Commodity Mutual Funds
Investing in commodity mutual funds is a way to diversify one's portfolio while minimizing the risks involved in commodity futures to the individual investor. In the same way that managers pool the money of many shareholders to maximize the return on the stock market, commodity mutual fund managers use the resources of many investors to take advantage of benefits in changes in the commodities market. Commodities are an interesting variety of articles of trade, ranging from agricultural products to precious metals to energy futures. At times these items are traded in the spot market, where actual physical delivery of the product is generally expected. Other investors prefer to sell the futures contracts before the actual expiration of the agreement. These investors seldom take delivery of their investment. Instead, they profit from selling the contract at a rate that is beneficial to themselves when the commodity's value increases. Commodities invested in through tax free mutual funds allow the investor to realize a greater percentage of return on their investment, instead of watching a large bite being taken out of their profits by taxes. In each case, knowing more about the investment and reading the fine print of agreements made with brokers or managers can aid in choosing tax free mutual funds that are likely to bring the greatest return on the investment.
One thing that investors appreciate about commodity mutual funds is that they can be used as a hedge against stock market investments. When inflation rises, the earnings per share of stock goes down due to the increased cost of borrowing money. Commodities, on the other hand, tend to rise in price at this time. This allows the commodity investments to act as a moat around the investor, which inflation is not likely to broach. Commodities are not risk free, though. They are generally traded using a margin account. This means that the investor only needs a small percentage to hold the contract. While this can result in fantastic profits for some people, losses can be equally impressive and affect many others. For this reason, many advise that commodities comprise only a small portion of the investment portfolio.
A way to minimize the risk inherent in the commodities market is to invest in managed commodity mutual funds. Another option is to make up your own portfolio, utilizing funds made up of companies which are in the commodity business. Either way, the investor needs to carefully examine the company's history, requirements and fees. Of course, the investor seeks to choose those investments whose fees do not threaten to overtake the expected profits, and which have a solid rate of return. One caution in this regard: it is not a good idea to choose those whose managers trade too frequently. Although at first this seems puzzling -- after all, the more activity, the more chance of creating profit -- this precaution is due to the fact that excessive turnover is not the best policy. It can actually reduce returns in that any actual profit may be diminished due to the costs of each transaction. Also, this opens the investor up to additional capital gains taxes on the transaction.
One way to avoid the federal and state taxes which normally occur on investments is to choose tax free mutual funds. These are money markets which invest in companies which are exempt from federal taxes. These usually have a lower yield than regular mutual funds. Read the prospectus carefully and do the math to determine if the tax-free aspect compensates for, or even surpasses, this loss in yield. Note that even tax free mutual funds can leave a person subject to capital gains taxes. Also, check your state's regulations regarding state tax exemption using these types of investments. In general, this choice works best if you are able to leave the money untouched for a while. Early withdrawal penalties can be substantial.
Investors in 401k, 403b and IRAs can rest easier in that taxes on capital gains are deferred when they are paid from mutual funds held in these accounts. However, even for tax free funds, a high rate of turnover can still result in an average loss of about 0.7% per year. At first this may seem insignificant, yet the effect of compounding interest lost due to taxes and transaction fees over the years can greatly affect overall profits. Remember, if a person invests in a high turnover taxable account, he or she is the one who is going to be paying the taxes. The over-zealous manager, who may be more concerned with showing a high rate of return to attract future investors, may not be as concerned with the effects of taxes. Do not misunderstand -- a high rate of return is a good thing. In after-tax terms, though, profit may actually be higher from investments which have a lower rate of return yet do not lose profit due to too many transaction costs. Index funds may be a good choice. Because these funds do not turn over their holdings so frequently, there is minimal exposure to capital gains.
All of the above factors illustrate the need for the investor to recognize the responsibility to look carefully into the details surrounding his or her investments. If one intends to make a profit, some work may be required to become knowledgeable about various investment instruments. However, this is time well spent. Proverbs 22:29 encourages: Seest thou a man diligent in his business? he shall stand before kings; he shall not stand before mean men. Whether the investment is in commodity mutual funds or tax free mutual funds, paying attention to business will surely bring some type of profit. That much is guaranteed.
