What investment records should you keep?

Keep them all. money

Lots of financial sites and blogs post articles offering advice about what records to keep in general: bankrate, soundmoneytips, realsimple, even the IRS has made an attempt.

As is often the case, Morningstar has one of the best explanations for why this matters when it comes to investment records. money

I keep every monthly statement from my brokerage and have a file over 2 1/2 inches deep to show for it. I wish this was an indicator of massive wealth, but really it is just a symptom of reinvested dividends. money


If you put $500 in a growth and income fund and reinvest the dividends and capital gains, each payment- in cents, dollars, whatever, is a transaction on the statement. And at the end of the year, you pay income taxes on those payments, even though they are (re)invested, and not cash in your pocketses. So if you do not have a ton of money (yet!), but still want to diversify broadly and put a small amount of money in a number of funds instead of just piling it all into one, your statements get long. money

Some of the new retirement funds like Vanguard Target Retirement 2050 are actually a collection of funds, so you can put all or some of your money in one of these, even if you do not plan to save it until retirement, and diversify that way, but I digress money

Some brokerages are no longer sending paper statements automatically and actually charging investors for this 'privilege.' Here is Ameritrade, disclosing its fees:

So if you only get electronic statements, or opt to get electronic only, you have to keep those too. And back them up! money

I finally got my 3rd and 4th brokerage account tax statements. One of these adjustments changed how $22.46 was allocated for tax purposes. I waited a month and a half to file my taxes because of how $22... good grief. money

So anyway, I sold a fund last year and I knew how much I originally invested, and Etrade does a good job of keeping track of funds that have automatically reinvested since they bought my account from my previous brokerage. My old records, however, did not convert to my Etrade account so I had to go back through my paper records starting in 2000 when I bought the fund to calculate my actual basis. This took me about 3 minutes to do because I had all my records in order and this changed my basis by a couple of hundred dollars which lowered my tax bill enough to buy a decent bottle of wine! Or, if I shop at Trader Joe's, 3 or 4 decent bottles of wine! money

So the lesson here is that you should keep your statements, paper or electronic, because your brokerage may be bought by a competing brokerage, or it may raise its fees and you may transfer your account to a better brokerage and all your details may not transfer over. And unless you want to pay the tax man (or woman) for the same profits twice, you'll want to be able to add up your actual basis, not just the amount you originally invested and having your statements handy and organized makes this pretty easy. money

Government passes law to steal from citizens

So like I predicted, I got four tax statements from my brokerage account. money

What a pain. money

I received two statements because my old brokerage was swallowed up by my new brokerage and I got two more statements supposedly because recent changes in tax law have made it so difficult for companies to figure out how to report their profits that it takes over two months just to do the math. money

That's right- I got home from work- after spending my day doing my part to keep the GDP strong while markets around the globe writhe in agony- to find two updated tax statements.

Thankfully, Etrade had alerts on its site indicating that this would happen so I avoided filing taxes only to have to refile. money

And yes- the title of this post is a bit of a stretch, but here is my thinking: money

The government has passed regulations so complicated that it now takes much longer to run the numbers so many investors find it more difficult to file taxes until much later meaning...

The government gets to keep my tax withholdings for longer. Since I am not being paid interest on this, this money can be put to use, grown, used as green wallpaper, whatever.

So rather than raise taxes- politicians should just continue to make regulations more and more difficult so that the government can hold tax payments for longer periods, collecting the interest on my money. money

Wait a minute you say- Wylie does not usually rant and rave and spin conspiracy theories... Well I just picked a bond fund which is pretty boring, so I'm trying to be more... lively. money

Plus, even the folks in Hawaii are agitated about this one. money

Wait to file your taxes if...

