Like what you hear? Help us out by writing a review at iTunes. Questions go to money@qdnow.com. Thank you!
Money Girl
099 MG Can You Lose When You Gain?
Hey, Fidelity. What's it cost to invest with the Fidelity app? Start with as little as $1 with no account fees or trade commissions on US stocks and ETFs. Hmm, that's music to my ears. I can only talk. Investing involves risk, including risk of loss. Zero account fees apply to retail brokerage accounts only. Sell or assessment fee not included. A limited number of ETFs are subject to a transaction-based service fee of $100. See full list at Fidelity.com/commissions. Fidelity brokerage services LLC member NYSE SIPC. Are you struggling to close deals? Cold outreach is wasting the time of both the buyer and seller at every stage, especially when sellers are using outdated data. Your organization can overcome these challenges with LinkedIn Sales Navigator, the first deep sales platform. Right now, you can try LinkedIn Sales Navigator and get a 60-day free trial at LinkedIn.com/trial. That is LinkedIn.com/trial for a 60-day free trial. At LinkedIn Sales Navigator, help you sell like a superstar today. Hello, and welcome to Money Girl's Quick and Dirty Tips for a richer life. I'm your host, Laura Adams. This episode is about the advantages and disadvantages of investing in mutual funds. As we all know, many people have lost investment money due to the stock market volatility in recent weeks. It's been a tough time for the vast majority of investors, but what's really tough is losing money in your mutual fund and then having to pay taxes on that losing investment. Let me explain. Even though many mutual funds have suffered big losses, some still have capital gains. A capital gain is simply the difference between the amount you pay for a capital asset when you buy it and the amount you receive for that investment when you sell it. If you make a profit from the sale, you have a capital gain that's taxable. If you lose money from the sale, you have a capital loss. Capital gains are allowed to be offset by capital losses. A situation where you owe tax even if you experience a negative return on investment is called a phantom gain. No, that's not a leftover joke from Halloween, phantom gains are common in a down market like we've experienced lately. They can occur when investors decide to get out of a declining fund. If the investor wants to sell, the mutual fund may have to raise money to pay the shareholder. The fund would do this by selling investments, even profitable ones. If you're not familiar with mutual funds, they're companies that invest in stocks, bonds, money markets, assets, and other securities, or a combination of these. The investments that a mutual fund owns are called its portfolio. It's a convenient package of many individual investments that would be complicated for a typical investor to manage on their own. Mutual funds allow people without financial experience to easily invest small or large amounts of money. But there's a big difference in how capital gains are handled with mutual funds versus with individual securities. When you buy and hold a stock, for example, you pay tax each year on what you earn. The income could come from interest earned or from dividends received. But you don't pay capital gains tax until you actually sell the stock and bank a profit. With mutual funds, this same information is true, but in addition to paying personal capital gains tax on shares you sell and profit from, you also have to pay the price to pay taxes each year on the funds capital gains. This is because U.S. tax law requires mutual funds to distribute capital gains to their shareholders. And these distributions are taxed at the long-term capital gains rate, no matter how long you've owned the shares. So if a mutual fund manager sells some of the underlying securities for a profit, which can't be completely offset by a loss, they must pass the taxable gain along to shareholders. This happens even if the fund had poor performance after you bought it. Does this mean mutual funds are bad investments? Absolutely not. Mutual funds offer shareholders great benefits such as professional management, diversification, liquidity, affordability and convenience. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans or travel, planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but policy genius makes the process a breeze. With policy genius, you can find insurance policies that start at just $292 a year for a million dollars of coverage. Some options offer same-day approval and avoid unnecessary medical exams. Policy Geniuses technology lets you compare quotes from America's top insurers in just a few clicks to find your lowest price. It's the country's leading online insurance marketplace. And if you ever need help or guidance, they have an expert license support team to answer your questions, handle all the paperwork and advocate for you throughout the process. It's never too late to plan ahead – go to PolicyGenius.com or click the link in the description to get your free life insurance quotes and see how much you can save. That's PolicyGenius.com. Are you struggling to close deals? Cold outreach is wasting the time of both the buyer and seller at every stage, especially when sellers are using outdated data. Your organization can overcome these challenges with LinkedIn Sales Navigator, the first Deep Sales platform. Like now, you can try LinkedIn Sales Navigator and get a 60-day free trial at LinkedIn.com/trial. That is LinkedIn.com/trial for a 60-day free trial. Let LinkedIn Sales Navigator help you sell like a superstar today. AI might be the most important new computer technology ever. It's storming every industry and literally billions of dollars are being invested. So buckle up. The problem is that AI needs lots of speed and processing power. So how do you compete without cost spiraling out of control? It's time to upgrade to the next generation of the cloud, Oracle Cloud Infrastructure or OCI. OCI is a single platform for your infrastructure, database, application development, and AI needs. OCI has four to eight times the bandwidth of other clouds, offers one consistent price instead of variable regional pricing, and of course, nobody does data better than Oracle. So now you can train your AI models at twice the speed and less than half the cost of other clouds. If you want to do more and spend less like Uber, 8x8, and Databricks Mosaic, take a free test drive of OCI at Oracle.com/advanced. That's Oracle.com/advanced, Oracle.com/advanced. But every investment vehicle has its pros and cons. I want to make you aware of a couple more disadvantages to mutual funds to simply keep in mind. Number one, most charge fees. Mutual funds can be expensive to operate. That's why investors get hit with annual fees and sales commissions, regardless of a fund's performance. However, there are some no-load funds that can minimize management fees. If you feel comfortable investing without the services of a broker, consider buying mutual funds directly from a no-load fund family to save on expenses. And another disadvantage of mutual funds is that share prices are calculated just once a day. This is in contrast to an individual stock, for which you can monitor price changes minute by minute if you like, by checking websites such as eTrade.com or scottrade.com. But because a mutual fund is made up of multiple securities, its price depends on the fund's net asset value, or NAV, which is calculated at the end of the trading day. But if you rarely reallocate money or buy and sell funds within a fund family, this may not be a problem for you. One way to eliminate taxes on mutual fund distributions is to buy them within a retirement account. This is because retirement accounts, such as IRAs and 401Ks, are examples of tax-deferred accounts. That means your profits are not reported as capital gains. You don't get hit with any taxes until you take your money out. At that time your profits are taxed as ordinary income, not capital gains. But if you own mutual funds outside of a qualified retirement account, be prepared for any possible tax liability this year. Many mutual funds ended their fiscal year at the end of October, so be on the lookout for their distribution estimates so you can plan accordingly. Here's a tip if you're investing in mutual funds in a taxable account. Consider waiting to buy more shares until after the fund has made any capital gains distribution for the 2008 tax year. I'll put a link in the show notes to IRS Publication 564, which contains in-depth information about the taxes associated with investing in mutual funds. I'm glad you're listening. Find a transcript of this show as well as all contact information at moneygirl.quickendertitips.com. Cha-ching. That's all for now. Courtesy of Money Girl, your guide to a richer life. [music] [music]