Tips for fine wine investment

By Bill Weston

Approaching wine as an investment is a practice which can pay off in many ways. There are few investments that can be enjoyed with a fine meal when your money is doing well. A wine investment is something that has many dimensions to consider as you become more heavily involved with the industry and is not something to be taken lightly.

It’s a practice that requires knowledge, patience, and a discerning palette. As a consumer, it’s important to understand what actually makes a wine valuable as it’s not simply the age of the bottle or the region from which it was imported and depends upon the intricacies of the actual wine market. 

Image attribution: SmartPhotoStock; free license

To judge the quality of a wine specifically as a wine investment you must begin by looking at several key factors. The vineyard from which the wine came from and the skill of the winemaker are very important factors as well as the genetics of the vine that produces the grapes.

However, as the vine ages, the number grapes it will produce lessens and the availability of the raw material affects the value of the wine itself. The skill and reputation of the winemaker responsible for the vineyard can also play a key role in the fluctuation of the wine price.

A fine wine investment is not a totally apolitical atmosphere and wine investment can seriously impact the exports of any region. For this reason, there are constant attempts made to justify the superiority of any particular region's products over another.

There is the taste of the wine itself versus the weight of the name actually placed on the bottle and sorting through the factors leaves one bottom line: price. This is the universal determination of quality as the scarcity of a wine does not impact its flavour, but it does impact its price tag.

It’s also important to recognise that not all wines improve with age and it does have an upper age limit when it comes to taste. Judging the position of a wine on its arch of maturity can only be done through tastings and the wine press usually takes it upon themselves to conduct these tastings and distribute the information.

The close monitoring of a specific release will be the source which collectors depend on to determine the price that they are willing to pay. Once in the market, receiving a return on your fine wine investment is typically done through auction and these auctions play a large role in controlling the fluctuation in price of collector grade wines.

About the author: Bill Weston writes on a number of subjects including fine wine investments. You can find out more about investing in fine wine at http://www.boltonsinvestments.com/

Key aspects of investment decision making

Investment decisions are made to reach financial planning goals. For example, make $100,000 by age 50. Traditional investment plans often assume an interest rate and consistent periodic contribution. In reality this can be easily disrupted by a lay off, change in market returns, or other unplanned for life disruptions. These models of investing are outdated in some ways; in such case, a new way of thinking about investing is needed. The following are key factors in many investment plans whether they are traditional or not.

Inflation

Inflation is the increase in the cost of goods and services according to the U.S. Bureau of Labor Statistics (BLS). Inflation usually occurs every year and amounts to approximately 2-3 percent. This means a $100 can only buy $97-$98 of goods after one year's time at that rate. In light of that, investments should at a minimum cover the cost of inflation if only to preserve the value of money. Treasury Inflation Protected Securities (TIPS) are a government financial security  that periodically adjust for an inflation adjusted return.  

Time 

Time is another important factor in investing. Time really is valuable, and when diligent savings is added with the discipline to only increase the amount, financial results can be pleasing. Everyone retires or dies, and money is needed in retirement.  To see time in action try a savings calculator like the one at the Financial Regulatory Authority (FINRA) and play around with the numbers. To illustrate, $1,000.00 at 5% compounded annually yields  $7,078.04 inflation adjusted over 10 years with monthly deposits of $50.00 and $19,590.82 in 30 years. 

Interest 

Interest is also very valuable and can turn small amounts into big amounts over time. When investing small amounts with a disrupted schedule look for the highest fixed interest rate available. For example, assuming a beginning savings of $8,000.00, low income, and monthly investments of just $50 a month at just 2% one can accumulate $39,205.94 over 30 years with annual compounding i.e. interest added yearly. At 5% the amount rises to $77,354.89 and at 7% the value is $125,930.53.  An international bond fund with fixed returns and low management fees is one place to look. An example of a bond fund is the Total Return Bond Fund (TGLMX) listed by US News Money.

Risk

Bond funds are also low-risk if they are high quality bonds. For those individuals with a higher risk tolerance, yields can be higher, but losses can also occur wiping out previous year's gains. Be careful to properly consider risk level in terms of time as risk can sometimes even out over time while providing a higher return. The investment risk pyramid below describes the types of risk and possible returns. Also, be sure to consider schemes and scams described by the Securities and Exchange Commission (SEC).  

