When it comes to commodities investing there are an unbelievable number of scams out there.

I am not kidding when I say that there are literally hundreds of companies out there just waiting to railroad you through the door, part you from your money, and happily send you straight to the gas chamber.

I know we’ve talked a little bit about how to decide what a good commodity investment might be.

So, I wanted to conclude this series by giving you the information you will need to avoid the evil villains of the investment world, and hopefully, get your financial happily ever after.

The secret to spotting commodity scams:

There is one major test that every single commodity scam will fail:

They will promise to make you a lot of money fast, with little to no risk.

• Penny stocks to make you rich!
• The next Berkshire Hathaway!
• The price of Gold/Wheat/Oil is going to skyrocket, get in on the ground floor!
• They all boil down to one simple thing: Get rich quick! No risk!

Now, frankly we are all smart enough to realize that there is no such thing as “get rich quick”. You wouldn’t be here reading this blog if you weren’t. However, there are not many things in the investment world that are as risky as commodities. Particularly commodity futures. If someone is telling you there is little to no risk involved, turn around and run the other way as fast as you can!

There are also a few other notable ways to spot a scam.

1. Long “squeeze” pages - We’ve all seen these. They are single page advertisements on the internet designed to keep you reading and convince you to act against your better judgment. If you land on one of these pages, click away as quickly as possible. Nothing good can come of it.
2. They are in a hurry to get your money – “Prices will skyrocket in the next few days!” or “Invest now before it’s too late.” Seriously, we’ve probably all bought enough junk off of infomercials that we should know better by now! I still have that stupid Ab belt from the 1990’s. You know the one I mean – the one that delivers low grade electrical shocks and promises a 6-pack. Didn’t work for me! And these basic commodity and futures scams are no different.

   Legitimate companies and investment opportunities don’t need to come and beat your door down to get your money. They are already making enough profit on their own. That brings me to my third and final point.

3. If they appear to “need” your money in any way, shape or form - Run away. Far away. If they are calling you at home, emailing you, or cyber-stalking you in any way, drop them like a crazy ex-girlfriend and head for the hills!

Always take these steps before you invest your money:

• Find a legitimate broker, and make sure that you get a risk disclosure document. Your broker is required to give it to you by law. Anyone who tries to tell you it’s “just a formality” is scamming you.
• Explore your options carefully.
• Sleep on your options. At least overnight, maybe several nights, before you invest your money.
• Only invest in funds that have a minimum of 3-5 years of solid performance.

Follow those rules and you are far less likely to wind up on the bad end of a commodities deal. There is so much risk involved in commodities anyway, why choose a risky company to invest with?

For more information on commodity scams you can check out The U.S Commodity Futures Trading Commission web site.

I hope that you have enjoyed this series on commodity investing as much as I have enjoyed writing it for you. If you liked it, you can offer your feedback here for a chance to win $50. Thanks!

The Princess Bride photo is © Twentieth Century-Fox Film Corporation 1987.

Writer Auditions – Author Connie Brooks – Offer Your Feedback

As the tax forms for last year’s investment income start to arrive in the mail we’re rudely reminded of the effect that taxes have on our investment earnings.  Especially when we lose money and still have to pay taxes, my Oakmark International fund was down about $100 for the year but generated over $1000 in capital gains, yikes!

One thing we can do to reduce the tax bite is to be aware of the tax deductions that are available for investing expenses. J.K.Lasser offers the following checklist of deductions for investors. Just make sure any investment expense deductions you take are well documented. Dont Mess With Taxes recently warned us that IRS audits are on the rise.

Expenses You Can Deduct

• Legal fees: If you sought legal advice regarding your investments, you can deduct those fees.
• Professional fees: You can deduct fees you paid to your accountant in compensation to provide you with advice about the tax effects of certain investment transactions.
• Fees for investment advice: You can deduct payments to a broker or an investment manager to manage your stocks and other investments.
• Books and magazines regarding investments.
• Safe deposit box fees, to the extent that you store your securities or other investment paperwork in the box.
• Fees you pay directly to your IRA or Keogh custodian.
• Traveling costs related to your investments, such as trips to your broker’s or investment advisor’s office and trips to look after investment property.
• Home computer costs if you use the computer to manage your investment activities. You generally must depreciate the computer using the straight-line method.
• Cost of software you use to manage your investments. In certain circumstances you may need to depreciate the software.
• Service charges you pay as part of a dividend reinvestment plan.

