Adding commodities to an investment portfolio can help diversify your portfolio while providing the additional benefit of inflationary protection.
Every investor knows how beneficial it can be to have a well-diversified portfolio. When a portfolio is well diversified, some securities will rise under certain conditions, while other securities fall under the same conditions. The idea of diversification is to find non-correlated securities that will rise and fall in value at different times. An investor does not want “all their eggs in one basket” (highly correlated securities) because there is the potential to lose everything all at once.
Proper diversification can help protect against various risks in the market place. These risks are called diversifiable, or unsystematic risk. When one company in your portfolio suffers from a firm-specific event such as a lawsuit, labor strike, or regulatory action that negatively effects their competitive advantage, that event will not dramatically affect a well-diversified portfolio.
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