Image source: New York State Office of the Attorney General

Contributions

In a volatile working environment and unsteady economic conditions it is a good idea to assume no consistent investment contributions, nor a steady return on investment. Using this method, one's investment plan is not caught off guard when a disruption such as unforeseen expenses, or changes in cash flow do occur. Keep in mind starting off with a high savings balance is a good way to leverage and begin earning more by saving. For example, 2% on $1000 is $20 but 2% on $100 is $2.  A key is to be consistent and keep the amount manageable, a low risk investment won't be exciting to watch but sticking with it can make all the difference.

Instrument

Financial instruments can make or break an investment. High risk investments such as leveraged stock options can destroy savings and kill years of investment savings; be careful. In reality, investors might not have enough to diverse risk across multiple investments. In such case safer long-term, medium-volatility utility stocks with high income dividends might be an option. The Motley Fool provides some examples of dividend paying utility stocks with yields above 6%.   Be forewarned though, even utility stocks can move with the market. The Empire District Electric Company Stock (EDE) listed by the Motley Fool declined over 50% from its 2007 high and still hasn't returned to that price. 

Options Trading: Collar Strategy Overview

The 'collar' is one of several types of stock options techniques, and is a relatively conservative way to insure investment  gains in corporate shares, and in some cases, a way to multiply dividend profit. The option involves three simultaneous transactions per the Options Industry Council. This  stock option strategy in effect locks in capital gains, for a time, without having to sell shares.  For example, if a shareholder has experienced an increase of .20 cents per share on 100 shares and believes the price of Coca-Cola shares could fall, writing a 'call option' against those 100 shares  pays for the premium of buying the protective put option which increases in value when the share price falls.

In order to fully grasp this stock option strategy it is necessary to understand the component parts of the collar strategy i.e. the long-put and call option. A put option is a bet that increases in value as share prices fall. These transactions can either be 'written' or 'bought'. The writer of a put option buys shares on margin or owns underlying shares, then charges a fee or premium to the buyer. Each stock option is 100 shares and gives the buyer of the option to sell shares at a pre-determined price. If the price per share falls, the buyer of the put option can sell for a profit at the expense of the option writer.

A call option is the inverse of a put option and allows the option holder to buy shares at pre-determined amount. For example, Mr. A buys 10 call options to buy ABC Corporation at $1.00 per share for a cost of .10 cents per share. This means the premium will be 1000 x .10 cents= $100. In order to make a profit above unrealized gains for a call option alone, the price per share must increase more than .10 cents per share. When purchased, a call option is a form of leveraging to higher level than might be possible than buying on margin. However in a collar, the call is leveraged by the underlying shares owned by the seller and the premium is used to purchase the put.

The Options Industry Council states collar options are good for protecting 'unrealized gains'. In other words, if the share price falls, the collar option covers the cost of that fall while allowing the shareholder to continue holding the underlying shares. It's a slightly bullish strategy and can also be used to claim dividends without risk according to  Michael Thomsett of Minyanville. In both cases the strike price of the options and the cost of the collar premiums is going to be an important factor in determining whether or not the options is a profitable technique to use.

To be profitable and work, the premium from writing the call option should be close to the premium for buying the put option. Additionally, the strike price for both options should be equidistant from the out-of-the-money price which should be the same for both options. For example, if Mr. A writes a call option for ABC Corporation and purchases a 'long-put' option, the out of the money price is ideally $1.00 per share for both option contracts. Moreover, the option cost is also ideally the same; for example, .10 cents per share.

How to Buy Commodities

Commodities are raw materials such as grains, metals, oil and livestock. The exchange of these materials and products has evolved over time from unregulated merchant and supplier contracts, to forward contracts, to commodities derivatives. What this means is the trade of commodities has become increasingly refined with the advent of enhanced logistics, market regulation, massive amounts of product, and electronic means of recoding transactions. There are several ways to participate in the trade of commodities and several key aspects to consider when investing in commodities.

