Tags: tax | IRA | inflation | commodity

The 2 Greatest Enemies of the Investor

By    |   Monday, 12 August 2013 07:52 AM

Many people worry about what to invest in, how volatile it will be and if it will go up or not. Well, if you pick solid companies, over time, volatile or not, they'll most likely go up as long as you give them the proper time to appreciate.

These are America's biggest worries in investing. However, the biggest concerns should be the things that can eat away at their investments: taxes and inflation

In my opinion, these are more consistent threats to your investments than anything else is.

Let's start with taxation. We know that more taxation is going to eat away a higher percentage of your paychecks and your investing nest egg if nothing is done proactively to fend it off.

How do we know this? We know it because our debts as a nation keep growing. The government doesn't have income. They have our income to pay their bills. Their income is taxation. When their obligations grow, eventually we're robbed more through taxation to pay for their lack of restraint and lack of stewarding what they've been given.

Additionally, the government keeps growing over time. Just like when your kids continue to grow, they require more food, a growing government "needs" more of your hard-earned money to continue to exist at that level and to continue to expand.

The government ensures that it can secure the extra tax money by doing two things:

• Using some of the current tax money they have taken in and turn that into programs like food stamps/welfare. They spend enough on that to get plenty of voters on it to legally sway the votes in their favor to ensure their future as politicians.

• Keeping a strong enough police force and military/national guard, etc. built up so that if the populous were to resist the higher taxation, they could forcibly take it from the middle class and rich. Yet, they'd likely be able to remain in power even still because the growth in the lower class is staggering and the government "owns" them more by keeping them hooked on the drugs of food stamps and welfare, etc. The recipients of these types of services aren't going to vote these guys out of power. It would be like them voting to reject the income they get from the government.

So we can see they have the set-up and ability to secure more taxes from the people. We know that they'll do it because of our growing debt obligations of the government.

We also know that the middle class will get hit the hardest by it before it's all said and done. How so? The poor won't be taxed because they don't make enough income to be considered taxable by the government.

The rich are well off enough to move their money and move their households elsewhere if they need or want to. The middle class is not nearly as mobile, so they'd have to just sit back and take it.

Now, there are some courses of action that can be taken, including:

• For now, you're able to delay some taxation and ultimately keep more of your paycheck by opening up an IRA, 401(k) or SEP IRA, etc. If you own your own business, I'd highly encourage the SEP IRA because you can put up to $51,000 per year in there tax deferred, whereas you can't put near that much in the other types of retirement accounts. But whatever type of account you can get, maximize the benefit of that by contributing what you can to it.

• Eventually, you may need to take part of your IRA offshore before the government institutes capital controls that prevent it from happening. Admittedly, I'm not an expert in that area. There are many places you can move it to legally and each country has its own pluses and minuses. So consult a professional if you go that route. Again, we're not talking about moving an IRA offshore to dodge taxes, we're talking about it to help to avoid government confiscation if they were to take it that far. Other countries in modern day have done so. So don't put it past America with debts that are spiraling out of control.

Ok, the next thing that is all but guaranteed to attack your investable money is inflation. Once the Federal Reserve was created and they figured out how to avoid deflation and inflate, they've done so. They've done it through both republican and democrat administrations ever since the 1950s.

Why would they inflate?

• They need to pay back debts in the future with cheaper dollars not more expensive dollars. So as long as the government debt problem exists, expect inflation. Since I expect the debt at the governmental level to always be an issue, expect inflation to always be an issue too.

• The next reason why they would inflate goes back to taxation. Remember, for the government, it's all about thinking up ways to get more of your hard-earned money. It's easier to tax assets that are going up in price than assets that are going down in price. Additionally, inflation causes the need for pay raises over time — those too will be taxed. If we were in a period of deflation, there wouldn't be the pressure on employers to hike employee pay as much as in an inflationary environment.

How do you avoid the harmful effects of inflation? You invest in the things that will become inflated rather than just consume the things that will be inflated.

What becomes inflated? Oil, gasoline, natural gas, coal, copper, etc. Commodities — natural resources — are what become inflated. If you're buying commodity exchange-traded funds (ETFs), commodity-related stocks, etc., you're going to see those assets rise right along with inflation.

So in waging a war on both taxation and inflation, it's a good thing to invest some of your money in a tax-deferred account such as an IRA, SEP, etc. Within that account, you might consider investing some of that money in these types of stocks and ETFs. In doing so, you'll likely win the war against overtaxation and inflation.

But if you do what much of America does, you'll likely lose the war on both fronts.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
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Many people worry about what to invest in, how volatile it will be and if it will go up or not. Well, if you pick solid companies, over time, volatile or not, they'll most likely go up as long as you give them the proper time to appreciate.
Monday, 12 August 2013 07:52 AM
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