Should Commodities Be Part of A Diversified Portfolio?
There have been many studies conducted that detail how adding Managed Futures to your overall investment portfolio will lower your portfolio risk and possibly increase your overall returns. The lines have become a little blurred as some people in the industry have taken a more liberal interpretation of the studies.
First of all, the studies are discussing Managed Futures - not Commodity Trading. Managed Futures are basically like a Mutual Fund but for Commodities and Futures. Professionals manage a pool of funds and are typically trend followers. They will normally have a track record of past performance. I would suggest finding a fund that has a proven track record of success. These studies are not meant for sending $20,000 to a commodity broker and betting it all on Crude Oil. That is just complete speculation and should not be part of your 'Investment' portfolio.
The problem here is that many small investors lose money from trading commodities. However, many large traders make money trading commodities. This is done through Managed Futures and through good commodity brokers who consistently make money for their clients. There are also many good individual investors who manage their own commodity accounts. Until you invest with such a source, be careful what you call your investment funds.
So, how do you feel secure that you are making an Investment in Commodities?
The obvious place to start is researching Managed Futures for their past performance. If you find a fund that has averaged 15% + returns over the past several years, chances are that should be a good investment. There are several sources that track performance of these funds. You can also read about their trading philosophy. This typically states whether they focus on trend following, range trading, markets traded, short-term or long-term trading. I usually recommend investing in one fund that focuses on trend following and one that focuses on range trading. That way you are diversified whether the commodity markets are trending up or down or in a range bound pattern.
It also makes sense if you have a CTA or Commodity Broker who has proven they can show a profit for you. By this, I mean that they have a well-crafted trading plan and have made you a decent return over at least a one-year period. Typically you can tell whether a Commodity Broker is capable of making money for his clients in a 6-month period. For instance, do you still have money in your account? Many accounts go bust in about 3-4 months. Is your Broker making strategic trades or is he risking your whole account on one market at a time? Are commissions drowning your account? These are just a couple of the questions you need to answer before "commodity trading" becomes part of your "investment portfolio." Just because a commodity broker has a license - this does not mean he is going to make you money. Find a good broker and stick with him.
By Chuck Kowalski
About the Author:
Chuck Kowalski has been involved in the commodity and futures markets as a Commodity Analyst, Broker and Trader for more than 12 years. He holds degrees in Finance and Economics and is currently the editor of FuturesBuzz.com.