Archive for June, 2009

High Taxes, Record Losses for Mutual Fund Investors Ignoring Book’s Good Advice During Last Three Tax Seasons

Sunday, June 28th, 2009

First the insult: In 2008 the stock market including mutual funds has logged its worst performance since Herbert Hoover was president.  The DOW is down 36.2 % for 2008 the biggest drop since l931.  During the height of the Great Depression stocks were reeling at 40.9 %.

According to investment researcher Morningstar, Inc, “Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have generated positive returns during the past 12 months.”

And Lipper has reported that of the 78 mutual fund categories tracked by the fund research company, only one is in the black. The rest are down 30%, 40% or more.

Next the injury: in addition to devastating 2008 performance losses in mutual funds, those fund owners that carry capital gains distributions will have to pay as much as 15% tax.

This is called the January surprise and has occurred every year for taxable mutual fund investors since the 2000-2002 downturn.  In fact, in 2007, a new high capital gains watermark was set: more than $24 billion was collected by the IRS–the highest tax shocker in stock market history.

Figures this year have yet to be fully complied but 2008 is expected to create huge capital gains distributions for investors. Lipper, said.  And making matter worse, the tax-loss carry-forwards that many funds had from the 2000-2002 market downturn were used up during 2003-2006.  So funds generally don’t have stockpiled losses to offset any of this year’s realized gains.

As senior analyst Tom Roseen of Lipper has said, “The tax holiday is over.”

Thus negative returns plus capital gains distributions calls for a more tax-efficient strategy or else investors can be expected to be hammered every tax season.  Don’t expect any relief from the new administration especially for high-income investors as President Obama has promised a higher tax rate on capital gains.

Overlooked factor in wealth creation over time, and the managed accounts continues to prove its viability as a tax-efficient and transparent investment vehicle.

Since substandard performance has descended upon us and recent tax-break laws will sunset in 2010, it would be prudent for taxable mutual fund investors to keep an eye on one of the main drags on their performance: taxes.

Over the past 20 years, the average investor in a taxable stock fund gave up the equivalent of between 17 percent and 44 percent of their returns to taxes, Lipper found. In 2006, the tax bite amounted to a hefty 1.3 percent of assets, which surpasses the average stock fund expense ratio of 1.2 percent.

“With the tax loss carry forwards disappearing, the tax bite on returns is likely to shot back up to rates of 2 percent or more,” says Roseen. “And now this year will give us mediocre returns plus a huge tax bill which should be of concern to investors.”

Don Wilkinson, wealth manager out of Newport Beach, CA and author of the book entitled Stop Wasting Your Wealth in Mutual Funds: Separately Managed Accounts—The Smart Alternative has urged mutual fund investors to stop the bleeding since 2006 and his widely acclaimed book endorsed by such fiialial superstars as Bernie Fisher of Fisther Investments again this year recommends to mutual fund investors  put their wealth in a better place like separately managed accounts.

“Tax prone mutual funds are the worst place to put your wealth, “ said Wilkinson.

While an investor can’t avoid paying Uncle Sam in 2008, wealth manager Wilkinson says–” a great way to decrease one’s tax liability for 2008 and future years is to get out of mutual funds and into managed accounts.

Many investors are getting the message as sales of his book have skyrocketed since the economy has plunshed and more savvy investors are departing mutual funds in droves for more tax friendly havens like ETF, Index funds and managed accounts.

In fact, “no mutual funds” investors have increased to 16% from 6% in just two years (2006-08).  According to a new study by Mass-based Cogent Research, it was found that established mutual funds investors presently retain an average of 40% of their portfolios in funds, down from 53% in 2006.

In total, mutual fund assets at $10.6 trillion on September 30 are down 8.7% from $11.6 trillion at the end of August.  Stock and bond funds posted net outflows of $63 billion in September, up dramatically from $12.1 billion in August, according to the Investment Company Institute in Washington.

“The economic downturn is accelerating a continuing move from mutual funds to alternative products, said Christy White, a principal at Cogent.  “This is a perfect storm going on.”

In addition, mutual funds are plummeting each year with capital gain taxes shrinking their return on investment (ROI).

As a case in point, taxes took the largest bite ever out of taxable mutual funds in 2007.  It set a new watermark.  For the 2007 tax year, more than $24 billion—the highest capital gains tax shocker billed by the IRS in stock market history stunned mutual funds holders, according to Lipper, Inc, a fund research company.

Thus, buy and hold mutual fund investors incurring huge mutual funds losses has prompted them to take fund assets and plow them into CDs, Exchange Traded Funds (ETFs), annuities and the new bright star in the alternative investment horizon: the Unified Managed Account (UMA). Like other managed account strategies like the Separately Managed Account (SMA), the UMA rewards the knowledgeable investor with asset customization, professional money management and, most important: reduced tax liability.

SMAs and UMA’s are asset management building portfolio strategies managed by independent money managers under an asset based fee structure offered by financial advisors and other financial agencies.

The UMA is particulary attractive as an alternative investment over mutual funds because it underscores one of the most important in demand characteristic of the human psyche: simplicity.

The UMA is a fully integrated asset management system providing comprehensive investment management in a single account.  It removes the need for more than one account and combines all the assets into one account with a single registration.

Best of all, the UMA possessing all the positive aspects of the traditional SMA, can also encompress most other alternative asset management vehicles (e.g.: stocks, bonds, ETFs and more) in a client’s portfolio.

Again, the portfolio is arranged simply as one single account.

Don Wilkinson, owner of a wealth management firm in Newport Beach, CA—DFW & ASSOCIATES, can find all the details about UMAs and SMAs in a book.  The book entitled: “Stop Wasting Your Wealth in Mutual Funds…Separately Managed Accounts—The Smart Alternative” can be found on Wilkinson’s web site: and ordered at a reduced rate.  Visitors to the web site can also obtain a complimentary revealing report entitled “Building Wealth with Separately Managed Accounts.”  Wilkinson’s book can also be ordered on (