...you own a brokerage account. money

I was jealous of a colleague who declared that he already had his tax refund on the way. I was even more jealous of the fact that his refund was small. money

Why would I be jealous of a small refund? money

In this case the government has been taking only as much money from my colleague over the course of the year as he ultimately would owe in taxes. Some people like getting big refunds, but that is a big interest free loan you are giving to the government... If you have enough income to do that, I've got a bridge for sale... money

So if you can only have what you will owe withheld (takes good planning), you get paid more throughout the year meaning you have more every two weeks to donate to charity, spend on bird seed, or spend at the movies. money

Anyway- last year I got an amended tax statement from my brokerage and I was really glad I had not submitted my taxes, because I would have had to re-submit them with the new form if I had been more on the ball. This year, I have yet to receive my tax statement from etrade and when my colleague was like "I'm done with my taxes" I was all like- "what is up with my stuff?" money

So I logged into my etrade account and found this buried in the page that allows you to view your tax forms:

"If you hold a mutual fund, REIT, or RIC, we may need to issue you an amended Form 1099. This may affect the date you will want to file your tax return. To minimize the possibility of multiple corrections, we will not be generating amended 1099s until late February 2007." money

I didn't even know what a RIC was but I own Mutual Funds and a REIT (Boston Properties).

My initial reaction was- why can't etrade get this stuff right the first time? Then I read an article by Andrea Coombes that led me to believe that brokerages are required (perhaps by law?) to send tax info by Jan 31st, but that many mutual funds and REITS send updated info to brokerages after this date forcing brokerages to send multiple copies and forcing those of us who invest in Funds and REITs to wait to file our taxes or file multiple times. Andrea specifically notes that some Brokerages are seeking permission to wait to send their tax info to clients. money

Since etrade bought my old brokerage, but the transfer did not happen until a couple of weeks into Jan. I wonder how may tax forms I will actually get... money

etrade does have this message on my account home page:

"1099s Available by January 31st.
This year as part of your move to E*TRADE Financial, you may receive TWO tax statements for 2006. Your tax statement(s) will be mailed to you and made available online by January 31." money

What this should say is that I may receive FOUR tax statements and should not even bother trying to figure out my taxes until the end of Feb. money

But regardless, the confusion and how long it is taking for me to receive this info does not appear to be etrade's fault, but rather a result of changing and complicated regulations. money

Tax day moved for everybody- not April 15th...

Taxes this year are due April 17th for everyone. Not the 15th, which is a Sunday. Not the 16th, even though your forms will most likely claim this. But Tuesday, the 17th. money

Why? you might ask. I mentioned that us Massachusetts residents get until the 17th because of the timing of Patriot's Day. Of course the rest of the country is not patriotic and/or does not celebrate our football team (even in shameful defeat) with a day off, but our esteemed representatives in the District of Columbia are taking the day off to celebrate Emancipation Day so the entire country gets an extra day to pony up our taxes. Don't just take my word for it (ever)- check it out yourself. money

I will post soon about why every extra day helps, even if you are getting a refund... money

Where are the charts?

A friend and faithful Wylie Money reader asked me- "Where are your charts? Your Graphs? The track record of your hypothetical portfolio as it takes the S&P 500 and thrashes it soundly, beating it into the ground?" money

I started on a long post about how there is no free portfolio tracking tool that automatically re-invests dividends and capital gains pay-outs especially from a historical date and I have not found a good tool to allow me to do this manually for the 20 funds I plan to track... money

Then I started thinking about my friend and his question and I got bitter and decided that he just wanted charts because his brain has frozen solid and gone numb because of all the snow he has suffered through recently (he lives in Denver). money

Then I realized, yea... I need some charts. But it could be a bit tedious to manage so here is my plan: money

I will chart the investment of $2500 per fund in each fund with $100 additional contributions on specific days I will pick each month (more about this process later). I am starting with a minimum of $2500 because several of the funds I have picked so far require this much and none of the funds I have picked (or will pick) require more than this- so one could actually follow this plan. Same reasoning behind the subsequent $100 additions. money

I will do this one of 2 ways. I will pick about 20 funds total and either:

a) One of you can give me $50,000 and $2000 per month- which is the cost of investing in this entire portfolio and I will invest it and etrade can re-invest the distributions and capital gains!!!!! money

or

b) I will set up a hypothetical portfolio- in Morningstar but please post a comment if you know of an easier to use free portfolio tool. And I will try and keep track of reinvesting dividends, etc. manually which will be tedious and make me sad. money

or

c) I will just set up a portfolio to track daily NAV (prices) which will give a general sense of earnings and be less tedious. money

