Question: As inflation continues to eat away at the value of my savings and conservative investments, I've been tempted to get into the commodities market. My broker says I should stay away from it -- that it's too risky for me. What do you think?
Answer: I think your broker is giving you good advice. Obviously I don't have enough information about your specific financial situation to make an absolute judgment, but commodity futures is simply not the right market for most people.
When you buy or sell a commodity futures contract, you are actually agreeing to accept (buy) or deliver (sell) the commodity itself at a specified price on some specified future date.
But in reality, delivery is rarely made -- virtually never, in fact, if you're talking about speculators in the commodities market rather than commercial operators. (How would you like to have 38,000 pounds of pork bellies dropped on your front lawn some morning?)
The speculator always closes out his contract by buying or selling a new contract to balance the original option to sell or buy. Profits (and losses) result from changes in market price that take place between the date of the original contract and the date it is closed.
The attraction of commodity futures lies in the leverage available. Futures are bought and sold on margin, often as little as 10 percent of the total contract.
So even a small rise in price can translate into a large profit on the amount of money actually invested. But by the same token, you can be wiped out by a small drop in price.
Trading in commodities is not for the faint-hearted. Even more important, in my opinion, it is not for the part-time speculator either.
Occasionally, you may hear of one who makes a killing, but he is the rare bird indeed. Usually it's the other way around, but how many people do you know who go around bragging about their mistakes?
You need to devote quite a bit of time to studying the commodities markets and keeping up with changing trends. In addition, you have to be in a position to move very rapidly in response to -- or really in anticipation of -- fast-breaking conditions.
In my opinion, commodity futures is a market best left to the full-time traders. The vast majority of part-time speculators lose money. It simply is not the place for the average investor, and I hope you'll follow your broker's good advice.
Q: The year-end statement from my mutual fund shows $130 in capital gains, $28 income dividends, qualifying for exclusion and $25 income dividends not qualifying for exclusion. All of these payments were automatically reinvested in the fund. Are these distributions taxable income for 1980 or do I wait until I sell the shares?
A: These distributions from your fund must all be reported on your 1980 tax return. (The reason is that the money was available to you in 1980 if you had elected to receive it.)
But the tax treatment is different for each of the three types of distributions. The $130 of capital gains is reported on line 13 of Schedule D. (Capital gains distributions from mutual funds are always long-term regardless of how long you have owned the fund shares.)
If you have no other capital gains or losses and thus do not otherwise need a Schedule D, you can instead simply enter 40 percent of total capital gains distributions on line 15 of Form 1040.
The combined total of income dividends ($28 + $25 = $53) should be entered in Part II of Schedule B. But if total dividends received from all sources in 1980 was $400 or less, you can skip Schedule B and enter the total on line 10a of Form 1040.
Now you have to distinguish between qualifying and nonqualifying dividends. For 1980 you may exclude up to $100 ($200 on a joint return) of qualifying dividends, and you would have to carry into line 10c (and thus include in taxable income) the $25 dividends that did not qualify for the exclusion.
Important: Be sure to keep a record of all dividends and capital gains automatically reinvested for you each year. These figures will be important when you eventually sell or redeem the fund shares, because they become a part of your cost basis.