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A commodity is a good that is produced or sold by different companies and has a uniform quality across all of those companies. Things like food crops, oil, natural gas, electricity, gold, silver, and lumber are considered commodities. There is no product differentiation between these items sold by one company or another. There are three main reasons that an individual should invest in commodities.

Perhaps most important is that commodities offer investors a way to protect their wealth during inflationary periods. Commodities prices tend to rise when inflation increases, so they offer investors a hedge against inflationary situations. While most assets do not benefit from any kind of inflation, planned or unexpected, commodities often do.

Commodities also are either not correlated, or only loosely so, with other classes of assets.  In fact, they are the only assets that have a negative correlation to bonds. This means that when stock, bond, and mutual fund prices trend downward, commodities prices tend to rise. Adding commodities holdings to an investment portfolio of less volatile assets decreases the overall risk of the portfolio.

From an investor perspective, this next argument may be most attractive. In most cases, adding commodities to the portfolio will increase the overall anticipated return. Over the long term, investing in diversified commodities futures has been shown to provide returns on par with U.S. stocks. Boosting the amount of risk-adjusted returns is music to an investor’s ears.

Protection of wealth by hedging against inflation, negative correlation with many asset classes, and the ability to increase overall returns are three reasons why investors should consider adding commodities to their portfolios. There are so many commodities to choose from that selecting the best ones will require some research. They can be traded through an individual trading account, managed account, commodity-related mutual fund, or commodity pool.