How money market investing differs from commodities investing
These days a lot of people are looking for places besides the stock market to put their money. The key if you are going to do this is to choose an investment that is not going to be affected by what the stock market does. Two of the best in this regard are the money market and the commodities market, knowing the difference between them can help you to choose the best option.
The biggest difference when it comes to investing and commodities or in the money market is that the money market tends to be much more stable. Commodities can and do vary in price pretty dramatically and this can result in huge profits or losses in a very short time period. On the other hand the money market is intended primarily to maintain a stable price as far as possible; the goal here is capital preservation. Clearly there is a big difference in the goals of the two different types of investments.
The other big difference between the money market and the commodities market is just what you are investing in. When you invest in commodities you are investing in something that is tangible, that means that it will always retain some sort of value. For example the price of oil may go up or it may go down but it will never be zero so there will always be some sort of value. With the money market on the other hand you are investing in debt which of course can become worthless if the people who owe the money find that they are unable to pay it.
Given the above you would think that commodities would be the safer of the two investments however that is not the case. The main reason for this is that the debt that is used in money market investing is for the very short term which greatly reduces the risk of non-payment. This is combined with the fact that in most cases you are investing in large groups of debt rather than just one individual debt so the risk that all of them will default is greatly reduced making the investment safer.
The other reason that the money market is a safer investment than the commodities market is that you have much greater liquidity. One of the dangers that you face if you invest in commodities is that you will not be able to close your position in the event that prices move against you by too much. This is called liquidity risk and it is almost non-existent when it comes to the money market. The whole point of the money market is to make sure that there is liquidity in the markets which means that there is little risk that you will be not be able to get out of your position if you need to.
One other reason that the commodities market tends to be riskier than the money market is the greater use of leverage. This is not normally used in the money market since the point in this case is capital preservation. In the commodities market on the other hand leverage can be used to greatly increase the profits that can be made, of course it can also greatly increase the potential losses as well. That means that you have to be much more careful when you are investing in commodities.
Based on what we have learned so far you may have gotten the impression that commodities are a high risk investment with the potential for a high return while the money market is nothing more than a safe place to leave your money to get a safe but small return. While there is so truth to this it is far from always the case. There are strategies that can be used that can make commodity investing as safe as the money market. At the same time the best money market rates can approach those offered by commodity funds through the use of aggressive trading strategies.
This naturally leads to the question of just what should you be investing in commodities or the money market, the answer of course is that it depends. You are going to have to look at your investment portfolio and decide how much risk you can afford and what kind of return you need in order to meet your goals. One thing that money market and the commodities market share in common is that they both have a very low correlation to the stock market. That means that they really are not affected by what the stock market does. This makes both good options if you are already heavily invested in stocks.
In the best of all possible worlds you would mix up your portfolio so that you are invested in both the money market and commodities. This combined with part of your portfolio in stocks should ensure that you are well diversified. If you don't have a large enough portfolio for that or if you already have a large number of other investments you may find that you can only choose one option. In this case you are going to have to decide what is best for your needs.
In most cases you will find that the better of the two options will be to go with the money market. The main reasons for this are that it will ensure that you have a stable part of your portfolio that will keep your money safe. Probably more importantly since the money market is highly liquid it will mean that you have a source of ready cash should you need it. You will find that if you are invested in commodities that you may not be able to access your cash quickly in an emergency. Since everybody needs to have a source of emergency money available it is a good idea to put some of it into the money market.