Expenses You Cannot Deduct

• Broker’s commissions that you pay for buying and selling securities. These affect your tax cost and the ultimate gain or loss on their eventual sale.
• Fees charged by your bank for check writing.
• Seminars on investments and investing strategies.
• Expenses of attending a stockholders’ meeting, even if you own stock in the company and the meeting would be useful toward making further investments.
• Any expenses you incur toward generating investment income that’s exempt from taxes (such as municipal bonds).

Where Can You Take These Deductions?
 
You deduct these expenses as miscellaneous expenses on Schedule A. Altogether, these miscellaneous expenses must add up to more than 2% of your Adjusted Gross Income (AGI) before you can take the deduction. And even then you only get to deduct the amount above the 2% limit.  You should keep track of your investment expenses, because they can add up quickly, and they may help reduce your taxable income.

You’ve probably heard of extreme sports, sports “perceived as having a high level of inherent danger or difficulty”. Well how about extreme investing!

Extreme Investing
I’m a pretty non-extreme investor in general; most of our money is in index funds with a small percentage in other industry specific funds.  But I do like to use a small portion of our money for “extreme investing”.  What exactly is extreme investing you ask?  Well it really depends on the perception of the person that is risking the money.

To someone who trades stocks on a daily basis and is very comfortable with the market, making margin trades might be their version of extreme investing.  On the other hand, to a person invested only in CD’s or bonds, simply buying a stock might feel a little crazy.

Why Extreme Investing?
Of course the point isn’t to get an adrenaline rush or an extreme buzz from watching your investment’s progress.  The reason you might want to do a little extreme investing is that it can help broaden your financial horizons. As creatures of habit we tend to stick with what we know, whether what we’re currently doing is the best thing for our situation or not.

Extreme Investing Options
Extreme investing basically entails taking a small percentage of your financial capital and using the money to invest in something you typically wouldn’t but think could be a good opportunity for you. Maybe you’re interested in starting your own business, investing in someone else’s idea, or just trading a few shares of stock.  Ideally, you’ll do research on the topic before jumping in so you can learn the risks and opportunities of what you’re getting into.  The money you invest should be money you’re willing and able to lose 100% of, after all this is extreme investing : )

Investing Growth
The cool thing about extreme investing is that once you make some money with it, you can use that capital to reinvest into training, research, or more growth with the same idea.  My version of extreme investing has been dabbling in online businesses and I’ve invested the money I’ve made back into new ideas.

Investing Guidelines
As I mentioned earlier, it’s important to only use a small portion of your financial assets for extreme investing, an amount you’d be willing to lose. If you lose it all don’t continue to pile your money into it. Make sure you research the investment area and understand what it is you’re putting your money into. When you make money invest it back into your venture for future growth.  The last rule is to learn from your mistakes and widen your horizons!

Why do today what you can put off until tomorrow? If that is your motto then this post is for you!

Time is Money
Even if you’re not a procrastinator by nature, you’ve probably had a time or two where putting something off cost you money.  Whether it’s paying money you shouldn’t be because you forgot to cancel a subscription or missing out on compound growth because you haven’t setup a savings or investment plan, procrastination can be expensive!

In our busy lives, time goes by faster than you can blink. Each birthday and tax season seems to come sooner than the last one.  Those months and years add up when you’re talking about paying higher expenses or earning lower returns on your money.

Make a Decision
The reason we procrastinate is often because we don’t know how to take the next step or don’t know what to do.  We decide we need more information or want to “think about it” for a little while.  Before we know it, a little while turns into a long while and we still haven’t made a decision.

A great example of this is not signing up for a 401k plan because you’re not sure which funds to choose.  Smart Money magazine reported that procrastination is one reason almost half of employees don’t participate in their 401k plan or contribute enough to get the company match.  I’ve seen this in action myself. 

Our 401k administrator offered a seminar on our plan and its options several years ago.  I was already investing and knew the plan options but attended to see if I could learn anything new.  Not much came out of the meeting other than the revelation one of my co-workers hadn’t been putting any money into his 401k ever since he started working there because he didn’t know which funds to invest with!

