Keyword: using commodities for portfolio diversification
When I first started investing, my portfolio was basically a tech-heavy smoothie. A splash of Apple here, a sprinkle of Amazon there, and a full serving of S\&P 500 index funds. At the time, it felt solid. But once the market started wobbling (hello, inflation and interest rate hikes), I realized my portfolio was riding one big wave — and when that wave dipped, so did everything I owned.
That’s when I started looking into using commodities for portfolio diversification, and let me tell you: it changed the way I think about investing.
If you’re wondering how commodities can fit into your portfolio, especially as a beginner, here’s what I’ve learned — with all the wins, mistakes, and aha moments included.
Why Diversification Matters (A Quick Refresher)
You’ve probably heard the phrase “don’t put all your eggs in one basket.” Well, in investing, that’s the golden rule. Diversification helps reduce risk by spreading your money across different asset types — so when one area struggles, others can help balance things out.
At first, I thought diversification just meant owning a mix of stocks. But that’s like eating only different kinds of pasta and calling it a balanced diet.
Real diversification includes:
Stocks (U.S. and international)
Bonds
Real estate
Commodities
Once I understood this, commodities started to make a lot more sense.
What Are Commodities, Anyway?
Before I get into how they helped me, let’s break it down:
Commodities are raw materials or natural resources you can trade, like:
- Precious metals (gold, silver)
- Energy(crude oil, natural gas)
- Agriculture(corn, wheat, soybeans)
- Industrial metals (copper, aluminum)
You can invest in commodities through:
ETFs (my go-to)
Futures contracts (a bit too advanced for most beginners)
Commodity-focused mutual funds
Stocks of companies in commodity industries (like oil or mining)
Why I Added Commodities to My Portfolio
Let’s be real — I didn’t wake up one day thinking, *“You know what I need? Soybeans in my portfolio.”* It was more like a series of wake-up calls:
1. Inflation Was Eating Into My Gains
In 2022, inflation started making headlines, and I noticed that my cash wasn’t going as far — and neither were my portfolio returns. I read that commodities often perform well when inflation is high, since prices of goods (like oil and wheat) go up.
So, I dipped my toes into gold with the SPDR Gold Shares ETF (GLD). It didn’t skyrocket, but it held steady while some of my growth stocks were tanking. That was my first lesson: stability is valuable.
2. Stock Market Correlation Was Dragging Me Down
Even with a “diversified” stock portfolio, everything seemed to move in the same direction. When tech fell, so did the rest of my stocks.
That’s when I learned about correlation — a measure of how assets move in relation to each other. Commodities often have a low or even negative correlation with stocks and bonds. That means when the market zigs, commodities might zag.
Adding in commodities gave my portfolio more balance during turbulent times.
How I Started: Simple Steps, Small Amounts
I didn’t go all-in. I started slow, testing a few options and learning as I went. Here’s how I approached it:
Step 1: Research Basic ETFs
I looked into commodity ETFs that didn’t require advanced knowledge or active management.
Some of my first picks:
- GLD for gold
- DBC (Invesco DB Commodity Index Fund) for a mix of energy, metals, and agriculture
- GSG (iShares S\&P GSCI Commodity-Indexed Trust) for broad exposure
These funds were easy to buy through my brokerage account, and I didn’t need to worry about managing futures contracts.
Step 2: Allocate a Small Percentage
I dedicated about 5–10% of my portfolio to commodities. It was enough to feel the impact but not so much that I’d lose sleep over short-term drops.
Over time, I adjusted based on market conditions. During inflation-heavy periods, I leaned a bit more into commodities; when things stabilized, I rebalanced.
What I Noticed After Adding Commodities
Here’s what changed once I started using commodities for portfolio diversification:
Less Portfolio Volatility
Commodities didn’t eliminate risk, but they **smoothed out the ride**. When my tech stocks were falling, my gold holdings held their ground. That balance helped my overall portfolio dip less during rough patches.
New Growth Opportunities
In 2023, energy prices spiked due to geopolitical tensions. My holdings in DBC and a small stake in USO (a crude oil ETF) performed surprisingly well — even when stocks were struggling.
It showed me that commodities can also boost returns in the right environment.
Better Understanding of the Global Economy
Investing in commodities made me more aware of things like:
OPEC decisions (which affect oil prices)
Weather patterns (which influence agriculture)
Central bank moves (which impact gold)
It gave me a bigger-picture view of the economy — and honestly made investing feel more interesting.
The Risks (Because Nothing’s Perfect)
I’d be lying if I said commodities were risk-free. Here’s what I ran into:
Volatility Can Be Extreme
Crude oil and natural gas can swing wildly. I learned that lesson the hard way when I bought into USO a little too late and saw a 15% drop in a week.
Tip: Stick with broad-based ETFs or start with less volatile commodities like gold or silver.
No Income from Commodities
Unlike dividend-paying stocks or bonds, most commodity investments **don’t generate income**. They rely entirely on price appreciation.
So, I kept my income-producing assets (like dividend ETFs and REITs) and used commodities more as a hedge.
Complexity (If You Dive Too Deep)
Commodity futures and roll yields can get confusing fast. If you’re just starting, avoid the advanced stuff until you’ve built a foundation.
My Ongoing Strategy
These days, commodities remain a core satellite in my portfolio. That means they aren’t the star of the show, but they play a crucial supporting role.
Here’s how I break it down:
60% Stocks (mix of growth and value, domestic and international)
20% Bonds
10% Real Estate (REITs)
10% Commoditie (via ETFs like DBC, GLD, and GSG)
I rebalance once or twice a year — or when market conditions shift significantly.
Final Thoughts: Should You Use Commodities for Portfolio Diversification?
In my opinion, yes — but smartly and strategically.
Commodities helped me:
Reduce volatility
Protect against inflation
Find new growth opportunities
Understand market dynamics better
If you’re a beginner, you don’t need to master futures trading or load up on obscure ETFs. Start with simple, broad commodity funds, keep your allocation modest, and let them work quietly in the background.
Using commodities for portfolio diversification isn’t a magic fix — but it is a powerful tool. And if you’re building a portfolio for the long haul, it might just be the missing piece you didn’t know you needed.
Next Article To Read: How I Used Commodities to Hedge Against Inflation