NEW YORK – As investors swear off their bad habits and make promises for the coming year, they would be wise to leave room on their to-do lists for a review of their mutual fund holdings.
Mutual fund experts stress that investors should review their holdings regularly and note that procrastination can eat into returns. And the transition from one calendar year to another can spark a flurry of activity that can affect investments and also create opportunity.
Rather than paring their holdings of poorly performing funds or re-calibrating their investments to remain focused on a larger investment goal, investors often avoid such examinations once they have made investment decisions.
Many mutual funds end their fiscal year in September, affording investors some time to plan for the tax consequences of their investments. This year has been a memorable one for the markets, with the major indexes showing double-digit returns. As a result, some investors will see sizable capital gains.
So while little time remains, investors could consider selling stocks that have performed poorly and applying that loss to offset some of any capital gains taxes they might face.
“People often don’t look at things their funds are sending them until after their tax year,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald &Co. By not acting to minimize their tax exposure, “they’re just basically giving money to the government.”
Pado contends investors generally shouldn’t buy into mutual funds at the end of the year because the funds often pay dividends that investors would then be taxed on. In essence, investors would be giving a fund money only to have it returned to them and taxed at the same time.
“You’re better off waiting until January,” he said. Even if investors would face taxes, it is better to wait until 2007 so they will enjoy more time to mitigate their tax liabilities.
Investors can also make the mistake of dwelling on a fund’s year-end holdings, Pado said.
Focusing on holdings as of a particular date or even looking at short-term performance can lead to costly mistakes because a fund’s long-term performance could show little resemblance to that of the short term.
“Those holdings are just a photograph in time, and I would never take a fund at face value for what it’s holding and would look at it for its historical performance quarter to quarter,” Pado said.
Jeff Tjornehoj, an analyst at fund-tracker Lipper Inc., also said investors should examine how a fund performs relative to its peers.
“If someone is talking about the great companies they acquired in the last quarter, look closely to see how they’ve done in previous quarters,” Tjornehoj said. He said the start of a year should arrive as a minor event for investors because they should be keeping tabs on their portfolio throughout the year.
But many investors contend January can help set the tone for the market’s performance in the coming year. In the last 35 years in which stocks showed gains for the first five days, the markets have ended that year higher about 86 percent of the time, according to the Stock Trader’s Almanac.
The month can see volatility as investors jockey for new positions. Investors can let go of a collective desire often seen at year-end to send stocks higher in order to burnish portfolios.
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