Live & Learn
We got my co-worker putting at least enough to earn the company match into some index funds.  I pointed him towards a few personal finance websites and recommended a few good books on money to help him get more comfortable with his investing decisions.  Later on we talked about how he was glad he finally got started even though he didn’t know what he was doing.  A lot of times just taking some action is what it takes to get over the indecision that leads to procrastination.  You might not make the best decision possible but you learn from your choices and make changes accordingly.

Make Time for Your Money
If you have some financial decisions or actions you’ve been putting off now is the time to take care of them.  I find what works for me is to make a prioritized list of the things I need to do and carry it around with me until I’ve completed it.  You probably won’t have time to get them all done at once but if you write them down and stay on top of it you should finish sooner rather than later.

Money Mistakes to Avoid
Read about other money mistakes to avoid:

• Misunderstanding Risk
• Loss Aversion
• Not Seeing the Big Picture

What are ETF’s and how can they help your investment portfolio? The Financial Planning Organization provided me this overview of exchange traded funds.

What is an ETF?
An exchange-traded fund (ETF) is a basket of securities created to track as closely as possible a particular market index, such as the Standard & Poor’s 500 Index or the Dow Jones Industrial Average. They’re similar to mutual funds in that they represent investments in the same types of securities, but they generally have lower fees and can be bought and sold with more pricing immediacy than mutual funds. They also have some clear tax advantages.

Since their launch in the early 1990s on the American Stock Exchange, there are now hundreds of ETFs available for investors to buy. As the market has struggled its way back since 2000, investors have embraced ETFs as a more efficient alternative to a mutual fund invested in the same securities. A financial planner can tell you whether ETFs are right for your portfolio, but here are some details to know beforehand:

How are ETFs created?
An ETF is created by large institutional investors who buy stocks aligning with the shares in a particular index, and then they exchange those shares – in baskets as large as 50,000 shares – for shares in the ETF. The redemption process works the same way in reverse — the institutional investors exchange shares of the ETF for baskets of the underlying stocks.

Are all ETFs based on indexes?
Yes. Indexes, like the S&P 500 or the Hang Seng Index (the primary stock index of the Hong Kong Stock Exchange), are a listing of stocks reflecting the activity of a particular investment sector on a stock exchange. One of the first popular ETFs had an unusual nickname – Spiders – a play on its actual name, SPDR, short for Standard and Poor’s Depositary Receipts. Newer ETFs track less well-known indexes, even indexes of bonds, and some ETFs are tracking very dynamic indexes that almost act like actively managed funds.

How are ETFs traded?
Unlike mutual funds, which have their prices set at the end of the trading day, ETFs are priced and traded every moment of the trading day. That’s generally more meaningful to institutional investors who buy and sell constantly than long-term investors who buy and hold. Furthermore, unlike mutual funds, ETFs can be bought on margin or sold short.

Why might ETFs be more tax-efficient?
Generally, ETFs generate fewer capital gains due to the unique creation and redemption process as well as the usually lower turnover of securities that comprise their underlying portfolios. Financial planners note that investors can better control the timing of the tax treatment of ETFs relative to mutual funds. Most importantly — by holding an ETF for at least one year and a day, capital gains will be treated as long-term capital gains, which are currently taxed at a federal rate of 15 percent (5 percent for low tax bracket investors).

Are there other advantages?
Unlike traditional mutual funds, which must disclose their holdings quarterly, ETF holdings are fully transparent, and investors know what holdings are in the ETF at any given time. Each ETF also has a NAV tracking symbol for even more precise analysis. This helps keep ETFs trading within pennies of their intraday NAV.

What about fees?
Shares of index-based ETFs may have even lower annual expenses than similar index mutual funds, which, in turn, tend to be lower than those of actively managed mutual funds. ETFs must, however, be bought and sold through brokers, and those trades do involve transaction costs. ETFs may prove to be more expensive than mutual funds to investors who add money each month to their portfolio.

What’s the downside?
Unlike regular mutual funds, ETFs do not necessarily trade at the net asset values of their underlying holdings. Instead, the market price of an ETF is determined by supply and demand for the ETF shares alone. Usually, the ETF value closely mirrors the value of the underlying shares, but there’s always a chance for ETFs to trade at prices above or below the value of their underlying portfolios. Also, since so many new ETFs are hitting the market, investors should be aware of the maturity of the particular ETF they are considering.

