A diversified portfolio is a portfolio that consists of allocating resources into different asset classes as a form of risk management. Diversification allows a user to mitigate risk from one asset class to multiple asset classes to reduce exposure in one sector.
A farmer with 100 acres may plant 100 acres of corn on his field, but he risks losing his entire income source if weather conditions are not conducive for planting or growing corn. To reduce his exposure to one commodity, such as corn, the farmer may mitigate his risk by adding another commodity to his operation, such as cattle. In this scenario, the farmer may use half of his operation in planting/harvesting corn. In contrast, the other half may be used as pasture and housing of livestock, allowing him to spread his risk through diversification.
Investors may also use diversification to reduce risk/exposure in one asset class in their portfolio. One way you can diversify your investment portfolio is by investing in commodities.
Typical portfolios include assets such as stocks, bonds, or mutual funds / ETFs that invest in stocks or bonds. When you use diversification to add a commodity to your portfolio, you mitigate your risk by reducing exposure in specific sectors or companies.
You can easily diversify your portfolio by investing in commodity futures or using mutual funds / ETFs that invest in commodity futures.
