Commodities investing is volatile, promising big gains and capable of big losses. But this volatility can work in your favor in a broad investment portfolio, where a small amount of commodities can offset risks associated with stocks, bonds and cash.
Investors are generally advised to allocate about 5% of their portfolio to gold and commodities. Don't go higher than 10%.
Prudent investors will own both the physical commodity as well as shares of the resource producers. Many mutual funds and exchange-traded funds provide such direct exposure, which for most investors is a better option than trading commodities on their own.
Beware these dangers when investing in commodities:
• Scam artists: All legitimate brokerages must be registered with the National Futures Association with a list of all complaints, sanctions and arbitrations.
• Poor money management: Don't risk too much of your money on a single trade. And set clear entry and exit points.
• Lack of knowledge: The volatility of commodities means you must stay up to date on new affecting the markets you are trading.
• Costs: Brokerage charges vary and can be high, so know what you'll pay ahead of time.
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