YW Blogcast 52 - Low Risk Commodity Investing

Conventional wisdom says, rightly so, that commodity investing is a risky pursuit. The capacity for a new investor to get badly burned is higher than in the stock market. Generally speaking, the commodity market is more volatile than stocks. Driven to a large extent by speculator demand, prices can rise and fall in the blink of an eye on news of natural disasters around the world, poor crop, great crops, or even for no particular reason that anyone can discern.

In short, danger, Will Robinson; very much danger!

So how can we at Young Wealth suggest a method of low risk commodity investing and still sleep at night with a clear conscience? The trick is to, “Unlearn what you have learned,” as Yoda would say, not that we suggest basing critical financial decisions on the unhinged ravings of a fictional Jedi Master. What we’re talking about is an approach sometimes called Packaged Commodity Investing, which is another word for real estate.

You might have never thought of it this way but basic commodities are the building blocks of the houses we live in: lumber, copper, steel, gold. The advantage to investing in commodities already pre-packaged into a structure is that you’ve taken an investment with no real useful value – are you ever going to actually take delivery of that pork belly contract – and transform them into a product (home) that everyone uses and demands. Humans need water, food, and shelter. By investing in real estate, then renting it out, you provide one of the most sought after commodities around – shelter.

And think of this, at the time of purchase you have locked in the cost of the commodities that went into construction of your investment forever, or at least a good 50 years if the thing was built stoutly. So while your cost is fixed, a rising demand for commodities causes the value of your house to continuously increase while, at the same time, you create cash flow from the investment in the form of tenant rent.

A pork belly contract is made up of 40,000 lbs worth of 12-18 lb frozen pork bellies. If you can figure out a profitable way to rent those things out to create cash flow and still retain ownership, please let us know. All investment requires some risk, or it wouldn’t be investing, but a conservative approach to commodity investing in the form of real estate has the potential to return a heck of a lot of return for your dollar.