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Author: 38Packard Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Stated Cost Basis vs. "Real" Cost Basi Date: 9/14/2005 9:03 PM
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Hi Folks,

I've been having the feeling that I need a financial advisor lately. I'm in my late 40's, two kids about to go to college, thinking about how and when I might retire, etc.

I have had a successful career, was in business ("S" Corp) for 18 years, built a sizeable SEP and 401K accounts. Now I work for a Fortune 100 company in which I receive bonuses and stock options.

I have Quicken Premier and I am pretty much anal about record keeping. When I set up Quicken back in 2000, I entered all of my investment history (which I had from statements and a former Managing Your Money program). I have recorded all of my contributions, buys and sells in each of the retirement accounts.

I also use Quicken's Planner feature with a number of realistic assumptions (retirement age, daughter's wedding, college expenses, conservative rate of return on investments, inflation rate for costs, etc.) Quicken tells me that my plan is working and that my wife and I should be able to retire and live according to our assumptions.

I have been choosing my own stocks since about 1998 and prior to that was invested primarily in mutual funds at Fidelity. Since I began investing directly in stocks, my retirement accounts were heavily invested in tech, and I took a real beating (on paper) in my retirement portfolio. I consider myself an investor (might be a stretch) but certainly not a trader. I often look at that loss and kick myself in the butt - almost daily. This has been really bugging me lately, and I decided to look for a Financial Advisor. I do not often buy and sell the same position within a year or so.

I called my former CPA who used to do my corporate tax returns to seek his advice, and he offered to sit and talk with me for an hour for free. I brought all of my Portfolio positions, my Net Worth, my Cash Flow statements, my Quicken retirement plan assumptions, etc.

He told me a couple of things that I wanted to get people's opinion on.

He told me that my knowledge and interest in planning and investing (in all areas) is such that I really do not need a Financial Advisor - just a professional that can provide a "second opinion" on investments, financial plans, insurance, etc. He was willing to do that on a quarterly basis for a reasonable hourly fee.

He told me not to look at my losses. Re-visit my portfolio annually, or semi-annually, and re-balance as necessary. Dump the losers and look for new opportunities to invest. He suggested your typical "growth and income" type of investments - which I have some (JNJ, G) but not much of.

He told me that I should reduce my risk by dropping some of the tech losers that I still own (EMC, ORCL, NOK, NTAP). He was surprised that I have moved alot of my money from tech to TGLDX - a Precious Metals Mutual Fund. Which he thought was not "mainstream" and risky - even though he acknowledges that interest rates are cyclical and will most likely be rising instead of falling.

And one of the most controversial things he told me was to re-calculate my "real" cost basis. Here's the question he asked me concerning my losses which are calculated in Quicken - "How does Quicken calculate the cost basis? The example: If I buy 100 shares of X at $10, and sell one year later at $15, then take that $1,500 and buy Y, does it calculate the cost basis of Y as $1,500 or $1,000?"

According to IRS regulations (as I understand them) the cost basis for Y would be $1,500, and that is how Quicken calculates the cost. My CPA suggested that I instead, calculate a "real" cost basis by adding all of my contributions (say $100,000) and then comparing that to what the current market value is. When I do that, I calculate about a 6.5% avg. annual return on my contributions over the past 15 years for almost a double. When I look at Quicken, it tells me that I am in the hole for about 20% on average.

My CPA told me that if after going through that excercise, if I am positive, then I really have not lost anything, and should just dump the losers and diversify without feeling a tremendous sense of loss.

I think that this might be a good way for me to look at this because I have felt much better knowing that I truly have not lost my hard earned contribution dollars, but have just lost (on paper) potential gains as some point in the past.

Would love to hear other people's opinion on these points. Thanks in advance.

Cheers!
'38Packard
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