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Investing alternatives: part 1 - commodities

Buying shares in businesses isn’t the only way to invest. Jonathon Curtis looks at the alternatives, and examines if they merit a place in a diversified portfolio.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

When you think about building an investment portfolio, shares, bonds and cash are probably what spring to mind. But there’s a host of other investments available – so-called ‘alternatives’. It’s a very broad category, which includes everything from start-ups, to forestry, and even investing in bacon.

Over the long-term some alternative investments have performed better than the stock market. But there are drawbacks, they can be difficult to understand and value, and funds which invest in alternative assets often have high fees, including complicated performance fees. Some also have a minimum investment period, so you can’t access your money early without paying a penalty. It’s also not as easy to buy and sell alternative investments compared with shares and bonds.

So what’s the answer? Well, as usual, “it depends” on what you’re looking for. Alternative investments have a range of characteristics and will each appeal to different types of investor.

In this four-part series we’ll lift the lid on four major classes of alternative investments: commodities, property, private equity and infrastructure. We’ll look at their pros and cons, how they’ve performed and how you can invest in them if you choose to.

Please note that this article is not personal advice and if you’re unsure that an investment is right for you, seek advice.

Part 1: Commodities

Commodities are often divided into two categories: ‘hard’ and ‘soft’. Soft commodities include agricultural products like wheat, sugar, coffee and meat.

Hard commodities have to be mined or extracted. They include oil and gas, industrial metals like steel and copper, precious metals such as gold and silver, and other materials like rubber and palm oil.

Should I invest in them?

Diversification is one of the main reasons for investing in commodities. Their performance usually has little to do with the stock market. So when markets are going down, commodities could rise in value, but the reverse is also true. Gold, for example, has traditionally been seen as a safe haven during falling markets – as markets tumble, investors take refuge in gold, pushing up the price. Of course past performance is not a guide to the future and there are no guarantees how commodities will perform. All investments, including commodities, rise and fall in value so you could get back less than you invest.

Because the price of oil, crops and metals affects how much we pay for our energy, food and cars, commodity prices can be a big driver for inflation. This means commodities could provide shelter against rising inflation or even potentially benefit from it.

Values are based on supply and demand both of which can change rapidly so prices can be volatile. There can be supply manipulation such as by the Organization of the Petroleum Exporting Countries (OPEC). Soft commodities can be severely affected by weather or disease.

Another important consideration is commodities don’t produce any income. So unlike investing in many shares and bonds, they only give investors one bite of the cherry – any gains come solely from rising values - and in many cases those gains have fallen well short of shares and bonds over the long-term.

Commodities vs the global stock market over 10 years

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Lipper IM 31/10/2009 to 31/10/2019.

How to invest in commodities

Investing in raw commodities tends to be the remit of large organisations. But there are ways for everyday investors to add commodity exposure to their portfolio. You could invest in the shares of companies that grow, mine or produce commodities. They might not offer the same diversification as the commodity itself though, as they can behave similarly to the broader stock market.

Exchange-traded funds (ETFs) are a simple and convenient way to invest in commodities. They’re bought and sold the same way as shares, and aim to track the performance of the entire market for a commodity such as metals, oil or gold. Some ETFs invest in the physical commodity, and the manager is responsible for transportation, insurance and storage costs. Others use derivatives to artificially replicate the performance of the commodity without having to own it. This saves on costs but it’s a higher-risk approach.

Commodities can be volatile investments, so we think they should only form a small part of a diversified portfolio.

Learn more about ETFs

Search for commodity ETFs

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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