Commodity Trading AdvisorsHiring a full service commodity broker can benefit anyone considering trading in consumable goods. Commodities are a good investment, but most novice investors need the expertise of experienced commodity trading advisors to educate them about the intricacies of markets and how to properly manage accounts. The casual investor usually has no idea about which goods are most profitable or about factors which affect net gains and losses, such as seasonal and economic fluctuations. Commodities are consumable, transportable goods such as grain, fuel, metals, food products, and meats used worldwide by a global population. While commodities are global, in the United States, futures, or commodity contracts, are traded at exchanges, such as the Chicago Board of Trade, the Commodity Exchange Group, and the more well known New York Board of Trade. Anyone who has watched New York Stock Exchange brokers hurriedly pacing the NYSE floor with pad and pencil in hand has witnessed traders feverishly calling out bids for wheat, soybean, crude oil, or sugar on behalf of clients as prices quickly rise and fall.
In the last twenty-five years, commodities have expanded to include financial derivatives based on bonds, securities, and domestic and foreign currencies. And there is a lot of money to be made, especially with traditionally hot commodities like gold, livestock, grains and financials. Market profitability is determined largely by national and international supply and demand. When goods are in short supply, demand increases and prices rise, causing a profit for suppliers and investors. But the average speculator lacks sufficient information to determine when commodities will fare well and when they will not. Commodity trading advisors are adept at forecasting profitability, based on years of experience looking at seasonal and global economic trends. A good broker is one who is zealous, trustworthy, and knowledgeable enough to make money for the client and achieve profits. In the Bible, Matthew, Chapter 25 extols the virtues of industrious servants entrusted with sums of money to trade and realize a gain on the open market: "Then he that had received the five talents went and traded with the same, and made them other five talents. And likewise he that had received two, he also gained other two" (Matthew 25:16-17). Surprisingly, in today's money market, five talents would be worth a whopping two million dollars and two talents would have brought a net gain of around $800,000! That's the kind of negotiator most any investor would love to have.
A full service commodity broker is not only familiar with short- and long-term market trends for commodities and futures, but he or she can prevent novice traders from becoming overzealous and unrealistic in expectations of returns. Knowledgeable commodity trading advisors can help investors develop and adhere to an effective investment plan, diversify portfolio holdings by placing money in different kinds of markets, and provide regular updates on performances. Brokers not only advise, but a good full service commodity broker is also an educator. Seasoned commodity trading advisors will want clients to gain information about options and futures markets, while retaining a level of dependency and fostering a long-term relationship built on mutual trust. Brokers usually have power of attorney and the client's permission to act on their behalf and buy or sell options or futures with the client's money. After all, the commodities broker works on a commission basis, a percentage of each trade; and when the client makes money, so does the broker. Establishing a good partnership is crucial to making money in commodities and futures trading. Without it, clients are just risking losing hard earned capital recklessly chasing elusive gains without the benefit of reliable and reputable counsel.
An ethical and trustworthy broker will provides expertise and enthusiastic counsel to ensure that clients make money on worthwhile commodities trading ventures. Brokers will spend considerable time researching domestic and international markets for trading opportunities, developing strategic money management and investing plans, projecting and speculating market profitability, and most importantly, regularly communicating with clients to keep them abreast of changes in portfolio activity. In turn, clients should respect the professional judgment of advisors and brokers and be consistent and timely in paying commissions and fees.
The best way to find a good trading advisor or full service commodity broker is to browse the Internet. Broker and advisor websites provide contact information for individuals and firms that specialize in counseling, buying and selling for prospective investors. In the United States, qualified, reputable brokers and counselors should be licensed and registered as a futures commission merchant or enterprise, an introducing broker, a trading advisor, or a commodity pool operator in order to buy or sell commodities for individuals or a group of investors. Registration with the Commodity Futures Trading Commission (CFTC) and membership in the National Futures Association (NFA) is also required for full service brokers and advisors.
Investors may opt to employ the services of an online commodity trading advisor via the Internet, versus a full service commodity broker. Online commissions will not be as high as those charged by face-to-face brokers; but it will be highly unlikely that an online advisor will offer the individual attention provided by full service traders. Investors would be wise to do background checks on any prospective agent and try to ascertain a track record of trading successes. It may be difficult to reference a broker's history of past account performances; however most should be willing to furnish a list of client references. Word of mouth is the best advertising for potential advisors and brokers. Consult with personal financial planners, bankers, mutual funds and other money management agencies for recommendations or referrals. Successful brokers will have a following of satisfied clients and a reputation for brokering the best deals in the hottest commodity and futures markets. Brokers are entrusted with investor monies and confidence, neither of which is easily replaced. Dissatisfied investors should not waste time, money or trust on unscrupulous traders who squander capital and miss opportunities to achieve profits.