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On money
© St. Petersburg Times, For some, exchange traded funds are a good investment Q. I'm thinking of adding index funds to the stock portion of my portfolio. Exchange traded funds and ishares are new to me. Can you explain the tax implications and possible fees associated with these investments? I like individual stocks for the ability to control taxable events, but I would like to be able to control the volatility of my investments. A. Exchange traded funds are similar to index mutual funds. If you buy one, you own shares in a portfolio of stocks that tracks a particular index. That's why these funds also are known as index shares or ishares. The best known of these are Cubes, Spiders and Diamonds, or more formally, the Nasdaq 100 Tracking Index (QQQ), Standard & Poor's Depositary Receipts (SPY) and Dow Industrials Diamonds (DIA). Because the funds trade like stocks, their price per share fluctuates during the day. That creates buying opportunities and inefficiencies. At times the funds trade for more or less than the value of the index. While funds smooth out volatility in a portfolio, they don't eliminate it. Costs are low for exchange traded funds, but because the shares are bought and sold through brokers, you have to pay commissions when you trade, as well as any fees involved in maintaining a brokerage account. If you do your investing in big chunks, exchange traded funds are a good substitute for traditional index mutual funds. Traditional funds are better if you are accumulating shares through small purchases. Both types of funds are tax-efficient ways to invest. Of course, any time you sell, you will realize a gain or loss that will have to be reported on your tax return. More information about exchange traded funds is available from the American Stock Exchange (http://www.amex.com). Q. "Experts" advocate long-term investing, but what about the downside? Here I am, a genuine long-term investor, stuck with a portfolio that is unbalanced and has practically zero flexibility. When I sold a little to rebalance, the taxes killed me. I'm in deep trouble because of this buy-and-hold idea. There have been times when some of these issues were going nowhere and others were appreciating rapidly, but it was too costly to get off the stuck elevator. Don't call me a very lucky crybaby. Sure I'm lucky, but what have I been able to do for myself recently? It looks as if these are the stocks I'm going to die with. A. If this is what you consider "deep trouble," you've led a very sheltered life! It is not a good idea to allow taxes to be the primary driver of your investment decisions. If you have done your homework and decided it is time to sell a stock, you should sell it. Just ask a few AT&T or Lucent shareholders who are kicking themselves for not selling. However, academic studies show that when investors trade their portfolios, the stocks they sell typically do better than the ones they buy. Maybe you would be smarter, but that's not guaranteed. Sorry I can't be more sympathetic! Q. Are Roth IRAs, regular IRAs and 401(k)s protected by Florida bankruptcy laws? This has been on my mind ever since I read an article about what is protected by bankruptcy, which said protection for retirement accounts varies by state. I am not considering bankruptcy but if something happened to me, such as a serious illness, would I lose my retirement safety net? A. This is one thing you don't have to worry about. Qualified retirement plans such as 401(k)s are protected from creditors and so are both kinds of IRAs. Online money mapThe name leaves a little to be desired, but if you are interested in technical analysis and stock screening, check out StockWorm (http://www.stockworm.com).
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to huntley@sptimes.com by e-mail.
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Times columns today Mary Jo Melone Ernest Hooper Gary Shelton Darrell Fry Hubert Mizell Robert Trigaux Helen Huntley Robyn E. Blumner From the Times Business desk |
