August 2011 - Posts - Kahler Financial
Welcome to Dollar Stretcher Community Sign in | Join | Help
in Search

Kahler Financial

August 2011 - Posts

  • Are Commodities the "Next Best Thing"?

    by Rick Kahler

    With the U.S. stock market’s dismal performance during the "lost decade," return-chasing investors looking for the next best thing may think they have found it in commodities. This asset class returned around six percent annually during the past 10 years.

    Usually "the next best thing" soon takes its turn becoming "the last worst thing." Still, commodities are one of the ten asset classes I recommend all long-term investors consider for their portfolios.

    Even though commodities are tangible assets like corn, coffee, or oil, you don't invest in them by renting a warehouse and filling it with truckloads, bags, and barrels. When investment advisors refer to investing in commodities, they are actually referring to investing in commodities futures.

    Don’t let the term "futures" scare you. I'm not suggesting you consider playing the futures market, risking the loss of much more than your investment by using extreme leverage. I recommend a non-leveraged investment in commodity futures.

    Commodity futures are a short-term claim on a commodity. Commodity futures do not raise capital, the way stocks do, but rather allow sellers to obtain insurance to lock in prices for the future delivery of their commodities.

    Commodity futures, then, do not represent direct purchases of the commodities (the spot price), but bets on the expected future selling price of a commodity. A commodity futures contract is an agreement to buy or sell a specified quantity of a commodity on a future date at an agreed-upon price. The investor (sometimes inappropriately called an "evil speculator" by cable news commentators) provides the seller of the commodities a guaranteed price or "insurance" by assuming the risk of unexpected movements in the future spot price.

    Most investors in commodities will diversify by buying a basket of various commodities, called an index. There are several commodity indexes like the GSCI and the DJ-UBS. Since commodities pay no dividends, the only way to make money from commodities is if they appreciate in value.

    There are large differences in the historical performance of spot commodity prices and commodity futures. Buying an index of "spot" commodities in 1959 and holding it for 45 years produced a total return of 3.47%, lower than the average inflation rate of 4.15%. This is consistent with the common wisdom that over the long term commodity prices haven’t kept pace with inflation.

    Instead, had an investor purchased an index of commodity futures in 1959 and annually rebalanced the index to equal weights, the return would have been 11.18%. This was comparable to the return of the S&P 500. However, the commodity futures had about 20% less volatility than the S&P 500.

    If the return of commodity futures equals that of stocks, why bother to have both? The reason is the two asset classes tend to move contrary to one another, which lowers the volatility of the overall portfolio and increases the return.

    The most effective way to incorporate commodities into your portfolio is by investing in a commodity mutual fund; PCRAX is one example. There are also a number of exchange traded funds. Be sure to do a little homework on the fund’s strategies, as each one can employ a different technique.

    Finally, be sure that your investment in commodities is for the long term. Trying to time the commodities market or a specific commodity isn’t advisable. Pick your allocation, say five to 15 percent of your portfolio, and stick with it, rebalancing at least annually.

    Peaks and valleys are an inherent part of any investment in equities. If history is any indication, adding a sliver of commodities to your portfolio will help smooth out your investment landscape.

    Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

  • What Tax-Free Income? Tax Myths, Spin, and Partial Truths

    by Rick Kahler

    If I had high blood pressure, I would have to give up listening to Sunday morning news shows. I’ve never figured out how politicians can so convincingly weave false information and partial truths into spin that they deliver with a straight face.

    One of the more popular partial truths is that 47% of Americans don’t pay taxes. While it is true that they don’t pay federal income taxes, they do pay Social Security and Medicare taxes on their wages. They also pay sales taxes, gas taxes, property taxes, and a host of other taxes.

    It is also true that the top 1% of wage earners pay 38% of all federal income taxes. Yet income taxes account for about half of the revenue raised by the federal government. A large portion of federal revenues come from Social Security, Medicare, and unemployment insurance taxes. The bottom 90% of wage earners pay the bulk of the Social Security taxes, which apply on the first $106,800 of wages.

    The purpose of the Social Security program is to provide a safety net to those who did not save adequately for their retirement. It seems reasonable that those who would benefit the most from the program provide a portion of the funding. Still, many feel the wage cap on Social Security taxes should be raised or eliminated, requiring those with higher incomes to fund a greater share of Social Security.

    Another partial truth underlies the many Internet and cable news stories about large corporations and hedge fund managers making billions in profits and paying no federal income taxes. These claims leave the reader or listener with the perception that the individual or corporation earned income that was tax-free. For the most part, no individual or corporation can have a taxable profit and not owe income taxes. Rarely, if ever, is income tax-free.

    In some cases, however, the tax code allows the taxpayer to defer the taxes on the income into a future year. It is true they may have paid no income taxes in the current year on profits. What the media stories don’t tell you is that the tax bill comes due next year or some year in the future. Anybody who’s ever sold a house or investment property and deferred the tax liability on the gain into the future by reinvesting the proceeds into another home or investment property understands this concept.

    Another charge of how the wealthy "game" the system and don’t pay income taxes was illustrated in an article published in the Portland, Oregon, Willamette Week, on April 13, 2011. The piece, written by David Cay Johnston, a columnist for tax.com, was titled "9 Things The Rich Don’t Want You To Know About Taxes."

    He gives the example of a couple who owned a sports team who went for seven years without paying a dime in income taxes while spending $45 million in one year alone. Unfair? Not when you realize the couple lived on borrowed funds during those seven years. Borrowed money is not income because you eventually must repay the loan. If the loan is secured by appreciated property and the property is sold to pay off the loan, capital gains taxes will be due at that time. In some cases, the capital gains taxes are more than the proceeds from the sale, so it's necessary to sell other assets to pay the taxes.

    The complexity of our tax code makes it difficult enough to reach accurate conclusions about who pays what on how much income. It only adds to the confusion when politicians and the media publish half-truths instead of facts.

    Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

About Us    Privacy Policy    Writers' Guidelines     Sponsorship     Media    Contact Us



Powered by Community Server (Commercial Edition), by Telligent Systems