Mutual Fund Taxable Distributions

by | Nov 15, 2008 | Asset Management

Some Mutual Funds have a surprise waiting for you

The cost structure of mutual funds is completely out of whack with what investors want.  Plus, they re-set their prices once per day, after the market closes.  The whole mutual fund industry needs an attitude adjustment, as that ship has sailed.  They are losing market share faster than the US car manufacturers.

The only time I’d recommend mutual funds are when mutual funds are the only option available to you.  Whenever exchange-traded funds are available, it is nearly ALWAYS in your best interest to consider them.  They cost less, trade dynamically throughout the day; some of them trade options as well.

Now, in many retirement accounts, like deferred comp accounts and 401k’s, mutual funds are your only choice.

But that’s NOT what this article is about.

This is about the mutual funds that Mr. & Mrs. Jones own that is NOT in an IRA or 401k.  Maybe your parents?

So, do you own the American Funds New Perspective fund in a taxable account?
A LOT of people do…this is a widely held fund!  You probably know someone who has money in it.  The fund is down MORE than the market (about 42% at the time this was written), and yet this fund will distribute somewhere around 8% in TAXABLE distributions in the next few weeks.

Taxable gains while you lose money.  Wonderful!

In terms we can all understand
You invest $100,000 in this fund a year ago.  Today it is worth $58,000.
And you will be facing an (approximate) taxable distribution of $4600 in the next few days.

When the market started dropping, fund managers started selling stocks that had gains – and losses.  Some positions were held for years.  And as the positions were sold, all the gains have been unleashed…to YOU.

This is where “buy and hold” can kick a good man when he’s down.  And don’t blame the broker that sold it to you.  First of all, he’s parking cars today.  Next, the list of funds with gigantic distributions at Vanguard (the home of “do-it-yourself”) is pages and pages long.

Paying taxes — after losing 30-40-50% of your money — is just lousy.
Now look, the “record date” for ALL of these funds is coming – quickly.
Like, in some cases, the next few days.

Don’t dilly-dally.

If you know ANYONE that holds mutual funds in a taxable account (and who doesn’t?), have them get in touch with me