Diversifying Your Investment Portfolio with Commodities and Currencies | Globe Capital Market LTD.
  • 20-Sep-2023
  • Capital Markets

Diversifying Your Investment Portfolio with Commodities and Currencies

The world of investment and finance is rather complex with various assets and asset classes to choose from like equity, debt or fixed-income securities, real estate, gold, mutual funds, commodities, and currencies, etc. to name a few. Although the major and the most prominent asset class that you might be similar with are debt and equity. However, owing to financial innovation and financially engineered products, there are other asset classes like Real Estate Investment Trust (REITs), options, and derivatives fractional real estate, to explore.


Midst the sea of investment and asset classes, commodities and currencies are two such asset class that seem to have lost the deadline yet plays an important role in modern-day finance and portfolio management. How about creating an investment portfolio with commodities and currencies?


(Source: Investment Portfolio – Overview, Types, and How to Build (corporatefinanceinstitute.com))


While you consider creating your investment portfolio, you must understand that a lot of emphasis has been laid down be it in the form of academic research, industry forums, and investor education events, not to invest everything or all your money in a particular asset class or stock. This follows the famous saying and quote in the world of finance, “Not put all the eggs in one basket”. For an investor like you, you need to diversify your portfolio among and across different asset classes and investment opportunities. Have you ever wondered the rationale behind this thought or idea of not putting everything in one basket or not putting all your money in one asset?


Just imagine a situation, What if the asset class you have invested in fetches a negative return, you were thus better off not investing in that particular investment opportunity or asset class. Moreover, it is nearly impossible to determine and accurately predict which asset class will fetch the highest return. The behavior of financial markets are governed by multiple factors some of which are easy to predict while other are not. Hence diversification is imperative and an essential element in creating your investment portfolio.


On that note, let us understand and deep dive into the essence of diversification and how diversification would help your investment portfolio with commodities and currencies.

What is Diversification?

The fundamental element for an investor like you is to minimize risk and maximize portfolio returns. A better and a comprehensive risk management in a portfolio setting is achieved through diversification.


Hence, you may refer to diversification as an essential strategy to reduce the overall portfolio risk thereby investing in a variety of assets. The fundamental concept underlying the theme of diversification is that spreading investments in and across varied assets and asset classes can eventually lower the risk of a portfolio, and lower the risk of loss in one particular asset. Thus, diversification helps to negate and nullify the loss incurred from one asset by the opposite return earned through another asset.


As an investor, creating an investing portfolio with commodities and currencies that are considered risky, your ultimate objective is to earn a higher portfolio return per unit of risk assumed.

How diversification helps a portfolio

Although the annotations of portfolio management are driven by statistical and mathematical models the underlying crux of diversification is simple and easy to understand. Many researchers and analysts suggest that a well-diversified portfolio consists of nearly 25 to 30 stocks or assets thereby yielding the maximum risk reduction benefits.
If you are still thinking about how diversification would help your investment portfolio think of it in terms that investing or adding more securities to your portfolio generates higher diversification benefits, although after adequate due diligence is done. The positive performance of one security neutralizes the negative performance of another security and hence a higher diversification benefit.

The benefits and pitfalls of Diversification

Before even creating your investment portfolio, you need to be sure about the benefits and pitfalls of diversification. As it might seem obvious, diversification essentially would reduce the risk of your investment portfolio by investing across multiple assets. Moreover, portfolio diversification negates the ill effects of volatility or large swings in asset prices.


It is also extremely important for you to understand the flaws of diversification before you decide to create an investment portfolio. On the flip side diversification also at times limits the potential for higher returns. If you a first-time investor, diversification can be daunting at the first go. Moreover, diversification leads to higher costs with varying fees.

Diversifying Your Investment Portfolio with Commodities and Currencies

If you are keen to build and diversify your investment portfolio with commodities and currencies, you need to be familiar with how to invest in currencies and commodities, what are the options, and how to transact.


An investor like you should be aware that by including commodities as an asset class in your investment portfolio, you can reap multiple benefits. It provides your portfolio with the needed diversification, it also serves as a hedge against inflation, and has the potential to generate your portfolio with excess positive returns.


However, you need to be aware and cautious that some commodities have a higher degree of volatility as compared to others. Commodities prices are governed by demand and supply dynamics and geopolitical factors.


The pertinent question that remains is “How to invest in Commodities”. You can think of investing in gold, oil, and base metals like zinc, copper, aluminum, silver, cotton, etc. in large quantities. Moreover, you can also invest in oil futures and options. One of the striking positives that you can draw is that during episodes of high inflation the demand for commodities increases thereby increasing commodity prices and hence spiking the return that you can think of earning.


You can think of investing in currencies in the form of buying one currency by selling the other currency pair. It is imperative for you to note that currencies are always quoted and transacted as a pair. One currency is exchanged for another currency. You can always earn diversification benefits and potential profits by capturing the advantage of fluctuations in exchange rates.


On the flip side, investing in currencies is governed by its set of risk factors ranging from volatility in the exchange rate to political instability which can hurt or dampen investment return.
You can transact and include currencies in your investment portfolio by investing in currency futures, currency exchange-traded funds (ETFs), etc.

Final Thoughts

Creating, building, and diversifying your investment portfolio can be a challenging task at hand. If you are stuck at any stage and need expert advice on how to create and navigate an investment portfolio, an investment advisor like Globe Capital is here to help. Globe Capital understands the importance of investor education. They provide educational resources, webinars, tutorials, and training materials to empower traders with the knowledge and skills needed to navigate the commodity and currency markets successfully. These resources can cover a wide range of topics, including portfolio management and diversification, trading strategies, risk management, technical analysis, and market fundamentals