---D.R., Apple Valley, MN
A. You've put our finger on a perverse bright spot. During most of the eighties and nineties one of the big dangers for a new investor in a taxable account was to "buy a tax liability." Investors would chase a fund that had enjoyed a great return the previous year. It would go nowhere for them but at the end of the year they would receive a taxable distribution for capital gains realized during the year. They had bought a tax liability.
Today that isn't very likely. The Morningstar Principia database for the end of August shows a total of 8,128 mutual funds that have, on average, a potential capital gains exposure equal to minus 44 percent of their assets. Basically, they have large realized or unrealized losses. The average of 398 technology funds has a potential capital gains exposure equal to minus 287 percent of assets. (It should be noted that these figures overstate the losses. The figures are smaller at the very largest funds. Fidelity Magellan has a potential capital gains exposure of only minus 15 percent; Vanguard 500 Index has a potential capital gains exposure of 2 percent.)
Today, the danger of buying a tax liability is small. With tax loss carry forwards, there are funds that will be able to have tax-free gains for quite a while.
Q. In a recent column you said it was time to find a new broker if you have lost over 50% of your portfolio's market value in the latest bear market.
I have a more complicated question. Let me preface this by saying that my broker is also a family friend, so this is a bit more awkward. At the height of the tech frenzy, our portfolio was heavily into technology stocks. And it still is. My CPA wife begged to diversify, but we were led to believe our IRA was where it should be.
Our $130,000 is now worth about $29,000. We have met with our broker twice in that time and have followed what little advice we can get. That is the crux of my question to you. Here is a broker who doesn't return phone calls and has offered little or no advice to us regarding our retirement account, unless we meet face-to-face with him. Even worse, in our last meeting with him about what to do with our dwindling mutual funds, he was supposed to research and get back with me about what options we had. That was five months ago. Numerous phone calls to him produced no results- he didn't return them. I have talked to my wife about finding another broker, but she is reluctant to do so... I feel like the deer caught in the headlights. Should we hold on and do nothing?
---J.G. , by e-mail
A. Here's my speculation on what's happening with your broker. First, he's in shock and doesn't know what to do. Second, he's preoccupied with his own problems: in addition to losing your money, he's lost his own money and his income is falling as clients check out. We're about to see a major dieback on the brokerage side of financial services, probably worse than the one that followed the crash of 1987.
His problems, however, aren't your responsibility.
Your responsibility is to sit down with your wife and suggest that a few awkward moments are a small price to pay to avoid eating cat food in retirement.
Your next responsibility is to do a "reset." Accept where you are; count your assets, set goals, and start marching toward them. A two-earner household has great powers of recuperation.
Rather than playing roulette with another broker, I suggest that you assume responsibility for your investments and start managing them on your own. This means selling what you have, starting very simple with an index fund portfolio, and sticking to it. Check my Couch Potato portfolio.
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