| BUSINESSWEEK ONLINE : NOVEMBER 29, 1999 ISSUE | ||||||||
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| BUSINESSWEEK INVESTOR
Commentary: No, Yearend Investing Isn't a No-No We've all heard the advice: Don't buy mutual-fund shares late in the year. Funds pay out capital gains and dividends in November and December. You'll have to pay taxes on those distributions even if you reinvest them. So finance gurus often suggest you defer income and buy after the payout. But a Florida finance professor and financial planner has done the math and skewered the conventional wisdom. Jay L. Shein says the old rule ignores a key issue: the potential earnings you lose by keeping your money in cash. ''There's an opportunity cost to waiting,'' he says. Indeed, if tax phobia scares you away from an investment you like, you could miss a month or more of potential appreciation. Sure, if you invest, you're likely to pay some tax. But if you stay in cash, what sort of aftertax return will that get you? Shein's numbers will appear next month in the Journal of Investment Consulting, published by the Denver-based Investment Management Consultants Assn. (www.imca.org). He figures that since 1990, the typical equity fund has outperformed money funds 70% of the time in the fourth quarter, after taxes. Even if you bought as late as Dec. 1, an equity fund would have outperformed cash 58% of the time. Put another way, if you had invested $10,000 in the last quarter of the year, on average it would have been worth $10,309 by Dec. 31, after taxes. If you kept the money in cash, you would have had only $10,078. One reason: December has been the stock market's best-performing month. Says Shein: ''If you just want to play the odds, you're better off buying and paying the tax.'' Here's how Shein, who teaches at Nova Southeastern University School of Business & Entrepreneurship in Ft. Lauderdale, Fla., and the Wharton School, crunched the numbers: He assumed an investor paid a 39.6% tax rate on ordinary income and 20% on capital gains but did not figure in state taxes. As a proxy for actively managed equity funds, he used a universe of 32 that had at least $1 billion in assets in 1990. From 1990 through 1998, he looked at what would happen to total aftertax returns through Dec. 31 if an investment were made on Oct. 1, Nov. 1, or Dec. 1. KEY QUESTION. To be sure, if you are considering buying into a fund late in the year, it's still a good idea to ask the sponsor when it's going to make its payout and how big it will be. ''If a fund is going to have a tremendous distribution a couple of days from now, of course you should wait,'' Shein says. But huge payouts are not typical. In 1998, the average distribution for a diversified U.S. stock fund was barely 6%. And remember, reinvesting dividends and gains today will increase your cost basis and reduce the tax bite when you sell the fund. Shein concedes his study was carried out in a bull market, and that it could have produced different results in a less buoyant period. Still, he makes a valuable point. Deferring income may be a bedrock tax-planning strategy. But don't do it if your aftertax return will suffer. By HOWARD GLECKMAN Gleckman covers taxes and financial planning in Washington. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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