Look carefully before you leap into the inviting commodity pool
With investments such as stocks and bonds having a dry spell, many people are receiving phone calls and letters asking them to jump in a pool.
This particular watering hole is better known as a commodity pool, and like the neighbor's swimming pool on a hot summer day, the commodity pools have been filling up fast as investors look for a place with refreshingly quick returns.
People fascinated with the often-volatile commodities markets have sometimes wondered how they could make money on the changing prices of soybeans, wheat, cattle, metals, heating oil, and foreign currency. For those who cannot figure out what the best commodities are for investment, and when to get in or out of a particular product, commodity pools, which can be more easily judged on past performance, may be safer.
Many people have done well in these pools, which like mutual funds, take investors' money and buy shares in a wide variety of commodities. The diversification minimizes risk and frees individual investors from ''margin calls'' by brokers, asking them to come up with immediate cash to make up the difference between the current price and what was actually invested. This would be needed to cover a sudden, dramatic drop in the price of the commodity. The investor in a pool is also free of having to make frequent decisions in a market that can change radically by the hour.
The number of commodity pools registered with the Commodities Futures Trading Commission jumped from 532 in 1979 to 827 last year, a rate of growth that is keeping CFTC regulators busy.
''I've had to take people off other areas to watch the commodity pools,'' says John T. Manley, director of the CFTC's division of trading and markets. His people aren't just registering the new pools, Mr. Manley said; they are also trying to keep tabs on the growing number of unregistered - often less-than-legitimate - operators.
Mr. Manley notes that commodities, including the pools, are risky enough without investors having to worry about pool managers who have no experience, carry a criminal record, or are just plain incompetent.
If you get a phone call out of the blue inviting you to invest in a commodity pool, the first question he suggests you ask is: ''Why me?'' Find out how the caller got your name and why he thinks you are a good prospective investor.
After that, an investor should look into the firm's track record, ask for a copy of the firm's disclosure statement filed with the Securities and Exchange Commission (SEC), and do independent research through other brokers, state securities offices, as well as the CFTC. While there are 827 pools registered with the CFTC, industry observers estimate the number would double if unregistered pools were included. The fee for CFTC registration is just $50, but the commission does ''fitness checks'' on the principals in the firm by talking to the FBI, the SEC, and the Internal Revenue Service.
Who should dive into such pools? One indication can be seen in the prospectus of one of the newer commodity pools, Boston Futures Fund III. To join this pool, an investor must have a net worth of at least $50,000, exclusive of house, furnishings, and automobile. Or, there must be a net worth of at least $25,000 and an annual adjusted gross income of at least $20,000. So, you have to be able to afford to lose your money.
Boston Futures Fund III is one of the first commodity pools designed for the new individual retirement accounts (IRA). The idea of investing retirement savings in commodities may seem too risky to many people, but the track record of the managers of this pool has minimized the risk, says Alan J. Sarnoff, vice-president of Whitehall Investors International. Whitehall organizes pools offered by its parent, Eastern Capital Corporation and other brokerage houses. Eastern Capital is general partner for Boston Futures Fund.
If in 1978 an investor had put $3,000 in the fund's predecessor, Boston Futures Fund II, it would be worth almost $18,000 today, Mr. Sarnoff says. Futures Fund III has a $3,000 minimum for all investment, with the exception of IRA accounts, where there is a $2,000 minimum to conform to the legal maximum on IRAs.
There is a way investors who are worried about having retirement funds in commodities can minimize the risk, Mr. Sarnoff notes. ''You can invest just this year's $2,000 in the commodity pool. Next year, you can put the $2,000 somewhere else, if you like.''
IRAs not always tax free
Would you please list states where IRAs (individual retirement accounts) are not tax deductible? It came as a surprise to me to find out California does not allow tax-free status of IRAs. -C.J.
Since the the tax-cutting law, including broadened rules and higher limits for IRAs, was passed last year, several states have moved to bring their tax laws in line with the federal law. Still, there are a few states where you must report the money you put into an IRA - as well as any interest - and pay state income tax on it. This is the case in Alabama, California, the District of Columbia, Massachusetts, Mississippi, Nevada (which has no state income tax), and Pennsylvania.
In California, there have been several efforts to change the rule, all unsuccessful so far. In New Jersey, IRA deposits are taxable as income, but not taxed when taken out, just the opposite of federal rules. And in New Hampshire, which also has no state income tax but does tax investments, IRA deposits are tax-free if they are in state-chartered banks or savings and loans. But if they are in outside financial institutions, like insurance companies, mutual funds, or brokerage houses, IRA deposits are taxed like any other investment.