Archive for July, 2008
The benefits of investing in commodities
July 7th, 2008
Some people love commodities, and others hate them. Some people think that the United States economy is heading for a recession, and they are running to commodities to hedge inflation, the weak dollar and even their gas bills. Others see commodities as overvalued and are selling their stakes in them to buy healthcare stocks, financial stocks and even real estate.
Which side is right? Only time will tell.
Personally, I think that commodities are in a bubble. Where in that bubble, I don’t know. I do think they’re in a bubble similar to the one that technology stocks were in during the 1990s and similar to the bubble that real estate is currently coming out of. Then why did I invest in the IShares Silver Trust ETF (a commodity fund) about a month ago?
Quick lesson on ETFs: For those that don’t know, ETFs or Exchange-Traded Funds are security certificates that claim ownership to a set number of underlying assets. ETFs often trade like stocks and can be made up of a basket of individual stocks (an S&P 500 ETF) or more recently commodities (a Silver ETF).
How ETFs work: Each share of an ETF represents an underlying asset. So 1 share of an S&P 500 index ETF represents a faction of all 500 stocks in the S&P Index. Like a regular mutual fund, an ETF owns the underlying shares. Because of this, a 500 ETF would move as the S&P 500 does. When the index goes up in value, the ETF goes up in value and visa versa. Similarly, 1 share of the IShares Silver ETF represents about 10 ounces of silver held in a vault. This ETF moves with the price of silver.
So I think commodities are in a bubble. Why I think that and what I think of market bubbles is a whole other topic, so we are going to focus on why I still purchased a silver ETF during what I see as a commodities bubble. The answers is easy - diversification.
Diversification is, “a risk management technique that mixes a wide variety of investments within a portfolio,” and is a great way to create and maintain wealth. With the recent developments that enable all investors to invest in commodities, I think commodities should be a part of everyone’s portfolio. Greater diversification reduces risk, and investing in commodities can very easily increase your returns as well.
So I bought silver, because at the time I had no exposure to precise metals, and for a few reasons, I like silver more than gold. I have never owned silver before, but I did some research, and I am happy with my purchase. I’m also very happy with my portfolios current diversification and asset allocation.
Please be careful not to invest too heavily in commodities or any asset class. After all, I think commodities may be in a bubble.
Tags: commodities, ETFs
Posted in Personal Finance | Comments (0)