Distribution, more commonly referred to as diversification, is a standard investment practice involving choosing investments that aren’t correlated with each other. The goal: by spreading your money out across a range of stocks or multiple different investment forms, you may be able to insulate yourself from excessive risk.
As a new investor, though, finding the right combinations can be a real struggle. And the most fundamental choice is between stocks and commodities.
Stock Distribution Options
If you’re drawn toward stocks as your primary mode of investment, one of the easiest ways for new investors to protect their funds and diversify their holdings is by choosing an exchange-traded fund (ETF). ETFs work by combining a group of stocks that, together, grow predictably. Though losses are possible, typically the more successful stocks in the fund insulate your investment against losses by the less successful ones. It’s important to understand, though, that you can choose your ETF, but you can’t choose which stocks are in it.
For those investors who want to select their own stocks, but don’t want to risk everything, another possibility is investing in penny stocks. Penny stocks can be risky – they’re usually new companies – but because they’re not worth very much, you also won’t be out a lot of money if one or two of your picks bottom out. Penny stocks are a good way to gain experience choosing your own stocks, but they’re anything but a sure thing.
Even those who are new to investing generally understand how stocks work – they’re shares in a company, representing how well that company is performing. Commodities can be a little more confusing. When investing in commodities, you’re actually betting on how well that item (corn, oil, coffee, etc.) will perform during an upcoming period. These bets are called futures and you need to use your predictions to develop a commodity spread.
When spread trading in commodities, you want to choose goods that balance each other out. This might mean examining commodity seasonality and other variables – oil costs generally rise during the winter, oranges may spike if there’s a hurricane that wipes out crops – while also working with less variable investments. Wheat, soy, and even coffee tend to be less variable than more easily disrupted goods. To trade commodities, you have to understand a variety of global trends, not just business activities.
Commodity Stocks: The Middle Ground
Still stuck on what to invest in? You might discover that your perfect middle ground is commodity stocks, stocks that are directly tied to the performance of commodities, such as gold mines and oil drilling companies. This may seem like a lot of moving parts, but if you’re ready to go beyond more traditional stock picks, commodity stocks can be a good way to develop an understanding of commodities more broadly. Furthermore, many of these commodity stocks are actually internally diversified.
If you want to test the waters of commodity stocks, consider looking into mining companies like Franco-Nevada (FNV). Rather than directly mining, FNV provides money to miners for future gold and silver purchasing rights. Thus, while their success is tied to gold and silver rates, FNV can actually thrive during a commodity downturn. Their internal diversification helps protect their performance. In fact, some of the most reliable stocks across the board are commodity stocks, such as Exxon-Mobil (EXX) and Vale SA (VALE).
Ultimately, there’s no right way to invest in stocks and commodities, but no matter what you choose, you need to keep diversification in mind. The more spread out or balanced your choices are, the less you’re liable to lose. Though there are no sure things, when your investments aren’t all pegged to the same external forces, you’re less vulnerable to a storm – literal or figurative.