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Retirement Discussions / Retire Early CampFIRE
|Subject: Re: Index vs. Managed Funds||Date: 3/5/2000 5:05 PM|
|Author: jpkiljan||Number: 5562 of 748980|
Good Post MauiGuy,
I made same 'mistake' years ago when I first bought a an after-tax mutual fund. I did my research and picked the best (versus risk) and saw my earnings grow nicely (just under the S&P500 growth rate), but each year, I was hit with increasingly larger tax bills for realized capital gains from within the fund. I finally stopped having the dividend/capital gains reinvested, just so I could find some end-of-year cash to pay the tax bill for this and other smaller after-tax mutual funds. I'd sell these funds, but the capital gains hit would be huge right now, so I am feeling trapped into selling these funds off slowly so I don't move into a higher tax marginal rate.
If there is ever the 'Great Market Sell Off,' I expect this yearly taxable windfall will increase quite a bit as funds are liquidated by shareholders. Some of these funds have pretty big 'unrealized capital gains' sitting in their accounts and the tax bill new investors may eventually have to pay for their investement in these accounts may be the next big mutual fund scandal even if it does not happen for another 10 years.
Currently, my annual dividend/capital gain distributions from after-tax mutual funds is approaching what I would need to withdraw annually to support an early retirement.
Like you, if I had to do it all over again, this money would have gone into one of the index mutual funds. Now there are even better choices than there were 15 years ago, and, as you do, I currently recommend SPY and QQQ to co-workers adn friends asking me where to first invest new monies. Your control over capital gains distribution seems pretty good in these new indices.
As you say, for tax-deferred accounts, none of this seems to matter.
Another element of index vs. managed fund. I know that the discussion so far is focused on funds held in
a tax-deferred account. For those just starting their investment life, don't make the same mistake that I
When I was young and foolish, I relied on the Wise to help me make some investment decisions in a
taxable account. I was steered to several managed funds, which I promptly invested in.
To my complete surprise and horror, at tax time I had an additional and significant tax burden with capital
gains taxes owed for the churning of stock in the managed funds. Because we were in a high tax bracket
it really hurt. I believe (it was some years ago) I paid far more in taxes than the fund's capital
It was then that I adopted a Foolish philosophy and spent alot of time becoming wise. Got rid of the
Wise, sold the mutual funds at a loss and switched to individual stocks in my taxable account. I only have
index funds in my tax deferred account which is of equal value as my taxable account. I have acquired
both QQQ and SPY for the taxable account in addition to the individual stock I hold in the account. Have
kept the fees extremely low. NowInMaui
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