Natural Gas Prices At Attractive Levels For Long-Term Investors

Natural gas bulls have been touting for years that natural gas is the fuel of the future, and, therefore, there is only one direction for price to go, and that is up. However, price activity over the last two years has definitely not been straight up. While there are many significant scientific advantages to natural gas, natural gas prices will still fluctuate according to the same basic economic principle that every asset adheres to -- supply and demand.

Investors and analysts who believe Natural Gas is a promising long-term investment tend to predicate that conviction on several key points:

The U.S. Energy Information Association has projected that Natural Gas consumption will increase by 64% by 2030. Thus, demand is expected to increase.There is only a limited supply of oil available and there are major environmental concerns surrounding the use of coal and nuclear energy, which means there will be an increased demand for natural gas alternatives. Again, demand is expected to increase.

Most experts expect U.S. consumption of natural gas to increase only marginally over the next 20 years, so much of the increased demand for natural gas alternatives will most likely come from countries outside the United States.

Currently, the two largest producers, by far, of natural gas are the United States and Russia. Combined, the two countries produce roughly 40% of the world’s natural gas. Forex trading, in general, is not directly impacted by the ebb and flow of natural gas production, but, specifically, Russia’s currency can tend to be impacted in the near-term by natural gas supply/demand levels.

Investors who want to position themselves in order to take advantage of a possible rise in natural gas have several options. First of all, they could buy and hold specific companies that specialize in the exploration and production of natural gas. Secondly, they could go straight to the commodity or futures markets, or thirdly, they could invest in an exchange traded fund.

United States Natural Gas Fund (UNG) is a fund that seeks to track price movements of natural gas by percentage.First Trust ISE Revere Natural Gas Index Fund (FCG) is a fund that seeks returns which correspond to price and yield of an underlying equity index called the ISE-Revere Natural Gas Index.SPDR S&P Oil & Gas Exploration & Production ETF (XOP) seeks returns that basically mirror the performance of the S&P Oil and Gas Exploration & Production Select Industry Index.

ETF’s can serve as an integral part of a long-term investors investment portfolio, and current natural gas price levels look attractive for long-term investment. Natural gas demand definitely has the potential to significantly increase in the future. A forex account can be used to track how currencies are moving in relation to fundamental developments that affect natural gas prices.

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Drawbacks of an ETF Portfolio

There are many advantages to ETFs but they aren't suited to every investor, especially not if you're a dollar-cost averager. Dollar-cost averagers contribute small amounts of money on a regular basis, and this can be disastrous if you're buying ETFs because every buy and sell order creates a transaction fee. For example, if you contribute $100 per month to a particular ETF and each transaction costs $10, you are instantly losing 10% of your investment every month. Index Funds are a great alternative for dollar-cost averagers. Like ETFs, they track broad indexes but don't charge transaction fees when you contribute more money (more on Index Funds below).

Many ETFs don't do as well as the index that they track so be sure to chart and compare your ETFs to their peers and to their index before you buy (I'll explain how to easily do this below). The most common reason for performance lag is expenses, you can't expect your ETF to track the S&P 500 accurately if it has a 2% expense ratio. There can also be other factors such as poor management or inaccurate rebalancing, but the bottom line is avoid ETFs that don't accurately track their index.

Like stocks, ETFs are very easy to trade. They don't require any minimum investment, they can be traded any time that the market is open, and you can buy and sell as frequently as you like. This makes it tempting to try to time the market or chase returns, and also creates a lot of transaction fees that eat into your profits. ETFs are designed for buy-and-hold investors, they can be very expensive if you trade frequently.

There is a much wider range of ETFs available today, and many are very specialized. Specialization often means an ETF is tracking a much smaller basket of stocks so they tend to be more risky and volatile. If you invest primarily in these sector and specialty ETFs, you're giving up your greatest advantage as an ETF investor, diversification. Stick with the broader indexes, don't give up diversity to try to squeak out an extra 1 or 2% gain, chasing returns backfires every time.
One of the capital gains burdens that you're going to have to deal with on a regular basis as an ETF investor is dividends. They are taxable, and they are unavoidable if you're trading stocks and funds. Fortunately dividends do provide a benefit that offsets the tax liability that they create. Even though you'll have to pay taxes when a company passes you part of their profits in the form of dividends, they are also boosting your returns.