This column is produced by the Financial Planning Association (FPA), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.

What’s the single most important factor in the value of an investment portfolio? Some might say risk or diversification. Others might think costs or taxes. These are all vitally important but not as crucial as the most basic investing principle.

The good news is that getting this factor right is simple. As a matter of fact, it’s the simplest secret there is to investing. The sad part is that many people can’t even get this one thing right. Until they do, there is no possible way they’ll ever make any money in the stock market. So what’s the secret? Read on and I think you’ll figure it out.

Getting Started
When I began my investment portfolio 7 years ago I wasn’t sure where to start. I didn’t know which funds to buy. I wanted to take advantage of the 10% average annual growth I’d always heard about in the stock market but I also didn’t want to lose my hard earned money.

The day I finally picked 4 mutual funds and setup my 401k was the turning point in my investing portfolio. While that first action was a little scary, it was also very simple. As I look back on all my investment decisions, that was by far the most important.

Figuring Things Out
Was I taking a risk, investing in mutual funds without being an expert? To some degree, yes. Anytime you put money in the stock market there’s a chance you could lose it all. However, I think it’s much worse to avoid getting started than it is to put some money in the market and learn from its performance.

My initial investment was a few hundred dollars in 4 different mutual funds. Many funds have a minimum but if you’re investing through a 401k or 403b plan you don’t have to worry about these minimums. If you don’t have one of these plans, check out the investing options for new investors and investing rookies. While I was risking a few hundred dollars, I was also gaining priceless investing experience. Over time my balances grew and eventually I hired a certified financial planner to look over our allocations and diversifications.

Taking Stock
I implemented many of the suggestions I received from our financial planner and have made a few tweaks since then. A review of the investment holdings of several personal finance writers yesterday gave me a chance to take a look at where we stand today. The small investing experiment that began about seven years ago is now worth a little more than a quarter million dollars and is relatively well diversified as you can see below:

29% – Vanguard 500 Index (VFINX) – Large Blend
14% – American Century Equity Income (TWEIX) – Large Value
13% – Vanguard Small-Cap Index (NAESX) – Small Blend
11% – American Century Ultra (TWCUX) – Large Growth
11% – Vanguard Total Bond Market Index (VBMFX) –
6% – American Century Intl Growth (TWIEX) – Foreign Large Growth
5% – Vanguard High-Yield Corporate Fund (VWEHX) –
4% – Oakmark International (OAKIX) – Foreign Large Value
4% – Vanguard REIT Index (VGSIX) – Real Estate
3% – Dodge & Cox International (DODFX) – Foreign Large Value

Investing Mistakes
I’ve lost a few thousand dollars over the last 7 years with American Century Ultra but that’s a small price to pay for getting a jumpstart on a nest egg for our future. I’ve since stopped investing in the Ultra fund and am trying to decide whether I should sell it all at once or a little at a time.

In addition to my mutual fund investments, I also put some money into Internet and B2B stocks through Etrade in the dot com boom. Caught up in the stock market rush of the late 90’s I lost all of it when the bubble burst. Although losing the money was painful, this was a wonderful investing lesson to learn early in life. I learned the difference between speculating and investing and how to use financial statements to understand the financial health of a corporation. If I hadn’t gotten started investing I may not have learned these lessons until much later in life when I could ill afford to do so.

The Simple Secret of Investing
If you haven’t figured it out yet, the simple secret of investing is just getting started! You may not know what you’re doing but you definitely won’t learn if you don’t start. The best thing to do is start small. Put in a little money to see how the investing process works and how your picks perform. Staying diversified across industries and asset types will help reduce your risk and make you feel more at ease.

If you don’t feel comfortable making the decisions yourself or would like a second opinion, hire a financial planner like we did. Make sure they hold a CFP designation and are a fee only planner. This way you’ll know they have knowledge and experience and don’t stand to earn any money off of your investment choices.

Whether you go it alone or with the help of a professional, getting started on your investing journey is the most important step to building wealth for yourself and your family. Now that you know the secret, get out and get started investing today!