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Conversations - Winter 2000
Our LWA family is growing! We have several new employees. Paula Cottingham is the new Administrative Assistant in the Financial Planning and Asset Management Group. Paula has jumped right in and is assisting all of us in whatever needs to be done. She will also assist with the tax return assembly during tax season. Paula lives in Berkeley Heights. She has two teenage daughters, Elizabeth and Sara, who attend Kent Place School. Betty Thomas has joined the Investment Group as an Investment Analyst. She is working with Diahann to prepare and review models in our rebalancing process. She will also be involved in other investment-related areas. Betty is a graduate of Montclair State University and lives in Orange. She joins us with experience from Midlantic Bank, as a branch manager, and Prudential Investments, as an Investment Advisor. Betty is a big fan of the WNBA and also enjoys working with wood and pottery. Lynn Tamburo has taken on the role of overall company management. Diahann and Clare have begun the process of turning over the day-to-day management of the business to Lynn. This will allow them more time to focus on client matters. Lynn joins us from J.P. Morgan where she held the position of Vice-President in the Human Resource Group. She graduated from Georgetown and is a CPA. She lives in New Providence with her husband, Nick, and her daughter, Catherine. Catherine attends Oak Knoll School. Diahann is scheduled to appear on CNBC's Power Lunch with Bill Griffeth at 12:50 in the afternoon on: 2/3 and 3/2. Our new e-mail service is operating. You can now e-mail an individual directly. Send them an e-mail to their first name followed by @lassuswherley.com. For Pat McCormick and Pat Daquila, use patm and patd, respectively. by Roxanna Pletchan, CPA, CFP® We are continuing our series on Investment Topics. As you may recall from our last three newsletters, we ran a series of articles this past year on investment principles that address some of the typical questions you ask us. Each quarter we highlighted an investment topic that we thought might be of interest to you. This quarter's topic is the final of the series and addresses the tax issues of investments. One of the fundamental principles of taxation, used to evaluate the effectiveness and fairness of tax legislation, says that a person should not be required to pay taxes until they have access to the underlying funds generating the tax. Unfortunately, not all tax legislation adheres to this general principle. If you own a share of stock, the principle applies quite easily in our tax structure. You are taxed on the dividends when they are distributed and taxed on the appreciation when you sell the stock. If you reinvested the dividend, you are still liable for the tax on the dividend. Why, might you ask, when I don't have access to the cash? The IRS views the transaction as two separate ones. First, the payment of the dividend, which grants you access to the cash, and second, the reinvestment, which is actually a purchase of shares of the stock or fund. The gain or loss on the sale of stock, bonds and mutual funds is called a capital transaction. That makes the gain or loss a capital gain or loss. Taxpayers combine all their capital transactions for the year. If the result is a net gain, then a beneficial tax applies where the assets were held for more than one year. Where the net result is a loss, special limitations apply to deducting the loss. When you own mutual funds, the principles of taxation get a bit more convoluted. Our tax system views the mutual fund as a conduit entity. You are taxed as if you owned the underlying assets of the mutual fund directly. If your mutual fund sells a stock at a gain, that gains gets passed to the fund holders in the same form that it was held by the fund. If the gain is a long-term gain for the fund, it is passed through to the fund holders as a long-term gain distribution and taxed as such. Mutual funds operate on fiscal, non-calendar year-ends. They distribute their annual gains to fund holders as of a specific date. You can, in fact, buy a fund a receive a taxable distribution shortly thereafter. LWA monitors the distribution dates for the various funds that we recommend and reviews purchases during periods of expected distribution in taxable accounts. One of the more interesting and frustrating aspects of mutual funds is the situation that occurs when a mutual fund generates taxable gains when the fund itself has had a poor performance year. This happens when the fund has sold stocks in its portfolio, which result in a gain where the current stocks the fund holds have declined in value or performed marginally. As you can see from this discussion, what starts as a simple concept of taxation becomes quite complicated when applied to the complex nature of mutual fund accounting. At LWA, we always monitor your portfolio first for comparison to your goals and asset allocation and second, for tax implications. We will begin a series of articles for the year 2000 newsletters. We are still discussing potential topics. Please let us know what topics you would like us to discuss. by GiGi Collins, CFA If most of the large cap mutual funds have been high flying this past year, then what is happening with the Dreyfus Appreciation Fund? To answer this question, you must look into the fund's portfolio to see what stock it owns. There are two main reasons for Dreyfus Appreciation's underperformance compared to some of its peers. First, it has an under weighting in technology stocks and an over weighting in financial stocks. We all know that technology stocks have been the driving force in this year's high performers. Second, some of its largest stock holdings have been flat this year. So why hasn't the fund reallocated to improve performance? Dreyfus Appreciation's philosophy is not to chase the "hot stocks" or this year's hot market sector. Instead, they prefer to stay with the large or giant blue-chip companies. This makes this fund less volatile and less aggressive when compared to other large cap funds. Also, this fund's long-term performance is one of the best in its category. That makes Dreyfus Appreciation a great fund for your core investment in large cap. Then we can add other aggressive funds from our recommended list when you feel you are ready for more risk. If you haven't yet sent us your e-mail address, please send it in. Send it to robin@lassuswherley.com so we can get you on our list. This is a great form of communication for many clients who are very busy or travelling, etc.
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