Commodity risk

Contrary to their generally risky image as investments, commodities help reduce overall risks in portfolios because of their inverse correlation with shares and bonds. They tend to do well when inflation is high or rising, and not so well when inflation is low or falling; equities and bonds tend to do the opposite.

by Knowledge@Wharton
Last Updated: 23 Jul 2013

Importantly, this research also suggests that commodities are innately less risky than shares - so further enhancing their risk reduction appeal.

Investing in commodity futures contracts was found to have delivered equivalent overall returns to the Standard & Poor's 500, the major US stockmarket index, in a 45-year period to the end of 2004. But the commodity futures produced these returns with smaller price swings - volatility - which equates to lower investment risk.

It remains unclear, however, why commodity futures, while being negatively correlated, should produce similar long-term returns as shares, and this is being further researched.

Are commodities futures too risky for your portfolio? Hogwash!
Knowledge@Wharton, 5-18 April 2006

Review by Steve Lodge.

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