• Commodities are traded as 'futures contracts'
• Futures contracts may be purchased directly or indirectly
• Exchange Traded Funds (ETF's) and Brokers participate in commodities purchases
• Leveraged buying of commodities can increase risk significantly
• Futures commission merchants facilitate the trade of commodities futures
• Several commodities exchanges exist worldwide and in the U.S. are regulated

Indirect exchange of commodities

Indirect exchange of commodities may take place through the buying and/or selling of shares of managed funds that themselves trade in commodities via futures contracts. These funds are called exchange traded funds or ETF's and may have a 1-2% fee associated with the management of the fund.

Through the trade of ETF's, the risk of trading commodities directly can be reduced via (1) knowledgeable management and experience of the fund, (2) diversification of commodities contracts, (3) and indirect involvement in international trade (investopedia.com). ETF's may participate in purchasing of particular commodities or a broad range of commodities.

Additionally, the companies that produce commodities themselves can be traded via mutual funds and/or stocks. These funds and/or stocks are bought and sold through financial institutions that offer brokerage services and offer an alternative to direct exchange of commodities by partial ownership of the commodities producer that's assets include commodities.

Depending on market conditions this type of trade may be more or less risky and garner different yields than direct trade of commodities. Commodities can also be exchanged indirectly through a broker that is licensed in commodities trading. (investopedia.com)

Direct exchange of commodities

Direct exchange of commodities is performed through futures exchanges via futures commission merchants (investopedia.com). Within the United States, these merchants/brokers can be investigated prior to opening an account for registration with regulatory bodies such as the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).

Since many commodities are traded as futures contracts, the actual physical exchange of the commodity does not have to occur as the commodities exchange can resell the physical contract and/or hold the underlying asset value through its market making capacities and/or financial affiliations.

There are several commodities exchanges around the World through which futures commission merchants operate. A few of which include the Chicago Mercantile Exchange (CME) which is now merged with the New York Mercantile Exchange (NYME), Tokyo Commodities Exchange (TOCOM) and Dubai Gold and Commodities Exchange (DGCX) (wikipedia.com) and each day, futures positions are settled and accounts with futures commission merchants are debited or credited to reflect daily changes in the price of futures contracts held. (nfa.futtures.org).

When the trader or broker of the contract decides to sell the contract and/or if the contract expiration date is reached, a final cash settlement will occur yielding either a gain or a loss. Since futures contracts are often bought using leverage i.e. margin that allows the buyer to purchase more with less, large fluctuations in commodities prices can having corresponding multiplied losses or gains to the value of the account through which the contract(s) are purchased.

Summary

Commodities trading involves the exchange of either commodities futures contracts, exchange traded funds (ETF) that themselves trade commodities futures contracts or companies that produce commodities. Levels of risk vary with the method by which commodities are exchanged i.e. direct or indirect, market conditions and the use of leverage in the exchange of shares and/or futures contracts. Commodities futures are exchanged through futures commission merchants who facilitate trade via the commodities exchange itself.

These financial intermediaries function as brokers, charge fees and/or commissions for their services and may be registered with commissions regulatory bodies. The practice of commodities trading may be participated in for a number of purposes including (1) market speculation (2) hedging of risk by commodities producers and (3) financial strategy by funds and/or financial institutions participating in the trade of commodities futures contracts.

Sources:

1. http://www.investopedia.com  (Investopedia)
2. http://en.wikipedia.org/ (Wikipedia)
3. http://www.nfa.futures.org/ (National Futures Association)

Tax Implications of Investing in Precious Metals

The tax implications of investing in precious metals can be assessed in several ways, each of which can have an impact on the net-profit an investment makes. These ways include the holding or sale of precious metals as 1) tangible property and intangible property, 2) capital gains, and 3) personal business.

This article will discuss these means by which precious metals can be taxed, the situations in which the tax applies, and the levels at which each method of taxed is implemented. There are also methods and financial instruments that may avoid or reduce taxation of precious metals, back room estate sales excluded. These techniques will be elaborated upon in the 4th part of this article.

Taxation of tangible and intangible property

Precious metals are considered tangible property rather than real property. Thus in some cases, the ownership of precious metals such as gold, platinum, titanium, and silver may or may not carry property related tax. The U.S. Federal government does not tax ownership of tangible property in the form of precious metals until they are sold and/or income is received in relation to them. However, some U.S. States such as Georgia, do tax ownership of personal precious metals. Some States that do not tax ownership of precious metals are Delaware, Pennsylvania, and Hawaii,

Taxation of capital gains

Proceeds from the sales of precious metals are taxable as income when those proceeds yield a profit from the original price after qualified cost basis adjustment. Not only are the sale of precious metals made for investment taxable as a capital gain on intangible property, they may also be taxable as income from sale of collectible assets, which for all but the lowest income tax bracket is equal to or higher than the maximum long term capital gains tax. This means that sales of Gold funds could end up taking 28% off your capital gains instead of 15%.

