financial professionals say commodities can be a good addition to your portfolio. Wall Street Journal contributor Debbie Carlson joins me. Debbie, when we say commodities, what types of investments are we talking about?
When we talk about commodities, we're talking generally about natural resources. So that can range everything from crude oil to corn to cocoa, even to gold and silver. So it's a wide variety of products.
Why do financial professionals recommend people consider including them in their portfolio?
Commodities don't always get the attention that stocks do. And they're a great hedge because they're usually not correlated with stocks. They can be a good diversification hedge. They can be a hedge against volatility. They can be a hedge against inflation. They can also play a safe haven role. That's why a lot of financial professionals recommend people include at least a small portion to commodities.
You mentioned inflation. How do higher prices factor into commodities' role in your portfolio?
There's been some research done by Invesco that since 1998, when the CPI, the Consumer Price Index, is greater than 2%, commodities broadly had positive returns 74% of the time. And when CPI is less than 2%, commodities had negative returns 84% of the time.
How do commodities act as a hedge against inflation and volatility?
And the reason why that is commodities reflect current prices. as opposed to stocks, which may reflect future earnings potentials. So commodities will reflect what's going on now. And that is one of the reasons why it can be an inflation hedge, because as demand for commodities goes up, the prices goes up. And so that is why they can be a good inflation hedge.
How would somebody buy commodities?
The easiest way for the average person is to use an exchange traded fund. You can also buy futures.
What evidence links CPI readings to commodities' historical performance?
You can buy managed futures. But it's just much more simple for someone to buy an ETF because they could go to their brokerage account and simply buy one of the many ETFs that are out there.
You mentioned that commodities are often a measure of current prices, but we also talk about oil futures, for example. What's the difference there?
When we talk about commodities, we can talk about spot prices and we talk about futures prices. The spot price is the price of the commodity today. The futures price is the expectations for the price in the future, which is why it's called the futures. And there's something known as a futures curve, and traders will buy and sell and do price discovery to get a sense of what a commodity might be worth in the future based on what is known today.
What kind of strategy should an investor use when buying commodities?
The best way to look at it is to think about a broad-based commodities index. And the reason why you want to think about broad-based is you can have exposure across the major commodity indexes in a single fund.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:01–1:29
2
What does 'commodities' include and why are they different from stocks?
1:29–1:58
3
Why do financial professionals recommend adding commodities to a portfolio?
1:58–3:18
4
How do commodities act as a hedge against inflation and volatility?
3:18–3:49
5
What evidence links CPI readings to commodities' historical performance?
3:49–5:22
6
How can an individual investor buy commodities—ETFs, futures, or managed funds?
5:22–7:01
7
What should you look for when choosing a broad-based commodities ETF?
7:01–8:02
8
How much of my portfolio should be allocated to commodities and how can an advisor help?
8:02–8:42
Speakers
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