Futures - High Risk and High Returns

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markchamp
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Futures - High Risk and High Returns

Postby markchamp » Sun Feb 21, 2010 4:34 am

what ever gives high returns comes with a high risk. according to http://www.investingstockfutures.com futures commodities such as oil is a good source of investment. anyone made any profits from investing in futures

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Re: Futures - High Risk and High Returns

Postby DoingHomework » Sun Feb 21, 2010 8:27 am

markchamp wrote:what ever gives high returns comes with a high risk. according to http://www.investingstockfutures.com futures commodities such as oil is a good source of investment. anyone made any profits from investing in futures


Inesting in futures is a great way to go bankrupt! It is not something an individual should ever do.

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Re: Futures - High Risk and High Returns

Postby MossySF » Wed Feb 24, 2010 7:19 pm

There's nothing wrong with the idea of futures themselves. You can always craft the position to be even safer than holding the regular stock.

The real problem is the cost overhead. Putting that perfect mix together might cost 10% commissions. Which means you then have to take extra-ordinary risks to overcome the drag. In the end, the only winner is the house (financial industry charging the fees).

You could take the same risks using leveraged ETFs at a fraction of the costs. Not that I am advocating that either - these things are those who are aiming to get rich quick and that's rarely a formula for success. Just saying there are cheaper ways to lose your money quick. ;)

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Re: Futures - High Risk and High Returns

Postby MossySF » Wed Feb 24, 2010 7:27 pm

And actually, I have made money on commodity futures. I hold a commodity futures fund in my 401K that is set an auto-rebalancing to bonds and stocks. I calculated I earned an extra 1.5% during the last 2 years from all the wild swings in prices from rebalancing.

Beyond holding a CCF ETF or fund, it would be impossible for an individual to diversify without blowing everything on commissions.

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Re: Futures - High Risk and High Returns

Postby DoingHomework » Thu Feb 25, 2010 6:10 pm

MossySF wrote:And actually, I have made money on commodity futures. I hold a commodity futures fund in my 401K that is set an auto-rebalancing to bonds and stocks. I calculated I earned an extra 1.5% during the last 2 years from all the wild swings in prices from rebalancing.

Beyond holding a CCF ETF or fund, it would be impossible for an individual to diversify without blowing everything on commissions.


It is certainly possible to make money in futures. And I understand that by creating a properly constructed position one can eliminate most risk. But, with an MBA in finance, extensive education in investments and in statistics and mathematical finance, I would not be comfortable devising that "low risk" position except in the most benign vehicles. I think it is hopeless for 99% of individual investors to do it right.

Mossy, if you are in the 1% that can then that is fantastic and I give you great credit. But I would never encourage anyone to speculate in futures. And, by definition, individual cannot invest in futures, they can only speculate.

I am fully aware that the whole point of futures is to reduce risk by hedging positions. For businesses, including many small farmers,futures are a tool for reducing risk. I understand them thoroughly. But I would never speculate in them except to hedge risks.

The real problem with futures is that the loss can be unlimited. If you but a stock your loss is completely limited by the amount you invest. With many futures positions your loss potential is unlimited. While you could hedge it, if you made a mistake the consequences could be dire.

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Re: Futures - High Risk and High Returns

Postby MossySF » Fri Feb 26, 2010 8:34 am

I'll clarify my responses. I hold commodity future ETFs (PowerShares DBC under my IRA) and funds (Pimco Commodity Return under my 401K). These funds hold futures instead of the actual commodity as the expenses of funds trading actual commodities would be too expensive. For me, the primary purpose is to hedge against sudden inflation. The secondary purposes are to take advantage of natural rebalancing opportunities between commodities, bonds and equities -- this is where I've gotten that extra 1.5% during the past 2 years. There's also one final profit source in the offering of price insurance to commodity producers. Like your example of farmers using futures to lock in today's price before they can deliver their foods, somebody on the other side is offering the purchase guarantee in exchange for a "fee".

As commodity funds and ETFs are very popular, many people already indirectly speculate in such assets. Beyond this, I would never directly futures unless I had 1B and wanted to profit on the price insurance premium over the long run. Then I could hold enough positions to diversify again counterparty risk and construct hedge positions. Without a massive amount of money, there's no way an individual investor could hedge and come out with a profit so the only option available is pure speculation with possible unlimited losses.

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Re: Futures - High Risk and High Returns

Postby DoingHomework » Fri Feb 26, 2010 10:42 am

Ah, of course. But commodities funds are completely different than buying the underlyings. There is nothing wrong with commodities funds. They are liek any mutual fund because they still must comply with teh Investment Company Act and other MF regs.

Commodities futures themselves are entirely different and are very high risk IF you don't know what you are doing. Even stories liek Hilary Clinton making $100000 in commodities futures are usually teh result of games played by brokers. And one of the troubles is that these games are largely legal! As an individual investor you are not protected.

One also has to remember that most of the serious financial blowups in teh last few years have resulted from poorly understood futures or similar contracts. And these were the best investment minds in the world that misunderstood them. Enron was trading energy futures. Lehman and AIG were trading financial product futures. These are accidents waiting to happen in most cases!

If, on the other hand you are a business that produces energy, buys energy (like an airline that has to buy fuel), or you have business risks that are sensitive to interest rates or currencies, then you can reduce risk and manage costs through the prudent use of futures. Futures are like explosives. They are extremely useful, safe, and valuable tools in the hands of the right professionals. uit they are not something most individuals have any business playing around with.


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