Taxation through 'pass through' business

Sole proprietorships, S-Corporations and Partnerships all receive flow through income on individual tax returns. This means end of tax year retained income from a gold collectibles dealer structured as sole proprietor or S-Corporation would be passed through onto the individual owners' 1040 tax returns as income.

This income is then subject to normal deductions and exemptions and then taxed at the income tax bracket rate in which the individuals' taxable income validates. Additionally, a minority portion of U.S. States assess tax on business inventories. In such cases the inventory tax is assessed via that State's taxation method.

Tax free, reduced, and deferred precious metals

There are a few ways to avoid or defer tangible property tax, tax on the sale of precious metals and income related to such. These methods include 1) conversion, 2) reallocation 3) exchange and 4) cost basis adjustment and expensing.

• Conversion

This means precious metals crafted into items such as tea-pots, jewelry, silverware etc. qualify as personal adornments and household items thus avoid being taxed as personal property even in States that do tax tangible property.

• Reallocation

The placement of intangible precious metal assets such a precious metals fund, in a tax-deferred instrument such as an I.R.A., or a tax free instrument such as a foreign company trust. When these assets are bought and sold they then may either defer income tax or avoid taxation so long as specific income is not brought into the United States. For example, a precious metals mining company that issues shares on a foreign exchange and is traded on that exchange through a foreign company trust, will not be taxed in the U.S. until that income is received within the U.S.' taxable jurisdiction.

• Exchange

Similar to barter where what is traded cannot be taxed as a sale because nothing is sold. Barter can be used to exchange for an item of higher value or higher potential appreciation thereby deferring taxation until that new item is sold.

• Expense accounting

Recoding the purchase of precious metals as an expense rather than a credit to a cash account may make a lower taxable income possible at the end of the tax year. This technique requires the use of a third party source of financing such as a private lender. Provided the source of financing has a lower cost in regard to the profit made from both the sale of the precious metal and the tax on such, then this method may be advantageous.

For example, company A purchases $10K of gold collectible coins with financing from Company B at 4%. After the tax year ends, the business sells the gold for a profit of 10% and pays off the loan half way through the loan's term. The loan ends up costing 2% due to early payoff, the profit becomes 8% and the tax on the gold's sale for that year is 0%, and annual income tax is reduced due to the financing expense.

Safest Way to Buy Gold

The safest way to buy gold addresses value, transportation and storage of the gold. This is because the amount of gold, how its price changes over time, and the market, political and economic conditions in which the gold is bought all affect the relative safety of the gold purchased.

The safest way to buy gold depends on more than one factor, specifically the objective of buying gold, the length of time the gold is to be held, the amount of gold that is to be purchased and the aforementioned purchasing environments. Ideally the safest way to buy gold is when the price is at its lowest and in bullion form either through exchange or physically, and via a safe and stable banking or dealing medium.

Image source: Petr Kratochvil

• Buying gold when prices are low

In terms of value, a safe way to buy gold is often during an economic boom and rising 'secular' market when the value of currency is rising. The reason being, gold prices tend to rise when currency declines in value and when the strength of an economy weakens. In societies where the value of money is unstable, gold is often purchased for its ability to hold value relatively well.

Buying gold when prices are low is a safer long-term gold buying strategy as the price of gold could continue to decline and hold at a low price for several years before rising again. For example, if an ounce of gold were purchased in 1947 it wouldn't have begun recovering significant value until the late 1960's to early 1970's.(2) Similarly, if gold were purchased in 1984, its value would not have appreciated until approximately two decades later.

In the United States the value of gold has experienced a tremendous incline since 2002 when the value of dollar began to decline.(1) A similar pattern took place in the 1970s, when the price of gold also rose. A part of the reason for this rise in the price of gold was the dropping of the gold standard in the U.S. and instituted by President Nixon. The trend didn't reverse until approximately 1983, when the value of the dollar again began to rise.

