This week's panel:
Frank
Armstrong
 Frank
Armstrong, CFP, is the author of Investment Strategies for the 21st Century
as well as the forthcoming investment guide The Informed
Investor (available on Amazon). He is the President of
Investor Solutions, Inc. a
fee-only Registered Investment Advisor, and Chief Investment Strategist of
DirectAdvice.com.
|
Norm Fosback
Norman G. Fosback is the most widely read
independent provider of mutual fund advice in America. He recently founded
Fosback Investment Management, which publishes a new investment advisory letter,
Fosback's Fund Forecaster. From 1971 through 1998, Mr. Fosback was
president and research director of The Institute for Econometric Research, where
he created, edited, and managed ten investment publications, including
Mutual Fund Forecaster, Market Logic, The Insiders, Investor's Digest, Income
Fund Outlook, Fidelity Forecaster, Income Fund Outlook, and Mutual
Funds Magazine, with a combined paid circulation of more than one million.
Mr. Fosback is also author of the acclaimed best-selling book Stock Market
Logic. Mr. Fosback also provides portfolio management services to
individual investors. Mr. Fosback can be reached at nfosback@fosback.com |
Do short-term bond funds work in tandem with interest rates?
Are mutual fund losses deductible?
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Do short-term bond funds work in tandem with interest rates?
from Rosemary
Q: Do short-term bond funds work in tandem with interest rates, this
is, loose value as interest rates go down or do they work inversely to
interest rates like a medium to long-term bond fund would?
A: (Frank) The shortest duration bond funds
are money market funds. Because all bonds in the portfolio mature so quickly,
they are allowed to carry them at purchase price rather than adjust their value
on a daily basis. A money market fund suffers no capital risk as interest rates
change, and the portfolio quickly adjusts to current interest rates as each
individual bond in the portfolio matures and is invested at current rates.
At the other end of the spectrum, long-term bonds have great capital
fluctuation as current interest rates change, but cannot adjust their coupon
rates. The bond owner is locked into the coupon rate until the bond matures.
An ultra short-term bond fund is about 10 percent of the way between money
market funds and long term bond funds. The Net Asset Value is adjusted on a
daily basis, but they have little capital risk because of the short maturity.
They also adjust quickly to current rates as their bonds mature and are rolled
over. Both the amount of capital risk and the time it takes the portfolio to
adjust to current rates are directly related to average maturity of the
portfolio.
Many investors find that the trade-off between increased yield and capital
risk is very favorable for short-term bonds. For instance, you might expect to
net about 1% more yield than a money market fund for a portfolio with a one-year
average duration.
Are mutual fund losses deductible?
from Dan
A: (Norm) Mutual fund gains and losses
are not ordinary income and are therefore not "deductible" per se. Rather, they
are capital gains and losses, either short-term (if you sold within 12 months or
less after purchase) or long-term (if you sold more than 12 months after
purchase).
You can use losses that you realize from selling your funds or other
securities to offset realized gains in the current or future years and thereby
reduce or eliminate your tax liability. Note, however, that you must have
actually realized the loss by selling the shares; unrealized portfolio losses
have no tax consequence whatsoever.
Finally, losses realized in a tax-deferred retirement account cannot be used
to offset gains simply because you do not report any gains or losses in these
accounts to the IRS.
Important Disclaimer
Investing in equities involves a serious
principal risk, and no assurance can be given that the techniques described here will be
successful. Returns vary and you may have a gain or loss when you sell your shares. Past
performance is no guarantee of future results. Index returns shown are historical and
include the change in share price, reinvestment of dividends, and capital gains. Indexes
are unmanaged and do not reflect the impact of transaction costs. Transaction costs would
have reduced the total returns.
International investments, especially those in emerging
markets, entail greater risks (as well as greater potential rewards) than U.S. investing.
These risks include political and economic uncertainties of foreign countries, as well as
the risk of currency fluctuations. These risks are magnified in countries with emerging
markets, since these countries may have relatively unstable governments and
less-established markets and economies.
Lastly, the questions and responses set forth here are for
general informational purposes only and are not intended to substitute for performing your
own independent research or contacting your financial or legal professional before making
any investment decisions. We make no guarantees as to the performance of any investment
strategy you choose and are not responsible for any losses you might incur.