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Technology ETF

If you are interested in accessing a popular sector of the investment market, you should consider a technology ETF. This is going to be an investment that can result in exposure to companies involved with the Internet; computer hardware and software; telecommunications; and even semiconductors.

As we saw in 2009/2010 with the financial sector, no market segment is 100% protected from downturns and that includes the technology space. In fact, years before the financial meltdown there was a technology meltdown with many sure-bets falling apart. Despite the risks, one could argue that no other industry is positioned for as much innovation and therefore growth as technology.

Be aware that many technology ETFs have another layer of specialization so don't assume that what you're buying will automatically cover everything from software to semiconductors.

Some broad US-based options include iShares Goldman Sachs Software Index (IGV), iShares Dow Jones U.S. Technology Sector Index Fund (IYW), and Vanguard Information Technology ETF (INT). If you're looking for more global exposure, look into the iShares S&P Global Technology Sector Index Fund (IXN). My preference is to start broad and if the weightings are somehow out of whack, then consider more specific options.

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Investors, Don't Panic, Everything's Going To Be Okay

Isn't it nice to hear some reassurance during a recession? Especially when the headlines have been doom-and-gloom for months. And it's true, we'll weather this storm, just like we've weathered every other recession for the past 80 years. If you're a long-term investor, your portfolio will recover.

You don't have to take my word for it, I wouldn't throw that kind of statement out there without providing you with some history and data to back it up. Hopefully this article will help you get some untroubled sleep tonight.

Don't believe the hype
The major media outlets are doing what they do best, painting this as the worst disaster in US history. Why? Because it sells papers, draws television viewers and attracts mouse clicks. The scarier the headline and the more dire the prediction, the more successful the story. Thirty years ago, we would have condemned any news journalist that used these kinds of irresponsible scare-tactics. Today, the news is forced to compete with other forms of media, so the line between news and entertainment has become very blurry. As a result, we've become accustomed to outrageous (often ridiculous) predictions of disaster and worst-case scenario analysis from people that we consider to be "newscasters" and "analysts".

We've all become a bit more cynical when it comes to the media, but it still takes a toll when all you see for months are predictions of disaster. We see our portfolios taking a beating, and this puts that little nagging doubt in the back of our mind "could everything they're saying be true? Is this the beginning of a 10 year global depression?" To compound the problem, it's human nature to try to one-up the competition. The negativity feeds on itself, today's headline is always going to be worse than yesterday's until the economy and the market start to recover.

Take heart
Mass media is an EXTREMELY poor predictor of future events. What happened yesterday and what's happening right now is the focus, the media is reactionary so you can count on the forecasts to always lag the actual market recovery. Take a little of Warren Buffett's advice to heart, "attempt to be fearful when others are greedy and to be greedy only when others are fearful." If the media is crying that we're on the brink of total collapse buy.

Stay objective
People are fleeing the market in droves, financial institutions are imploding left and right, we're embroiled in two costly wars, the dollar is weakening and inflation is much higher than it's been for a long time, right? I don't disagree with any of those statements, they're all facts.

How can I say things aren't so bad if I agree that all of those things are true? Because this is a recession, and things are always tough in a recession so I see no reason why this one would be any different. This is an inevitable part of the business cycle, albeit the most painful part. Every economic boom requires a bust at the end before the cycle can start over and we can experience the next expansionary phase.

But isn't this worse than all past recessions? Nope, it's milder than some and worse than others but it's far from the worst. It only feels that way because you're losing money. Stay objective, and when you start having doubts, let history be your guide.

So how about some history when have Americans faced greater challenges?

~ Our worst economic disaster was the crash of 1929. Back then, we were an emerging market. Ever own an emerging market stock? They define the word volatility. The crash of ‘29 and the 10 year depression that followed were dark times in America for the rich, poor, and everyone in between. In contrast, today we are the most developed economy in the world and we have sound fiscal and monetary policies, which is why our expansion periods (bull markets) are so much longer than our contractions (market corrections and recessions).

