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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.

August 2004 Performance Review

Foreign bonds led the way, with the American Century International Bond (BEGBX) up a sharp 2.4%. That funds strong performance was based largely on strength in bonds, but partially on a weakening dollar as our ongoing trade imbalances weighed on investor’s minds.

Election Investing

The economy and the stock market are much bigger than any one elected official, even the President. That said, the executive branch’s economic policy can move markets, particularly certain types of securities.

July 2004 performance review

The Conservative portfolio was down .45% in July. We’d like to have seen this fund up last month given the positive returns for bonds, but the small stock stake wiped our bond gains.