Diversifying With Commodities

Adding commodities can help diversify a portfolio; however, before investing it’s important to understand the potential opportunities and the risks.

Should I Invest in Commodities?

Commodities are where essentially everything starts. They’re the things that are grown on farms or mined or pumped out of the ground. Adding a small commodities allocation can help further diversify a portfolio, but it’s important to know what you’re investing in before you do so. Things to understand include:

  • Commodities prices have tended to move opposite of stocks; as a result, they may help smooth a portfolio’s performance when there’s stock market volatility.
  • Historically, adding commodities to a portfolio has usually increased its return potential as wells as its level of risk.
  • Commodities markets can move quickly, and if you’re not careful, you may lose your entire investment (or more).
  • There are a number of ways to gain exposure to commodities, such as trading futures and buying commodity-related stocks, and through packaged products.
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Investments in fixed-income securities are subject to interest rate and credit risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors, and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

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