Ms. Morrison Speaks Money

Archive for December, 2008

Hey all you smart mutual fund investors, listen up!  Check your accounts on line now, or call your broker or investment company,to see if your fund issued any capital gains this month.  That’s right, even though your fund’s value probably took a nose dive, there very well may have been trading in that fund throughout the year that could have resulted in a capital gain.  Mutual funds distribute the bulk of such gains during December to their shareholders, so you COULD owe income tax on capital gains even though your fund is sporting a big fat loss, or even a mild-paunchy loss…

You see, when a lot of novice or nervous investors call 1-800-REDEEM (that’s a joke, not a real number to my knowledge) fund managers have to raise enough capital by 4pm EST each day of trading to satisfy all the redemptions.  Well, quite a few savers sold out of mutual funds when the markets started declining.  (Generally it’s savers, not investors, that panic and sell prematurely incidentally.)  So, quite a few mutual fund managers had to juggle their portfolios, invariably selling out securities that had built-in capital gains.  Yes, I know, a distant memory…over 6 months ago, even…but I digress.

If the mutual fund manager wasn’t able (or interested) to offset those gains with losses, there may have been an excess of gains over losses, resulting in us shareholders having to declare a portion of those gains on our individual income tax returns.

Here’s an example:  Your mutual fund issued a gain to your account in mid December totaling $1,000.  Look through your portfolio (as I mentioned in my earlier blog today) for a security whose value is at least $1,000 less than your basis (fancy term for what you paid for it, including all reinvested dividends, if applicable) and sell that security booking a $1,000 capital loss.  Your losses offset your gains (for the most part it’s that simple, although long-term capital losses-securities held one year and one day–offset long-term capital gains, and short-term capital losses–securities held less than one year and one day–offset short-term capital gains).

Finally, the federal government allows you to deduct an additional $3,000 in excess of all offsetting capital gains and losses each year against ordinary income.  If you have more than $3,000, you get to carry the excess forward to future tax years.  Some states follow the feds in the unlimited carryforward of capital losses, New Jersey, however does not.  Check with your CPA for details on this, to be sure, if you expect heavy losses in 2008.

At the end of the day, its the end of the year.  No sense in paying unnecessary income taxes.  So, while you did not actively sell any securities this year to produce a capital gain, you may be an unsuspecting shareholder who DID receive a capital gain.  There’s still time to avoid paying tax on that by “booking;/realizing” an equal dollar capital loss, or even quite a bit more than the amount of capital gains, and deducting your $3,000 excess on your 2008 return and pushing the balance forward.  Yes, Ms. Dubious, there WILL be capital gains in your future, and they JUST might start in 2009!  You’ll be prepared however, with perhaps an ample supply of carried forward capital losses so you won’t have to pay taxes till they’re all used up.  Now THAT’S planning, and THAT’S effective planning.

Consult your broker and/or CPA for details.  (Most likely your fee-only financial planner has already contacted you and handled this for you.)

Posted by Debra in Investing | 2 Comments

Hey folks,

Don’t miss out on the salve for our investment wounds!  Uncle Sam shares in our investment pain, by allowing us to tax-deduct our investment losses, but you must act in the next two days, you heard it, by 4pm EST on Wed., December 31st.

What’s all this clatter you ask?  Well, let’s say you have held your favorite (or even your not-so-favorite) stock, bond or mutual fund for a while and the value has dropped a lot.  You’ve been licking your wounds, whining to yourself or anyone who would listen, but hanging on “till it recovers”, right?  Well that could take some time so here’s an idea in the meantime.  Sell that investment (or investments) in the next 2 calendar days.  Buy a SIMILAR investment the minute your sale proceeds are available, since you don’t want to be “out of the market” these days…a substantial recovery could happen in 8 hours!  You can’t buy back the exact same security you sold because you would run afoul what’s called the “30-day wash sale rule”, which precludes one from selling a security at a loss, writing off that capital loss from their income tax, then buying back that same security within a period of 30 days.  (You CAN buy back the same security, yet you would forego your income tax deduction, which is the whole point.)

So, the trick is to find what I call a “sister” product/security to that which you’re selling, buy that and otherwise participate in the market’s performance in that substitute/sister security for the next 30 days.  After 30 days, you would have the option of either keeping that sister/substitute security, or selling it, and buying back your original security.

