Commodities Investments: How to Determine Your Risk Appetite - dummies

Commodities Investments: How to Determine Your Risk Appetite

By Amine Bouchentouf

Risk is perhaps the single greatest enemy you face as an investor in commodities. How wonderful would life be if you could have guaranteed returns without risk? Because that’s not possible (and has never been possible), you have to find how to manage, tame, and minimize risk.

Your risk tolerance depends on a number of factors that are unique to you as an individual. The first step in determining your risk tolerance is deciding how much risk you’re willing to take on. Although no equation or formula can determine risk, you can use a general rule to identify the percentage of your assets to dedicate to aggressive investments with an elevated risk/reward ratio.

As a general rule, the younger you are, the higher your percentage of assets should be devoted to higher-risk investments. This approach makes sense because if you lose a lot of value, you still have a lot of time ahead of you to recoup your losses. When you’re older, however, you don’t have as much time to get back your investments.

Here is a simple guideline to help you determine the percentage of assets that should go into investments with higher returns (and risks), such as stocks, commodities, and real estate. This is not a percentage of how much of your portfolio you should invest in commodities.

Age Group Percentage in Growth Investments
0–20 Up to 90%
20–30 80%–90%
31–40 70%–80%
41–50 60%–70%
51–64 45%–60%
65 and over Less than 45%

These rules aren’t set in stone, but you can use them to approximate how much of your assets to place in investments that have a high risk/reward ratio. If your investments are increasing just fine with the percentages you’re working with, don’t change them! As the saying goes, if it’s not broken, don’t try to fix it.