• Storage and issuance of gold ownership

When storage, record of purchase and transportation are a matter of concern, a safe way to buy gold is to purchase gold stock. Gold stock is a share position in a company that is involved with gold production and distribution. For example, Barrick Gold (GLD) and Newmont Mining (NEM). If the company is a risky investment however, and one chooses to diversify that risk, a gold exchange traded funds such as the Spider Gold Fund ETF (GLD) may be a safer option. When buying gold through stocks, other factors come into play such as the company's financial solvency, strategic planning, annual revenue etc. If the companies aren't safe investments, neither is the gold which they mine.

• Economic and political instability

To safely buy gold during times of economic and/or political instability, physical purchase and possession of gold may be safer than through a national institution. Gold bullion is authentic refined gold either in coin or bar form. This type of gold is sold by 'bullioners' and in some cases is minted by the Government. Gold bullion is 99.5% or a higher percentage.(3) 24 karat gold is the highest percentage of gold available.

Purchasing gold bullion coins with a numerical face value adds value and cost to the price of the coin. Physical gold bullion may also be a little higher in cost than the commodity form. Buying gold bullion through 'bullioners' and accredited dealers is safe as long as the gold being shipped is insured and cost reimbursed should the gold be lost. When investing in gold bullion, an issuing stamp certifying the gold's authenticity ensures one is safely buying gold.

• Buying gold through commodities exchange

Another safe way to buy gold is through a secure, regulated and stable commodities exchange such as the Chicago Board of Trade (CBOT) when the spot price of gold is at long term low value. Commodities are traded by producers, and for commercial reasons. This method avoids transportation and delivery of gold if the gold commodities futures are not delivered. These financial instruments are used more to hedge prices in the short term and are not always held for long periods of time.

Sources:

1. http://www.investortrip.com/images/dollarindex
2. http://www.measuringworth.org/datasets/gold/result.php
3. http://www.monex.com/

Differences Between Futures and Forward Contracts

The difference between a futures contract and a forward contract reveals itself in the way the two contracts are used, how they are regulated, the extent to which each type of contract is utilized, and their influence on financial markets. In fact, there are a number of significant differences between a futures contract and forward contract even though they are related via a historical connection. • Futures contracts evolved out of Forward contracts Futures contracts are a financial instrument that evolved out of forward contracts. Historically, farmers, banking institutions and buyers used to negotiate purchase and delivery of a commodity where the banking institution offered a letter of credit to the supplier based on the purchaser's credibility. In turn the farmer would deliver goods on a specified date and was paid by the banker. The banker then settled with the buyer. Over time commodities exchange process became more sophisticated and the forward contracts themselves were bought and sold without actual delivery of the commodity. Eventually around the middle of the 19th century exchanges emerged in which these contracts were traded in the form of Futures contracts which led to more differences between the two types of contracts. These differences are outlined as follows: • Futures contracts are traded more frequently Futures contracts are more common within financial markets whereas forward contracts are not as vulnerable to price differences caused by frequent exchanges with price differences that reflect changes in market conditions. Additional differences between futures and forward contracts Several specific differences between futures and forward contracts exist. These differences can help distinguish between futures and forward contracts. The following factors illustrate the difference between a futures contract and a forward contract and demonstrate how different these two contracts actually are. • Regulation Forward contracts are not regulated in the same as Futures contracts are. Futures contracts are subject to more oversight from organizations such as the Commodity Futures Trading Commission (CFTC). A history of futures contract regulation can also be found at the CFTC website. • Contract Terms Negotiating a forward contract can be done in a restaurant, at a golf game or at a business meeting. Futures contracts are conducted exclusively through a trading exchange such as the Chicago Board of Exchange. • Derivative Commodity While forwards and futures can theoretically trade in anything, in practice Futures are limited to what the exchange incorporates into its trading mechanism. For example, The Chicago Board of Exchange facilitates futures contracts in agricultural, bond futures and metals futures. Forward contracts have more flexibility in what is traded due to the fact they do not have to be traded through an exchange. • Fees and/or Commission Futures contracts usually involve some kind of fee and/or commission whereas forward contracts between individuals do not have to incur finance charges. • Trading Process Futures are bought and sold in high volumes that would be impractical for forward contracts with delivery. These high volumes are rapidly facilitated through real time exchanges whereas forward contracts can be bought and sold at a coffee shop or business meeting after hours of negotiation. • Insurance The exchange of futures contracts is not always insured whereas the commodities in a forward contract are more likely to be insured. • Contractors and Contractees Since forward contracts have more flexibility, they are more likely to be entered into by a wider variety of contractors and contractees. Futures contracts on the other hand are traded in a more exclusive manner. For example, food distributors and retailers have forward contract when negotiating the future delivery of watermelons for a specified wholesale price, whereas commodities brokers are more likely to buy and sell derivative contracts such as those involving the exchange of oil. Source: http://www.cftc.gov (Commodities and Futures Trading Commission)

