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The Conflict of Interest Game
Disgruntled investors are going after Wall Street once again, this time accusing one of investment bank Morgan-Stanley's high-tech mutual funds of making biased stock picks.
Recent lawsuits allege the Morgan Stanley Technology fund was...
The Exclusive Club Of Large Caps
Picture one of those clubs where only the real heavyweights need apply. In the library the old aristocrats, General Motors and JP Morgan, are dozing in their leather chairs. On the terrace, a late luncheon is underway for those who have only...
Top Investments and Stock Picks for 2006
If you read the headlines today you will hear everything from
recession, decline, slow start, etc... Everyone is commenting on
losses or very marginal gains. Yet there are some investors like
me that did really well in the last few years and are...
Wayne Rogers: From Actor To Super Investor
Wayne Rogers: From Actor To Super Investor By Bill Knell It took a tragedy not far removed from Wayne Rogers to wake him up when it came to money and how to handle it. According to an interview he gave to the Financial Intelligence Report, Wayne...
Why Now Could Be The Best Time to Make Money On The Stock Market?
Do you wish to make money on the stock market? Would you like to know why there could be no better time then now to make money on the stock market? The answer is demographics. Demographics is the statistical study of the human population. No doubt...
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MUTUAL FUNDS SNARE THE PUBLIC IN A HIDDEN TAX TRAP!
One among many ways you lose money in non-indexed mutual funds is the tax trap. You may have to pay taxes even when your mutual fund loses money! To many people this is painfully unexpected. Here is how this counter intuitive event occurs. By law, mutual funds do not pay taxes. Instead, they pass on those taxes to you, the shareholder in the mutual fund. If the fund manager sells a stock for more than it cost the fund a profit is generated. This profit is called a capital gain and it is taxable. Capital gains are taxed at your ordinary income tax rate which is between 28% and 38.6% for most investors if the fund held the stock for less than a year. If the stock was held for more than a year, in other words long term, the tax is 20%.
There are a couple of reasons why mutual funds pay taxes. If the fund does poorly investors will bail out. The mutual fund has to sell off stock to pay the investors who leave. Even if you are not one of the investors jumping ship you will still have to pay your portion of the capital gains tax.
Dividends are another reason that taxes come due. Dividends are taxed at the per-share earnings distributions that companies make out of their quarterly earnings. Many investors instruct their mutual fund to automatically reinvest their dividends. This means that the fund uses the money to buy more shares in your name. Even if you reinvest and never get a penny of the dividends, they are subject to tax, according to the IRS.
Another reason you may get a tax bill is due to high turnover. Turnover measures the frequency with which a fund manger buys and sells shares, sometimes in search of the next high-flying stock or undervalued stock on the verge of taking off. According to Lipper, the average fund in 2000 showed a turnover rate of 122%. This means that the entire portfolio changed between January and December, and 22% of the replacement shares changed as well.
This is the ultimate case of account churning!
You simply have to understand that when you buy into a fund you are buying into a tax liability. The best way to avoid these taxes altogether is to restrict your purchases of mutual funds to your 401(k) and try to only buy indexed mutual funds such as the Vanguard 500 (VFINX).
About the author:
Dr. Scott Brown, Ph.D., a.k.a. “The Wallet Doctor”, is a successful futures trader, real estate investor, and stock investor. Dr. Brown holds a Ph.D. in finance from the University of South Carolina and a Master in International Management from the prestigious American Graduate School of International Business a.k.a. Thunderbird. His 1998 articles in Technical Analysis of Stocks and Commodities were prophetic in predicting an impending stock market crash. He has helped many people become profitable investors teaching them to look out over many years to spot stocks that are low and primed for rise in the new bull market. His second article met with approval by Dr. Bob Shiller of Yale University. Dr. Shiller is the economist that Alan Greenspan most highly regards who coined the term “Irrational Exuberance.” In 1998 he was shouting out to the world to “get out” of the stock market but now he is shouting to everyone that it is time to “get in!” The Wallet Doctor is not only sought after for investment advice and coaching in stock investing but also in futures trading and real estate investing. He also teaches investing in Spanish and Portuguese. His free newsletter www.WalletDoctor.comis jam packed with personal finance and investment tips and advice! His course which is described in detail at www.BonanzaBase.comteaches home study stock market investment students more than an undergraduate or MBA degree in finance...how does he know? Because he is also a university finance professor!
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