10 Oct Are commodities a good investment?

Q. I’ve heard that commodities are a good alternative investment. What’s the best way to buy? How do I know which ones are the best for this market?
— Curious

A. Commodities can be a good addition to a diversified portfolio.

But this is one kind of investment you want to think about carefully.

Commodities derive their investment returns very differently from other investments like stocks and bonds, and that makes them a good diversifier, said Andy Kapyrin, director of research at RegentAtlantic in Morristown..

“Most investors do not buy commodities directly and put them in storage. Rather, they buy funds that invest in futures contract for the commodity,” he said. “The futures typically trade in line with the underlying commodity they track, but can deviate over longer time periods.”

He offered this example with oil.

As of late September, oil was about $45 per barrel, Kapyrin said.

“If I buy an oil future that expires in September 2017, I have to lock in a price of about $49 — $4 higher than the current price,” he said. “So, I as the commodity investor, start out $4 or 9 percent in the hole and have to make that up before I even break even.”

This is one factor that has kept commodity returns low in recent years, he said.

Once you understand that futures pricing mechanism, you can look at investing in commodities.

Individually, commodities can be very risky, Kapyrin said, once again offering oil as an example.

“We saw its price plunge from over $100 a barrel to below $30 earlier in 2016,” he said.

So rather than subject yourself to the risk of buying just one commodity, consider investing in a basket.

“The price of oil has very little to do with the price of a precious metal like gold, and less still to do with an agricultural commodity like cotton – so, investing into a broad basket all at once may help to limit risk,” he said.

He recommends looking for an exchange-traded fund (ETF) or a mutual fund that follows a broad basket of commodity investments.

“That way you don’t have to make the call of whether oil, gold, corn or copper is the better bet at any given moment in time and you’ll likely take less risk in the long term,” he said.

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This post was first published in October 2016.