How to Make Room in Your Portfolio for Commodities - dummies

How to Make Room in Your Portfolio for Commodities

By Amine Bouchentouf

One of the most common questions from investors is, “How much of my portfolio should I have in commodities?” The answer is usually simple: It depends. To answer that question, you have to take into account a number of factors to determine how much capital to dedicate to commodities.

If you’re new to commodities, you should start out with a relatively modest amount — anywhere between 3 and 5 percent of your portfolio — to see how comfortable you feel with this new member of your financial family. Test how commodities contribute to your overall portfolio’s performance during one or two investing quarters. If you’re satisfied, you can gradually increase your percentage.

Many investors who like the way commodities anchor their portfolios settle at about 15 percent exposure to commodities. That’s a pretty good place to be if you’re still getting used to commodities. When you see the benefits and realize how much value commodities can provide, that number will steadily increase.

Here is a hypothetical portfolio that includes commodities along with other asset classes. This could be a sample portfolio for an average investor who wants exposure to both liquid and nonliquid (real estate) assets. A diversified portfolio such as this one helps reduce the overall volatility of your market exposures. Having unrelated assets increases your chances of maintaining good returns when a certain asset underperforms.