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January 18, 1999 I haven't written about mutual funds per se so far. Now is a good time to think about mutual funds, and that's because of distributions. Now what are distributions anyway? I'll bet most investors could not tell you, even though they have to deal with them. Here's the deal: when a mutual fund gets a dividend from a stock it owns, that's income as far as the IRS is concerned - whose income is the question. The way the laws work, the mutual fund itself does not pay taxes on the income, but instead passes this liability on to the holders of the fund, in amounts proportional to their holdings. These tax liabilities are called distributions. There are several kinds, too. In addition to ordinary income distributions, we also have short term, intermediate term and long term capital gains distributions. I won't get into how to deal with these things on your tax return, suffice it to say that you'd rather not have them, if you can avoid it. It turns out you can, at least to some extent. Mutual funds have the choice of when to declare a distribution. (The fund industry must be some powerful lobby - imagine the IRS letting you choose when you feel like filing taxes!) The most common choice is to declare one annually, in December. Think about this - if you buy in November, you get socked a month later with the taxes from the whole year's activity. If you buy in January, you avoid this trap. In case you haven't looked out your window, now is January. Of course, you shouldn't base your investment decision solely on what is probably a fairly small tax bill. We must also consider whether this is a good time to buy, and which fund to choose. But I'm a believer in accumulating small advantages when you can, and you might as well buy in January, other things being equal. Another factor to consider is the trading style of the fund. A fund that trades a lot will generate a lot of capital gains dividends. A fund with a lot of high-dividend stocks will generate a lot of income distributions. I tend to favor index funds. Index funds don't trade much, so have reduced distributions. They have low fees too, which helps put the odds more in your favor. One hidden kicker is that they build up big unrealized capital gains. If they are ever forced to sell by net redemptions, these could bite you. If you're thinking of a fund, have a look at the Vanguard 500 Index fund. It's the second largest fund and set to pass Magellan this year. Magellan managed to actually beat the S&P 500 index last year, but I don't think that'll happen again. My hat's off to the Magellan manager, good ol' what's his name, who wasn't there a few years ago and probably won't be there again a few years hence. Just remember that John Henry song and bet on the robot. Today's close: Dow 9340, S&P500 1243, NASDAQ 2348 December 31: Dow 9181, S&P500 1229, NASDAQ 2192 All-time high: Dow 9643, S&P500 1275, NASDAQ 2384 Autumn low: Dow 7539, S&P500 956, NASDAQ 1419 The year is only two weeks old and the market is still cooking along just fine. The NASDAQ is up 7% already, the other indices not quite so sizzling, and of course the Internet stocks are still tearing through the roof. Everything's just im-peachy. I think the continuing fascination with the Clinton sex scandal is another bullish sign - people are feeling good and enjoying the show. If they were worried, the public would not put up with it for long. May they call witnesses and have long and lurid testimony.
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