~ The 2000-2002 Tech Wreck was scarier than this recession. The scariest part of the tech wreck for me occurred right before the crash. Do you remember the euphoria in 1999 and early 2000 near the end of the greatest expansion that the US stock market had ever experienced? Pundits claimed that the tech boom created a new paradigm in business, "we would never have to experience another recession again because of the exponential growth potential of technology companies". That sounded like complete insanity to me and the crash that followed proved that people often lose their objectivity during strongly bearish AND strongly bullish conditions.

~ 9/11 was scarier than this recession. Prior to 9/11, most Americans spent very little time worrying about our national security. Terrible things happened in other places, they didn't happen here at home. On that fateful day, we were introduced to terrorism on an unprecedented scale and it happened on American soil. Our illusions of complete security at home were shattered in an instant and the market plummeted. At the time, we had no idea how deep or painful the economic and political fallout that followed might be. The fact that the market recovered only a few months later is a testament to America's will and resilience.

~ Black Monday was scarier than this recession. On a random Monday in 1987, the stock market experienced its worst one day drop in history, it plummeted over 20% in a single day. I doubt many brokers, serious investors or retirees living off of their portfolio slept well (or at all) that night. There was no logical explanation for what happened, and to this day, people still argue over the cause of the crash (for the record, I blame program trading!). Nerves were frayed for months afterward and market volatility reached unprecedented new highs as investors jumped in and out of the market trying to avoid being part of the next massive selloff.

~ Stagflation in the 70's was scarier than this recession. Stagflation was baffling for investors and economists when it first occurred in the 1970's. How could we be experiencing stifling inflation while we were also experiencing a prolonged recession? Theorists worried that recession coupled with inflation could only lead to one logical conclusion, a complete economic meltdown. At the time, there was no historical data to refute that conclusion. Of course, that didn't happen, but it sure created scary market and economic conditions for several years.

Those examples may have provided a little comfort but, personally, hearing how things could be worse never really makes me feel better. I'd rather hear why things aren't as bad as they seem, so here are a few historical investing facts that help me sleep like a baby

~ Every 10 year period since the end of the depression has produced gains. This is even true RIGHT NOW. That's right, even though we have the current recession and the tech wreck of 2000-2002 lumped into the mix, diversified long-term investors (such as those holding S&P 500 Index Funds) from 1998-2008 have a gain.

~ In the last recession, we faced an INVESTING bubble which created a valuation crisis. Since I'm an investor rather than a real-estate speculator, I'll take a housing bubble over an investing bubble any day. When the tech boom ended in 2000, every major index was sitting at a record high and stock valuations were through the roof. We were facing a valuation abyss, most stocks in the technology-laden NASDAQ were trading FAR above normal or realistic P/E ratios. We had a long way to fall back then, but we are in a very different position today. Did you know that the S&P had barely made it back to the levels of the late 90's before this recession started? We don't have that monkey on our back this time around, stocks are already starting to look pretty cheap from a valuation perspective, even to the bearish pessimists.

~ Today we are facing a HOUSING bubble, but comparisons are starting to overshadow losses. The major banks are experiencing massive losses as a result of questionable speculation and sloppy sub prime lending. What we have working in our favor is that comparisons are starting to look pretty good. The largest bank (no longer the largest) suffered a $10 Billion loss in Q4 ‘07 and a $5 Billion loss in Q1 ‘08. Analysts predicted that they would lose $3.1 Billion for Q2 but they beat expectations by only losing $2.5 Billion. In the last six days, the stock has gone up 43%. Wait! After announcing a $2.5 Billion loss the stock is UP? Comparisons are powerful and the media will almost always focus on recent performance, they rarely look further back than a year.

~ First Movers are starting to pour money back into the market. The financial sector has been beaten down the worst during this recession, and many companies are simply suffering from guilt by association. However, those that weren't involved in the worst of the risky speculation or sloppy sub-prime lending are now being rewarded. For example, JP Morgan has had decent volume for a couple of months and their stock price is almost back to break-even for the year. First movers are snapping up the best bargains.

Bottom line, this recession will inevitably end just like those that came before it. I'm not an oracle or an expert, and I have no idea when this recession will end, but I still feel comfortable telling you that "everything's going to be okay". The market can't always go up, it needs cooling off periods. The cooling off periods that are particularly steep, prolonged and painful are called recessions. We're experiencing one right now, but it's not the first or the worst and it won't be the last.