The ABCs of commodity futures

If you want to trade in the futures market there are a few things that might be helpful to know beforehand. For starters, you'll need some money in advance and sometimes a good credit rating to secure certain types of account needed for the commodity futures trading. Also, some knowledge of what it is you're investing in could be advisable as this may reduce your commodity futures trading risk.

• What are Commodity Futures: Commodity futures are financial contracts derived from a particular physical commodity such as corn or copper. These financial instruments are regulated by the Commodity Futures Trading Commission (CFTC) and are often traded back and forth without delivery and/or transfer of a commodity.

• How they work: Commodity futures are traded on special exchanges such as the Chicago Board of Trade. A buyer of futures contracts often purchases on credit meaning they only have to put down a certain fraction of money to buy the whole contract. As the price of commodities changes from day to day, the value of the futures contract also fluctuates in terms of what the underlying commodity is actually worth in relation to the contract.

• How to analyze them: To analyze the value of a future's contract it can be a good idea to investigate the supply and demand of the underlying commodity being traded, broader economic conditions, daily, monthly and yearly price fluctuations and conditions affecting the particular industry. For example, if a hurricane is about to hit the Gulf of Mexico this could positively affect the price of oil futures.

• Benefits of Commodity Futures: Futures trading can be exciting and rewarding. The benefits of futures contracts can be great if the price of a commodity rises after the contract is purchased for a lower price. For example, suppose used cars are a commodity. Person A goes to dealership B to buy 10 used cars 1 month in the future for a special deal price of $15,000. After signing the contract a reputable antique automobile association declares the cars special antiques thereby increasing the market price of those cars and benefiting the buyer of the contract.

• Risks: Inversely, had those automobiles been deemed junk, the value of the cars could drop below the contract price. The contract holder is then obligated to buy the cars at a price above what they are actually worth meaning the resale value of the contract is lower. Since the contract is often bought on credit, the cash deposit a contract holder has can decline faster than had the contract been bought dollar for dollar.

Tips to consider when trading commodity futures

Commodity futures trading is more sophisticated than straight equity trading because it involves derivative calculations, and a more complex set of relationships between the industry and the financial instrument. For this reason it can be considered a good idea to study the calculations required before hand and to plot derivative calculations upon actual commodities price movement to see where one would have been had one acted upon those calculations.

When buying and selling commodity futures, a few suggestions may prove helpful. Specifically, they are as follows:

• Margin Account: Only invest what you can afford to lose as the risk associated with futures trading are greater than straight equity trading and some other forms of investment.

• Commodity: Choose the commodity you know the best as this may assist you in predicting future prices better. Consider things like regulation of the commodity, imports and exports, and seasonality.

• Brokerage: When trading commodities futures a brokerage account is often used. Selecting a broker that his trustworthy, and reputable that provides a wide array of services and investment opportunities for an affordable commission price.

• Analyze: Pre-analysis of a particular commodity using financial tools, mathematical metrics, economic forecasting and market analysis can all assist in making more accurate assessments of the strength or weakness in a particular commodity investment. In turn, these types of analysis may help one be a better investor.

Trading commodity futures can be considered an advanced form of investing. The practice involves some important mathematical calculations and an understanding of the derivative markets and nature of commodities futures is quite important.

The better one knows the market, the trading process and the industry dynamics of the underlying commodity the more possible it becomes to trade successfully. While nothing is guaranteed in investing, it can be helpful to be as well informed as possible before investing. By utilizing the information and techniques illustrated above, one may be better prepared for commodities futures investing.