Ok…here’s an example.  You own Pepsi stock.  You sell Pepsi stock today, and in 3 days when it settles, buy Coke stock.  You hold Coke stock for 30 days, and if you really want your Pepsi stock back, sell Coke and buy Pepsi shares back.  (You will settle up with Uncle Sam/IRS on either a short term capital loss or gain on your Coke shares for that time, but generally this is not a deal-breaker.)  Alternatively, you may choose to keep your Coke shares if they seem to give you the exposure you wanted in the soft drink business.

Here’s another example.  You own ABC’s US large cap growth fund.  Sell that fund in the next 2 trading days and buy XYZ’s US large cap growth fund, or buy ABC’s US large cap blend fund…you get the point.  Either the substitute mutual fund can be from the same “family” or a different family.

If your original holding was bought at like $50. per share, and it’s now worth $20. and you owned 100 shares, you effectively sell the 100 shares, and write off the net difference of your purchase price of $5,000 less the current market value of $2,000.  or $3,000.  ($30 per share).  If you are in the 30% federal income tax bracket, you have just saved $900.  ($3,000 x .30)  Meanwhile, you bought the sister/substitute holding, which keeps you in the market to experience the recovery.

Now THAT’S great news!  You will be smiling come April 15th, 2009 when you complete your 2008 income tax return.  We always gripe when we have to fork over a portion of our capital gains to the IRS, now let’s take advantage of the other side of the code–allowing the government to share in our losses to the extent of our effective tax bracket, in the above example, to the tune of 30%.  Even if you are in the 15% tax bracket, it pays to get a break from Uncle Sam for a change, right?

So, DO something with the two trading days left in this year!  Take a look at your portfolio, and see where there are losses–see where the current price is lower than the price at which you bought the investment–and place your sell orders quick.  You’ll have a day or 3 for the proceeds to be available, and you can research your replacement/sister/substitute investments after a New Year’s toast.  I’m NOT advocating selling now and not buying back into the market!  You would be missing the recovery–however long it takes, it will occur.  History tells us that, for goodness sakes.

And for any of you who DID sell out a month or more ago, you’ve now waited the requisite 30-days, you can buy back into your original investments, if you still think they are worthy.  Remember that the smart investors use all angles of the tax code and this is the most obvious home run of all in a depressed market.  Let’s watch our financial dough rising by selling some losers and raking in additional dough, from Uncle Sam already!

Posted by Debra in Investing | 2 Comments

Hey ladies!  Go to the recording of my teleseminar today onwww.blogtalkradio.com for some positive perspective on the markets and advice on staying the course to be eligible to reap the returns that the stock market has historically given.

I congratulate all who have not sold out of their stock mutual funds, realizing that monies invested in the stock markets are there for the medium-to-long term goods and services that we will buy as we age.

Yet I want to invite those who may have sold out of their stock mutual funds or stocks to begin buying back into the markets, perhaps utilizing a strategy called Dollar Cost Averaging, which is fancy language for investing systematically into the market on different days thereby attaining different purchase prices whose average has historically been favorable to simply choosing one particular day in which to invest (or sell, for that matter).

The main point is to think through what cash you will need in the near term, in the medium term and in the long term, and to match those time goals with the most appropriate investment types.  For example if you need to purchase goods or services within the next 2 years, those funds should be set aside in a Money Market, preferably a Government Money Market or a series of short term Certificates of Deposit.  Monies needed in 2-7 years should be invested in diversified no-load bond mutual funds, (or better yet, bond index funds) and monies need to buy goods and services in 7+ years should be invested in diversified stock index funds that historically have returned in excess of inflation.  Let’s invest in our own empowered retirements and provide ourselves more choices that historically stock mutual funds have provided.

Market timing–getting out of the market at high price levels and then getting back into the market at low price levels–has lured many an investor, as well as many a professional money manager over the years.  Yet when Peter Lynch–the single most successful stock picker of our age, and the former manager of Fidelity’s wildly profitable Magellan Fund from 1977-1990 when that fund’s asset base swelled from 20 million to 14 billion, and beat the S & P 500 11 out of 13 yrs, sporting an annual ave return of 29%–is quoted as saying he has never known anyone to be “right” on timing decisions more than once in a row;  that should be fair warning to the amateurs among us not to try this at home.

That said, it has been VERY difficult to maintain our equilibrium amidst the media’s barrage of negativity and Chicken Little admonitions, so if you scurried to the sidelines and into cash out of fear, pull your courage back up and become an investor again, to reap what would certainly be stock market gains over the next 24 months and longer.  We Can Do It Women!™

Posted by Debra in Investing | No Comments

I, for one, have NO interest in zero percent return on my money.  Yet this weeks’ traunch of 4-week US Treasury bills paying ZERO percent sold out!  Yes, you read correctly; people stormed the Treasury to have the US Government hold their money, period, paying out zero (or less, read on) interest.