Final note- until I pick all 20 funds, I will not set this up because going back and trying to get historical info and tracking the funds and picking new ones all at once would require more time spent on this that I am willing to commit. money

Social Security

In response to this article about the US going bankrupt, I commented on Social Security including crazy ideas like rolling back the retirement age and giving all my 'projected' payments away. money

I was discussing this with a friend over a frosty pint later on and he almost took his empty glass and wacked me over the head with it in a well-meaning attempt to knock some sense into me.

Anybody else want to buy me a pint o' cider and discuss? money

Capital Gains Distributions Attack!

So December 4th was a good day for investors as the DOW, NASDAQ and S&P 500 were all up over +0.70%. money




Two funds caught my eye yesterday as they posted serious declines in value (images from cnn.com): money

PCOAX Putnam Capital Opportunities;A






PGRWX Putnam Growth & Income;A






So what gives? Many mutual funds make capital gains distributions. Often this is a result of portfolio turnover. Wikipeda explains it like this: money

"Turnover generally has tax consequences for a fund, which are passed through to investors. In particular, when selling an investment from its portfolio, a fund may realize a capital gain, which will ultimately be distributed to investors as taxable income." money

Someone holding the funds above would not see the total value of their holdings go down by 10% or 11%, assuming they were reinvesting their dividends and capital gains distributions, as the amount of the distribution would buy additional (now cheaper) shares of the fund.

Where this shows up is in the new year, when it comes times to pay taxes. The 10% that was distributed will show up on Form 1099-DIV from your brokerage as a taxable event. So you will owe taxes on the amount distributed. money

One way to avoid or lessen the amount of capital gains distributions you receive is to invest in funds that do not sell the stocks they own very frequently- funds with lower turnover. In retirement accounts, IRAs 401(k)s or 403(b)s for example, your holds are not subject to taxes while they are held in the account so you do not pay taxes on these distributions. Kep in mind though that when a fund manager sells a stock, she pays a fee to do so, just like you would, and those fees are also passed on to shareholders so low turnover is good for a variety of reasons, even in tax free or tax deferred accounts. money

That said, you will find that different strategies are used in categories- some categories have higher average turnover than others. The key here is not to pick the lowest turnover possible- if the fund is underperforming its peers for example. A better strategy is to pick a well performing fund with a lower than average turnover. money

The Putnam Capital Opportunities fund Is a Small Cap Growth fund with 60.27% turnover. This is high, but the average for this category is 110.43% so this is below average. The bigger concern here is the 5.25% sales load. If you bought this fund at the beginning of the year and sold it on October 31st, you might be pleased with your anticipated windfall as the fund was up 13.09% at that point. The average gain for funds in this category was only 7.16%. However, after paying the 5.25% sales load, accounting for 1.20% in expenses and after paying taxes on profit and capital gains, the estimated take home here is 4.65%. money










The Putnam Growth and Income fund is a different story with some similar issues. The first issue here is that, despite the name, this fund falls in the Large Cap Value category not the Large Cap Growth category. Funds do drift around and switch categories from time to time, but this fund has been solidly Value for a while: money












Why does this matter? You should know what you have. Different sectors go in and out of favor. A lot of analysts think Large growth stocks are due for a run. If you owned this fund, you might think you have your investments poised to take advantage of this trend if it happens. You would be wrong and Putnam should be ashamed for misleading you or better yet, update the name of the fund. Anyway... money

The average turnover for Large Cap Value funds is 55.91% and the average for Large Cap Growth is 83.76%. Since this fund is invested in Value stocks its turnover at 52.80% is... average. If you bought this at the beginning of the year and sold it at the end of Oct. you would not walk away with a 10.99% increase- you would take home around 3.34%. money










When we choose a Large Cap Value fund for out hypothetical non-retirement account, we'll see if we can find a fund with lower turnover, and hopefully now it is a little more clear why we care! money