Your investment portfolios are only as good as the amount of diversification you incorporate into these. Many people understand spreading risk over a diverse portfolio but they usually assume that diversification can only be made through widespread investments in bonds or stocks. However, it’s equally as astute if not more so to also diversify across markets rather than within a market itself.
I’m speaking, of course, of the importance of investing in commodities as well as in securities. The precious metals market, oil markets and recently of teak have actually enabled many people to make huge payoffs from their investments. Even though the markets were dropping in 2018, there is a great chance that these will begin to grow in the coming year.
The question of whether you ought to invest in these markets depends on the performance of the commodities historically and the opportunities that have arisen over the past couple of years.
The Advantages of Investing In Commodities
Compared to stocks and bonds, commodities tend to fluctuate a lot less. This is because often people buy these as a necessity or like gold; these have consistently been highly valued throughout history. The oil market does tend to fluctuate a lot and based on whichever currency you invest with; you can make a fair bit of profit from it.
As part of your Self-directed IRA, you can probably sustain your wealth and even accumulate it if you play your cards right. Here are some advantages that you can expect from investing in commodities
A Buffer For Security Market Fluctuations
The problem with keeping your investments tied to the stock market or to bonds is that you will constantly be worried about fluctuations in the market. In the context of your retirement and long term financial stability, this uncertainty is going to put you through a very intense emotional rollercoaster.
There are two ways in which the commodities market can help with your problem:
Stock Markets and Commodities Move in Opposite Directions
Investors are fickle. The entire market shifts and flows depending on two factors; the demand for a certain stock and the financial performance of the company that created the stocks. If the securities market starts dropping, investors begin to shift to the commodities market in an effort to preserve their incomes.
Assuming that the market starts dropping, your overall portfolios are very likely to begin showing losses. While your commodities will begin moving in the other direction as people demand more commodities to invest in. In the worst-case scenario, a portfolio that’s divided between stocks and commodities would break even rather than have you experiencing losses. In an ideal situation, you could actually stand to make a profit with commodities with rising prices.
Preserving Your Wealth
Due to the relative stability of commodities markets like gold and silver, it’s entirely possible that you might make a marginal profit after years of holding your investment. However, it also means that your investments will not devalue over time.
So, if you’ve invested $100 in the stock market and if the market crashes, you might just lose all your money or your investments might lose their value to drop to half of what they were worth. However, if you’ve invested $100 in commodities; your overall worth would most likely still be $100 if not more in the long run.
So your investments in the commodities markets will act as a buffer against any fluctuations in conventional investment markets.
Ability to Trade Worldwide
Investing in the energy sector or getting into partnerships with commodity producers is also a great idea because it gives you access to the greatest market in the world; the global economy. There is a greater chance of you making profits from these commodities based on the differences between the prices in your markets and those across the world.
This is one reason why working with oil exporters is usually considered a lucrative investment step. Oil as a commodity is highly valued throughout the world. Setting aside the interventions from OPEC, which are few and far in-between; you are almost always guaranteed to make profits trading oil in specific market segments.
Compare these to stock and securities markets; you’re geographically and financially restricted to trade elsewhere. For many people, this restriction also puts them into focus for any market instability and prevents them from making more money with their investments, had they invested in other commodities.
Lesser Inflationary Pressures
Stock and security markets tend to be insulated to inflationary pressures. The thing is the profits or the financial stability of a company rarely ever responds directly to changes in prices. So if a stock is traded at $100, in a time when inflation was at 6%; its price won’t change if the inflation were to go up to 10%, in fact, it might just reduce the value of the stock.
For one thing, you will lose a lot of your purchasing power with the rising inflation and for another, you’ve probably already lost a lot of money as investors shift markets due to economic instability and the market drops.
Commodities, on the other hand, are the cause of inflation. As primary goods that are used to manufacture or produce energy, fluctuations in these prices ripple across the market to create a magnified effect across individual sectors of the economy.
If you hold commodities, you can very well ride the inflationary wave without losing any purchasing power at all.
Working with commodities has multiple benefits that you absolutely cannot enjoy with securities and stock markets. Commodities present to you a diversification option that can shield you against market fluctuations, give you profits in times of failing stocks and provide a buffer against much of the uncertainty that you find in security markets.
Holding commodities is a great way to preserve your wealth and maintain your long term financial stability. Using these to support yourself, in the long run, is a great way towards long term financial security.
About The Author
Mikkel Thorup is the host of The Expat Money Show podcast and the author of #1 Best-Selling book Expat Secrets on Amazon. He has spent nearly 20 years in continual travel around the world, visiting more than 100 countries including Colombia, North Korea, Zimbabwe, and Iran.
His goal is to help Expats like you to generate additional streams of income, eliminate your tax bill, and take advantage of offshore structures so you can travel the world freely and never have to worry about money again. For more information on his legal (but creative) tax strategies for Expats watch this free video.