#15 Why a large weighting in the Resources sector is not suitable for investors looking for consistent dividends and low volatility
Australia is one of the largest exporters of commodities in the world – we are the largest iron ore producer as well as being one of the largest producers of coal, LNG and gold as well as many other minerals such as manganese and lithium. This is reflected in the fact that the Resources sector is one of the largest sectors of the index representing 20% of the ASX 300. This lesson seeks to explain the risks inherent with the Resource sector and what IML believes are the most important factors when picking stocks in the sector.
While investing in the right Resources stocks can be rewarding over the long term if one picks the right companies, the sector as a whole tends to be very volatile. This is because the profits and dividends from every Resource company are highly dependent on the price of the underlying commodity that they produce – and these prices are highly unpredictable. As such it is not a sector for the faint hearted nor prudent investor to be heavily invested in.
Let’s first explore what makes the Resource sector so volatile: