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BEWARE OF END-OF-THE-YEAR MUTUAL FUND INVESTING TRAPS

- Alan Lavine and Gail Liberman



The end of the year is when mutual fund investors stand to make more mistakes than any other time. That's because there are several do's and don'ts involved in end-of-the-year investing. Getting into a mutual fund at the wrong time can cost you on your income taxes. Here are some simple things to consider before investing at year end.

  • Don't buy shares of mutual funds for your taxable accounts at the end of the year. Even if your fund makes no gains for the remainder of this year, you'll still owe taxes on any gains the fund made the entire year--even when you didn't own it.

  • If you still wish to invest in your taxable account at year end, do call the fund company and ask for the date and approximate amount of year-end capital gains distributions. If it is significant, wait until the fund declares the dividend, then consider investing. As a rule of thumb, it pays to avoid buying funds for taxable accounts during the last two months of the year.

  • Do consider buying funds that have capital losses carried forward into next year. You can call the fund company and ask about these. If the fund has lost money on its trades, those losses can offset any capital gains next year, offsetting some of your year-end gains in 2002. Look around for well-managed funds with big losses over the past two years. They may have losses carried forward to next year.

  • Do invest in your tax-deferred retirement savings accounts at year end. For tax-deferred accounts, the distribution of year-end gains doesn't matter. Uncle Sam won't be getting his hands on the profits.

  • Do continue to dollar cost average into your mutual funds or stocks. Assuming you have been investing regularly, one or two months worth of contributions will not make a major difference in your capital gains distributions. Besides, most people dollar cost average into retirement savings accounts.

  • Don't let the performance of your stock funds over the past couple of years keep you from investing regularly. On average, it takes about a year to break even on your loses in a bear market, according to Ibbotson Associates, Chicago. But in 1973 and 1974 when the stock market lost 45 percent, it took five years to make back the losses.

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    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).


    To read more columns, please visit the column archive.




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