Stay objective, stick to your long-term investing strategy, and ignore the headlines and short-term market volatility. Buy and hold and hold and hold and in the future, when you're reading euphoric predictions of never-ending bull markets or dire predictions of decade-long global depressions, trust history, if you're a long-term investor, your portfolio will recover.

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Equal Weight ETFs

Every now and again the debate of equal-weight vs. market capitalization-weight ETFs (exchange traded funds) takes center stage. Depending on who you talk to, one is often cited as being better than the other. I disagree. Both styles provide different investments. So maybe one is better for YOU, but there isn't one style that is better for EVERYONE.

First off, let me describe the differences. ETFs need to determine how much of each constituent company to hold. This is more often than not based on the company's market capitalization. The greater a company's market capitalization, the greater the percentage of the ETFs holdings it will represent. With equal-weight ETFs, every company is allotted an equal percentage of the ETF. This means that a large company such as Microsoft won't have any more influence on the ETF than a small company like RSA Security Inc.

Some people point to the recent performance of equal-weight ETFs as proof that they are superior. But this logic is flawed. The main reason that equal-weight ETFs have done better is that their structure favors smaller capitalization stocks which have done better across the board. Currently, megacaps are "out of favor" and are lagging the market. But one day these larger companies will become the leaders in terms of returns and at this time the ETFs that emphasize these through market capitalization will pull ahead of the equal-weight ETFs.

So the choice of which type of ETF to use depends largely on what else you have in your portfolio. I prefer to use the smallcap ETFs to get my smallcap exposure rather than to figure out how to use an equal weight ETF to achieve the same effect.

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Small Cap ETF

In order to understand the appeal of a small cap ETF, it is necessary to understand what this type of investment actually is. We all know about companies like IBM, Citi, and Exxon because they operate globally, employ hundreds of thousands of people, and make billions of dollars a year. But smaller companies i.e. those with small market capitalization or small caps for short are another viable option for investors to consider. Small caps tend to focus on the markets in which they operate whether that is in the US or abroad.

When an investor is hoping to round out a portfolio with exposure to up-and-coming companies or ones that are more closely tied to local economies they should turn their attention to a small cap ETF. Their size tends to translate into limited capital and reach beyond immediate borders. Of course this isn't a hard and fast rule with web-based companies able to cross borders with relative ease.

International small caps also provide the additional variable of being more closely tied to currency fluctuations in the region they operate in. Depending on your perspective this can be a good thing or a bad thing. Weaker currencies can offset gains can vice versa so be sure to examine the potential impact before investing.

One thing I like about small cap ETFs is they allow me to get broader exposure to the market -- the US in particular. With market-cap weighted ETFs like SPY, a significant portion of the investment dollars go towards a relatively small percentage of the companies. Investing in a small cap index fund in effect adjusts that weighting to make it more proportional. Combined with a mid-cap ETF you get more control than you would with a single ETF that attempts to cover all bases by tracking something like the S&P 1500.

Some small-cap ETF options to consider include the iShares S&P SmallCap 600 Index Fund IJR. iShares also offers value (IJS) and growth (IJT) variations of this ETF.

For even smaller companies, be sure to check out Micro Cap ETFs.

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401K Guide and History

Are you contributing to a 401K, IRA or Roth IRA? You should be! This guide explains everything you need to know about these wonderful tax-free wealth building tools.

I'll cover the 401k first because that's the one that seems to prompt the most questions. One of the first things I want to stress to you is that employers have handed over the responsibility of retirement planning to you, pension plans are pretty scarce today unless you work for the government and even those are starting to disappear. The sad truth is that most Americans are terrible at long term planning, and many that aren't contributing to a 401K plan will have to work until at least social security age and probably after if they want to have anywhere near the standard of living during retirement that they are accustomed to while working.

When our parents were working in the 50's, 60's and 70's, employers were expected to provide for employees in retirement. If you paid your dues by working for a single employer for an entire career, most would in turn provide you income in your retirement. While pension income might be less than you made when you were working, you could at least count on continued paychecks. This gave people the means to retire even if they never saved a penny.

