Commodities offer rewards as well as risks

Article Excerpt

Commodities are the raw materials that production and manufacturing rely on. Investing in them can help investors diversify their portfolios and win greater protection from inflation. However, commodities as a group can be both cyclical and volatile, and investors might rightly question the wisdom of either directly holding commodities or the commodity producers themselves in their portfolios. Long-term gains with more risk Over the period since 2002, an investment in a basket of physical commodities delivered a return of just 5.4% per year, while commodity producers returned 9.5% per year; this compares with the 9.5% per year return of the S&P 500 index (see table below). The IMF All Commodity Index provides a good measure of the performance of physical commodities as a group. This index holds a broad basket of 67 commodities including energy (40% weight), metals (23%), and agricultural products (35%). Commodities and the listed producers are more volatile than the broader equity markets—estimates are that the volatility of the monthly price…