Commodity traders arrive at diversification of their market exposure by creating portfolios that potentially reduces risk or provide a hedging platform
Commodity portfolio refers to a collection of commodities given a particular weight to each asset. The old adage "Don’t put all your eggs in one basket" illustrates the need of a diversified portfolio in the practical world. Portfolio rebalancing gives an opportunity for risk management to the traders and offers safer returns in the long run.
Commodities can provide valuable diversification benefits to an investment portfolio. Addition of commodities can reduce overall long-term portfolio risk when used with traditional assets like stocks and bonds. Depending on the market sentiment and economic scenario, commodity prices and prices for stocks and bonds fluctuate. Adding commodities in overall portfolio may not necessarily protect against market risk always. However during neutral and negative time periods for stocks and bonds, commodities may perform well (in terms of returns) as the correlation between commodities and financial asset is weak, historically.Back