Marital Advice

***** You're Going to be Rich, Rich, Rich! *****
(Part 2)

Some of the most important advice that I gave to my grandson in the book, Marital Advice to my Grandson, Joel, deals with how to avoid investment money traps and, in fact, how to become rich through investing.  Last week, in Part 1 on this topic, I discussed investing in stocks.  This week, let's take a look at two completely different investment possibilities:

Investing in Bonds 

We'll make this short.  There are a lot of investments, like government bonds, corporate bonds, municipal bonds, treasury bills, and money market certificates that pay interest on your investment.

My Advice: Normally, the interest rate is too low for a young person to invest in these.  Four or five decades from now, when you want to be more conservative with your investments, you might consider it.

Investing in Commodities 

This is certain to happen, so pay attention.  Some day, a friend is going to say to you, "I know how we can make a killing in the commodities market - thousands of dollars a day."  That is why I am giving you a little background knowledge here, so you will know what he's talking about.

Various commodities including sugar, coffee, lumber, corn, soybeans, wheat, cattle, hogs, and silver are traded on the Board of Trade.  These commodities are traded in units called "contracts."  For instance, a corn contract consists of 5,000 bushels.

Let's say that corn is currently selling at $5 a bushel, so a contract of 5,000 bushels is worth $25,000.  Now, here is what might seem to make investing in commodities attractive - to buy, or control a 5,000 bushel contract of corn, you only need to put up 10% of the contract's $25,000 value, called a Margin.  You don't actually have to take delivery of the corn; you can sell your corn contract before it comes to that.

Let's assume that the price of  corn goes up 20 cents a bushel the first day you own a contract.  That's an increase of $1,000 (5,000 bushels x $.20 per bushel) in one day on your $2,500 investment!  This amounts to an annual rate of return on your investment of a whopping 14,600%.  Wow!!!  You da investment guru, no?  No.

Here's the killer.  The price of corn can go down as well as up, and it can go down a whole lot faster than it will go up.  Let's say there is a news report that the corn crop in Brazil is going to be double what was expected.  Therefore, since the supply of corn is going to be larger than expected, the price of corn will drop like a falling meteorite.

Let's say corn drops $1 a bushel over a four-day period.  Thus, you would lose $5,000 in one week on your 5,000 bushel contract of corn.  That's bad, but the really bad news is that you and your pal each bought ten contracts of corn in your quest to get rich quick - your loss is $50,000 for the week.  How did that feel?

My Advice:  If you don't pay attention to any other advice I'm giving you, pay attention to this.  It might save you from bankruptcy and it might save your marriage.  DO NOT UNDER ANY CIRCUMSTANCES INVEST IN COMMODITIES.  Got it?

Next week, some really good advice on how to become rich, rich, rich by investing - and you can get started with only a few hundred dollars.

Copyright  ©  2018 By Peter Davidson