In the late 70's, congress added a section to the Internal Revenue Code - Section 401(k) in which employees could avoid taxes on dollars contributed to deferred compensation plans. This program was intended for executives but companies were quick to interpret the legislation for their own benefit. The major reason for the explosion of 401K plans is that they allow employers to spend so much less on employee retirement planning. Rather than paying a pension until the retired employee passes away, a 401K plan only requires that employers cover the administration and support costs plus any company match programs during employment, there is no additional expense after the employee retires.

This concept is much easier to grasp with an example. Let's say that Joe worked for 30 years and earned $60,000 per year at retirement and that his employer's policy is to provide a pension equal to 70% ($42,000 per year) of his highest income. If Joe retires and then lives another 30 years, the employer will have to pay him 30 X $42,000 = $1,260,000.

If, on the other hand, Joe's company provides a 401K plan that matches 5% of his income the picture is quite different. For simplicity, let's assume Joe earned $60,000 every year that he worked. Let's say that the company pays $2,000 per year for various 401K plan administration expenses related to Joe's account. In addition, they match 5% of his income, $3,000, in the plan for 30 years. The employer's total liability for Joe's retirement benefits is ($2,000 admin & support X 30 years ) + ($3,000 company match X 30 years) = $150,000.

By switching from a pension to a 401K the company saved $1,110,000. From an employer's perspective, this huge expense savings represents a tangible long term benefit for the company and for shareholders. Oh wait, what about those pesky ethical implications? Don't forget that the average American is terrible at saving money and even worse at investing it and that most people are not long-term thinkers. Not to mention the fact that when you dump retirement planning responsibilities on people that weren't prepared or properly educated, you have just added a huge burden to taxpayers in the future and subtracted value from American society in general nah, we won't worry about any of that. Okay, time to step down off our soap box before someone pushes us, what's done is done and we have a lot to cover.

I'll at least end the history section on a bright note. You can definitely retire wealthy using a 401K if you're properly educated and, luckily, you're on the right track by reading this article.

Here's a break down of what you need to learn into easily digestible chunks:

Benefits of a 401KHow it all works (tax deferral, payroll deduction)Contribution limits & recommendationsRetirement Distributions and Hardship Withdrawals

The two greatest benefits of a 401K are that they reduce the taxable income you have to report to the IRS and once money is in a deferred account you can invest tax free until you withdraw the money at retirement. Rather hear that in English than in accounting-speak? Alright, for example, when we say you reduce your taxable income, that means that if you earn $50,000 per year and contribute $5,000 to a 401K you only have to report $45,000 to the IRS when you file your taxes. If you are in a 24% tax bracket, this saves you $1,200 ($5,000 X 24%) in taxes. When I say money in a deferred account is invested tax free it means that you will never pay taxes on capital gains, dividends, coupons payments or any other form of profit. The only time you will ever pay taxes is when you withdraw the money.

What makes stock market investing the greatest wealth-building tool the world has ever seen? Compound interest. While this might sound very "mathy" and boring, I want you to get excited when I talk about compound interest because it's the closest thing to magic you're ever going to see in real life. Albert Einstein once declared that compound interest is "the most powerful force in the universe" and I agree because it certainly has made a lot of people rich. It's a simple concept and is best demonstrated through examples so let's compare a 401K portfolio to a taxable portfolio.

In this example, you're going to contribute $10,000 per year. In addition, you decide to put all your money in index funds so that you can get the average market return which has been about 10% historically. In the 401K plan you will pay zero taxes, in the taxable account we'll assume 24% of your profit is lost in taxes. After 30 years, the 401K will have grown to $1,644,940 (and this doesn't include any company match) and the taxable account will have grown to $1,052,974. The 401K grew 56% more than the taxable account. Albert was right, he must have been a pretty smart guy.

While I blasted companies for taking away pensions and rolling people into 401Ks in the history section, 401Ks are actually a pretty strong investment vehicle if you take full advantage and work for a company that provides a wide variety of investment options.