As a matter of fact, a whole slew of Nervous Nellies and Nells also bought some 3-month Treasury bills and the demand was so prevalent at one point (the prices were pushed up so high)  that the yield actually dropped to LESS THAN ZERO percent interest; i.e., NEGATIVE interest!  (Bond prices and bond yields are on an inverse relationship in that when prices rise, yield drops.)  In other words, some savers lost actual PRINCIPAL in T-bills.  Here’s how that works:  Nervous Nellies/Nells paid $100. for Treasury Bills on which they would only be paid 99.99 or 99.98 at maturity.  WOW!

Now I’ve repeated myself, cause I’m still trying to understand it!  Let me see, Treasury Bills are basically bearer obligations of the United States which are backed by the full faith of the US government.  They are generally sold at a discount and they promise to pay a specified percentage of interest on a specific scheduled date. (FYI, the spread between the purchase price and the maturity value is deemed interest, which is federally taxable, but exempt from State and Local income taxes.)  So, the principal face amount backing/guarantee is generally attractive, and yes, gives some savers a warm and fuzzy feeling.  But when one purchase at the maturity value of the bond, there is no spread, thus no interest.

Real inflation is definitely more than zero currently, so these Treasury bills, while guaranteed in principal to pay their maturity value, don’t fall into my definition of “safe” because their purchasing power is diminished.  If you have a pulse, you are buying stuff.  And the “stuff” you are buying, from heating oil, to gasoline to groceries to hospital beds to prescriptions, costs more because of inflation.

I am aware that in addition to individual Nervous Nellies and Nells, many institutional money managers bought these zero interest Treasury bills to “window dress” their portfolios.  You see, the holdings of most money managers are posted at the end of each quarter, and if a portfolio manager suffered negative volatility, they may counterbalance some of their risky holdings by buying some Treasuries, or they may even sell those riskiest holdings and use the proceeds to buy Treasuries.  This would give a different, and in these times a more “comforting” feeling to their existing or prospective investors, wouldn’t it?  We women investors are smarter than just to look at holdings in the past quarter however.

While I am not rendering professional investment advice here, I am imploring mature women investors to use our hard wired common sense and not over react with our portfolios towards what some in the marketing world would call “safe”.  We STILL need a return ON our investment portfolios, not just a return OF our investment, especially for the long term.  Remember, we still have longer life expectancies than our male counterparts.

So women, if you have your short-term scalpel out, back away from your statement or computer screen or telephone, put the knife down, and allow your portfolio to perform long-term in an array of investment types–some stock mutual funds, some bond mutual funds and some cash/CDs.

Even with many stocks and stock mutual funds having been pummeled in value, many are still paying attractive dividends, albeit some of them reduced.  Bonds and bond mutual funds are still paying interest, and some high grade short term municipal bonds/mutual funds are attractive.  Do some homework and/or consult with your fee-only financial advisor as to your risk tolerance and the relationship to that of your portfolio holdings relative to your goals, but I implore you, do NOT accept zero percent interest, now or ever!

Posted by Debra in Investing | No Comments

Posted by Debra in Investing | No Comments

Posted by Debra in Miscellaneous | 1 Comment

What the media is writing about why the stock market is opening and closing at whatever level is pure guesswork, at best.  Have you noticed that often the same circumstance or instance is listed and/or credited for the market’s upturn AND downturn?

Let’s get one thing straight.  The stock market is fueled by a collection of buyers and sellers.  When there are more buyers than sellers, the market goes up and vice-versa.  When investors act on their fear by selling, the markets go down.  When investors act on their hope by buying the market goes up.

So don’t be swayed by the media’s headline that the big 3 auto bailout, for example, caused the market to go up or down.  Don’t be convinced that the election of Barack Obama will be the cause of any day’s movement.

We are investors who are shell-shocked, period.  Yet, smart investors are looking for signs of opportunity, and this may be the best such opportunity in the past 40 years for opportunistic buying.  Scared investors often wait for signs of stability before investing new money, thus losing the majority of the upticks/recovery.  More on that later.

Yet today’s message is advice NOT to read or be influenced by the media, and its’ headlines.  It’s laughable!  Let’s make a smart investment plan and work it.

Posted by Debra in Investing | No Comments