Natural resource investing refers to allocating capital into natural resources such as commodities, real estate, farmland, timberland, and infrastructure assets. It provides diversification benefits and inflation hedging capabilities compared to traditional securities like stocks and bonds. Investors can gain exposure through various methods including commodity futures, commodity funds and ETFs, REITs, direct real estate ownership, farmland and timberland funds, infrastructure funds and publicly traded partnerships. Natural resource investments tend to have low correlation with stocks and bonds, with higher volatility, illiquidity risks, and complex tax considerations. Proper due diligence and risk management are crucial for long-term success.
Commodities offer diversification and inflation protection but are volatile
Commodities like precious metals, industrial metals, agriculture, livestock, and energy products can be accessed via futures contracts, commodity funds and ETFs. Investing in commodity futures provides exposure to spot price changes. Contango and backwardation effects impact futures contract returns. Commodities tend to be volatile with event-driven price spikes, but have low long term correlation to traditional securities, making them effective portfolio diversifiers and inflation hedges. However, commodities do not generate income and require active risk management.
Real estate provides income and diversification benefits
Real estate investing includes direct property ownership, REITs, real estate funds, and mortage-backed securities. Rental income, capital appreciation potential, high tangible asset value, and inflation hedging ability make real estate attractive. But illiquidity, large capital required, and local market knowledge necessitate thorough due diligence. REITs provide liquidity but have higher correlation to stocks. Real estate performance varies greatly based on property type, location, and management.
Farmland and timberland offer portfolio diversification
Farmland generates income from crop sales and land appreciation. Timberland provides timber sales and land value growth. Both asset categories benefit from biological growth over time. Farmland and timberland returns have low correlation with traditional securities. But they require large investments and have limited liquidity. Investors can access these assets through direct ownership, funds, publicly traded partnerships, and ETFs. Expertise in agriculture or forestry industries is needed to manage risks.
Infrastructure provides high income and diversification
Infrastructure includes transportation, utilities, communication and social assets. Ownership can be via direct investment or funds, while public-private partnerships are also common. Infrastructure investments involve development, acquisition, or operation of long-lived essential public usage assets. They offer stable cash flows at relatively high yields, with lower volatility than stocks. But regulatory risk, high capital needs, and limited liquidity require rigorous due diligence.
Natural resource investing provides portfolio diversification and inflation hedging but requires expertise in specialized asset categories. Risks include volatility, illiquidity, and complexity. Thorough due diligence and active risk management are essential for long term success.