Most companies will offer to automatically deduct 401k contributions from your paycheck, you should definitely choose this option if it's available. This saves you the headache of figuring out your taxable income when you file taxes because your W2 will adjust your taxable income by the amount you invested into your 401K. This also means that you don't have to worry about whether or not you have the will power to set aside savings from your earnings. Since it is automatically deducted you'll never see this money in your check, the contributions will go straight to your 401K. About 80% of Americans don't save a penny from their regular pay, so for most of us, automatic contributions into a 401K allow us to avoid the instant gratification spending urge and will-power issues.

Another benefit is that 401K contributions are not a straight line reduction to your income. Huh? This means that if you choose to automatically contribute 15% to your 401K, your paycheck will not decrease by the full 15% because of the tax benefits associated with tax deferred accounts. For example, let's say you earn $50,000 per year and you are taxed at 24%. You will bring home $38,000, right? Now let's say you decide to contribute 15% of your salary ($7,500) to your 401K. Many people assume this means a 15% reduction to take home pay but your take home pay actually only goes down by 11% as a result of the $1,800 tax break you received on the $7,500 you contributed to your 401K plan ($7,500 X 24% tax bracket = $1,800 tax break).

The next topic is Maximum 401K contributions. In 2008 you were allowed to contribute $15,500. This is the amount that YOU are allowed to contribute. Any company match is not counted against you so technically the maximum contribution is $15,500 + your company's match amount.

How much should you contribute? In our opinion, the old rule of 10% to savings no longer applies, the new minimum is at least 15%. Why? Because the good old US of A ain't what it used to be. You're not as likely to have a pension, the dollar isn't the strongest currency in the world any more, and social security may face reductions in the future since it is the largest expense in the federal budget and will eventually face major solvency problems. Save 10% or less and your lifestyle will be seriously cramped when you try to retire, you may even have to postpone. If, on the other hand, you form the habit of saving at least 15% and invest wisely you should be able to live comfortably when you retire without having to fret over running out of money or every dollar spent.

Typically, companies offer some kind of employee match and you should always take full advantage of this free money. For example, if your company offers a 100% match up to 5% of your salary and you make $50,000 per year, they are basically giving you $2,500 as long as you put at least that much of your own money into the 401K plan. Just like your contributions, the company match goes straight into your tax deferred account. In this example, if you contribute $2,500, they will match and now you have a total of $5000 which means an instant 100% return on your investment. Strangely, many people don't contribute to their 401K and therefore don't take advantage of the company match Are you kidding??? Don't pass up free money.

When you reach the age of 59 ½ you can take a lump sum distribution minus a 20% withholding tax, a small price to pay considering all those years of tax free investing. If you don't want the lump sum, you can also choose to either start receiving retirement distributions, which will also be taxed at 20%, or you can leave the money alone. However, at age 70, you will be forced to start taking minimum distributions. Luckily, if you're forced to withdraw, some of these dollars can be rolled into another tax deferred account called an IRA which is covered in detail in the IRA, Roth IRA, and Roth 401K Guide.

The question I dread the most is "can I withdraw money early?" Unfortunately for many people who have made this costly mistake the answer is yes. It is possible to withdraw money and even borrow against your 401K, especially if you meet a hardship qualification, but this is a very bad idea. Every penny you take out or borrow delays your retirement.

However, I want to provide a complete guide so we will tell you that avoidance of foreclosure, medical expenses not covered by insurance, and permanent disability are examples of common hardship qualifications. Even if you meet these qualifications your withdrawal will be subject to a 10% withdrawal tax penalty in addition to your normal tax rate. This means that if you're in the 24% tax bracket and you take money out for any reason Uncle Sam is going to add a 10% penalty and take 34% of your withdrawal in taxes. The Roth 401k will allow you to withdraw funds without paying taxes or penalties, and I will discuss this type of 401K below, but taking money out of your retirement fund is still a BAD idea.

The tax free investing offered in a 401K account is your best opportunity to build wealth and save for retirement. Take full advantage and contribute every penny that you can afford. Also make sure you manage your portfolio diligently, don't leave it up to your planner or your company. We have a large library of free investing information on this site. Please help yourself to as much as your brain can hold and keep coming back until you're comfortable managing your own portfolio. You're always better off when you manage your own money, who else will care as much as you do about your nest egg? That definitely doesn't mean you shouldn't seek expert advice, we recommend that you do, but learn enough to be able to validate any advice that you're getting.

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