Charles Rotblut will speak at the 2015 AAII Investor Conference this fall; go to www.aaii.com/conference for more details.
The growing popularity of exchange-traded funds () and the rise in gold prices over the past few years has raised the awareness of including commodities (metals, wheat, oil, etc.) in one’s portfolio. Yet, for all the attention, there has been relatively little discussion about the advantages and disadvantages of using ETFs, futures or commodity-producing companies to invest in commodities.
John Stephenson provides a great primer on this subject in his book “The Little Book of Commodity Investing.” This is worthwhile reading if you are considering allocating a portion of your portfolio to commodities. An excerpt from John’s book can be found on page 7.
I’ve looked at gold for my own portfolio, but never bought it because I could never figure out how to value something that does not have a stream of cash flows associated with it. Since I am likely not alone in this conundrum, I contacted Thomas Winmill, who manages the Midas Fund—one of the best-performing gold sector mutual funds over the past five years. Thomas explained the factors he thinks have the greatest influence on the price of gold, as well as the role the precious metal should play in one’s portfolio. A transcript of our conversation appears on page 10.
It is often assumed that investors have a clear understanding of exactly what an ETF is. Unfortunately, this is not universally the case. In fact, new investors may not even fully understand what a mutual fund or an annuity is either. If you are in this category, you will want to read this month’s Beginning Investor. I explain exactly what each of the five most commonly used investment vehicles are and point out some of the unique risks associated with each one. The column appears on page 14.
There are a variety of ratios that can be used to identify undervalued stocks, including the price-to-sales ratio. The key is to find stocks that are true bargains, as opposed to stocks that are simply trading at low valuations. John Bajkowski discusses a screen that finds stocks with both low price-to-sales ratios and several other attractive traits in his First Cut column on page 16.
Due to the large number of economic reports published over the course of a calendar month, it can be difficult to determine which data provides the most insight. This is why I asked Aaron Smith of Moody’s Economy.com, a popular economic website, to discuss the reports he places the greatest emphasis on. You can read a transcript of our conservation on page 17.
The ongoing market volatility has likely caused some of you to realize investment losses. If those losses were incurred in a taxable account, tax regulations provide some measure of relief. You can use the losses to offset capital gains, thereby lowering your overall tax bill. In addition, you can also carry forward any net losses in excess of $3,000 into 2011 and beyond. Julian Block explains how to use the Internal Revenue Code to your advantage on page 23.
Capital losses are also a consideration when evaluating a variable universal life insurance policy. This is a unique type of life insurance that allows you to control how your premiums are invested. The downside is that if equity sub-accounts are used and stock prices fall, the death benefit may have to be reduced. Peter Katt explains the risks and what role variable universal life can play in a life insurance portfolio on page 26.
In response to a recent AAII survey, many of you stated a preference for dividend-yielding stocks. As a result, I chose the High Relative Dividend Yield strategy from AAII.com for this month’s featured AAII stock screen. The strategy looks for stocks that have both current yields above their seven-year average and a history of rising dividend payments. The article starts on page 29.
Wishing you prosperity, Charles
Charles Rotblut, CFA
Editor, AAII Journal