Soy beans, gold bars. oil. coffee beans, and corn are all commodities. Oil and gold get far more media attention than many of the rest, but the list of investable commodities is long and diversified. Commodities in general (and oil and gold in particular) are usually seen as excellent inflation hedges. Because of all the positive diversification and inflation-hedging benefits, I do generally recommend commodities as one of the alternative asset classes to invest in, if you dont mind the added complexity. Commodity exposure is by no means necessary, but it can add ballast to an otherwise-volatile portfolio.

You Could Trade Commodities Directly

This is the dumb way to do it. Why? Because trading commodities directly (when I say directly, I mean via commodities futures on a commodities exchanges) is complicated and fraught with danger.

The big picture of commodities trading involves 48 global markets, within which 96 commodities are traded. In the United States, the Windy City houses the Chicago Mercantile Exchange (CME). When it comes to diversity, CME has the global commodities market cornered.

To better envision what happens at the CME, and other trading houses, keep in mind that this is not a marketplace filled with products that change hands. Instead, most transactions are done via commodities futures, which are defined by Wikipedia as a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date.

Here are the problems with trading commodities directly:

1. Fewer regulations and protections The stock market isnt exactly known as a safe haven for small independent investors, but its Fort Knox compared to the near free-for-all of the commodities (and forex ) exchanges. These markets are absolutely dominated by the big boys. Good luck trying to beat them at their own game.
2. Waaaaaay too much leverage With stocks, its a bit more difficult to to get 20:1 leverage. Sure, you can use options but that at least requires some level of sophistication. Not so with commodities. Ever heard that phrase absolute power corrupts absolutely? Its true. Similarly, easy leverage bankrupts absolutely. Or something like that. Point is, its very difficult for most people to ignore the siren call of the potential for huge short-term gains.
3. Too complicated Commodity trading has its own lingo. Its not that its too difficult to get the hang of but rather that, well, dont you have better things to do?
4. The market is highly efficient Its extremely difficult if not impossible to earn above-average returns in efficient markets.
5. You may get stuck with 100 barrels of oil on your front lawn Well, probably not. But Im sure this has happened at least once or twice. When you hold a position to expiration, you literally have to take possession of the physical commodity. Forget to close out? Well, I hope you have somewhere to store 1000 pork bellies.

Commodity Mutual Funds Are A Better Way To Invest

I bet you saw that one coming, didnt you? As with almost every asset class, commodity mutual funds  (or ETFs ) provide the quickest, easiest, safest, and most reliable way to benefit from commodities exposure. You get instant diversification, (relatively) low costs (although theres a lot of room for improvement here), professional management of the idiosyncrasies of investing in commodities markets, and, most importantly, lots of extra free time to do whatever you want. Managing individual investments is time- and research-intensive and, unless you really enjoy stuff like that, is definitely no the most efficient or enjoyable use of your time. So just buy a mutual fund or ETF and be done with it. Your wallet and your family will thank you.