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Fool’s Gold

12/30/04 - ETFs

One inalienable rule in the mutual fund business is that funds with hot track records bring in the most money. Like it or not, this is a business of performance chasing. But occasionally this law of past performance does not explain investor excitement over a particularly popular fund.

A good example is when Merrill Lynch brought in over a billion dollars into their new internet fund, which they launched in early 2000 – just in time to destroy investor’s money. There was no hot past performance, just clients of the broker who were hungry for Merrill’s expertise in an area that made other investors rich. In this case, the past performance of other funds in the category was enough to bring in investor money.

This year we are seeing another illogical success story in new fund launches, and this one is not even in a particularly hot category.

November 2004 performance review

No funds in this portfolio are issuing a capital gains distribution that warrants the selling of the fund to avoid a tax hit. We do advise new investors who are just adding a stake to wait until after the record date to purchase this portfolio’s funds in a taxable account.

How Mutual Funds Work - Capital Gains

We love mutual funds. Mutual funds provide cheap and easy investment diversification, they're easy to get in and out of, they're highly regulated, and they allow investors access to expert financial guidance at a low price. As investments go, we think that mutual funds are far and away the best option for the vast majority of investors in America.

But there are a couple of things about mutual funds that we don't like. Fund investors never know exactly what they're invested in. Mutual funds sometimes charge fees that are too high. Mutual funds can also hit investors with large and unexpected capital gains distributions.

Ask MAX: Avoid Buying Funds In December?

12/08/04 - Ask MAX

Martha from Ohio asks:

I was told by a friend that I shouldn’t buy mutual funds at the end of the year because I can be hit with additional fees. Is this true?

Your friend was referring to capital gain distributions, which are actually a different animal than ordinary mutual fund expenses (like management fees, expense ratios, or 12b-1’s). But while your friend is right (cap gains do pose a potential risk to investors who purchase a fund near the end of the year), the distribution trap is a hazard that can usually be avoided with a simple phone call.

The Tax Man Cometh

Sure April 15th gets most of the glory, but in the world of mutual funds, tax time is really in December. Why? Because that’s when stock funds typically distribute taxable gains to fund shareholders. Throughout the year, fund managers sell stocks at a profit. Some companies that mutual funds own pay dividends. Each year – usually in December - a fund has to distribute these realized gains and incomes to fund shareholders or face tax penalties. 

October 2004 Performance Review

Utilities are proving to be one of the strongest areas in the market this year. We’ve owned a utilities fund in most of our model portfolios these past few years so we are pleased to see this formerly out of favor area take off.

Ask MAX: Where do I start?

11/10/04 - Ask MAX

Matthew asks:

I’m 21 and in the U.S. Navy, currently serving on the ground in Iraq. I have saved about $2000 and I plan on saving and investing an additional $500 a month. I want an investment that will grow, but I don’t want a crazy amount of risk either. How should I invest? Thanks!"

I don’t claim to be the Amazing Kreskin, but allow me to look into the future and reveal to you this: you are going to be a terrifically successful investor, and you’ll retire fat, rich, and happy.

How do I know? Because you’re just 21 years old and you’re already building an investment portfolio, and because right off the bat you are being sensible about risk.

Starting early means that you have years upon years of compounding returns coming your way. The money you invest will make you money. Then you begin making money on the original investment plus the return you’ve made. As your investment grows, you’ll earn a return on a bigger and bigger pool of money.

The fact that you are concerned about risk at your age is equally impressive. Many investors a heck of a lot older than you still don’t realize that they need to consider both the upside and downside potential of an investment. You are quite right in wanting to build a growth-focused investment portfolio, but even aggressive investors should have some exposure to lower risk securities like government bonds.

A MAXadvisor Spook Story

With Halloween all wrapped up, we felt now is the time to discuss our current investing fears. Here are the two biggest concerns today.

September 2004 Trade alert!

Since mostly longer term bonds did well last month, most of our action was in stocks. The Vanguard Short Term Corporate fund, which makes up 30% of the portfolio, was up just .18%. Since every other fund but one beat the S&P500 and Dow, the portfolio scored a good return anyway. The other small gainer was Harbor Bond.

Fannie Mayday

The regulatory spotlight returned to the world’s largest mortgage buyer, Fannie Mae (FNM), this past week. What they see is not pretty. And neither is what the worst case scenario would mean for your mutual fund investments, to say nothing of your home and your future tax bill.