Mutual Fund Double Whammy
By Pinyo • Oct 24th, 2007 • Category: Investing, TaxesI just got hammered by a mutual fund double whammy. Since I bought my SSgA Tuckerman Active REIT (SSREX), it lost nearly 6%, then the fund distributed $2.9418 per share last Friday. The end result? The fund is now down almost 20% and I will have to pay capital gains tax on the distribution! Overall, I should have been more careful about having mutual funds in my non-tax sheltered account.
Photo from Wikipedia
What is a mutual fund double whammy?
A mutual fund double whammy occurs when:
- The investor is losing money, because the mutual fund price dropped below the original purchase price (this is the first whammy).
- The mutual fund then distributes its capital gains, and the investor has to pay capital gains tax on the distribution (this is the double whammy).
What am I doing about it?
- I decided to cut my losses early and sold SSREX.
- I used the money to buy Vanguard REIT Index ETF (VNQ) and Vanguard Pacific Stock ETF (VPL)
These changes helped me accomplishes several things:
- Capture the 20% loss from SSREX, which I can use as a tax write off against other capital gains, including the distribution.
- Reduce my real estate exposure from 15% to 8.5%, which I think is more reasonable.
- Increase my international equity exposure from 18% to 26%, specifically adding exposure to the Japan and other emerging Asian markets.
- Reduce my overall portfolio expense ratio from 0.73% to 0.66% (expenses can kill long-term portfolio performance).
Overall, I didn’t think the loss was a big deal, and believe that the changes will make my portfolio more tax-efficient and diversified.
You can track this particular portfolio at my Covestor page.
Carnivals:
- This article was featured in the Festival of Stocks hosted by Financial Alchemist. For more information please visit the Festival of Stocks.
Yikes…that is a scary drop on the chart…ahem..my recommendation..
Asia funds, Asia fund, Asia funds
-Raymond
With all due respect to Raymond, diversify, diversify. Asia funds make up about 15% of my portfolio, but I wouldn’t expose myself heavily to them any more than I would heavily expose myself to the US equity market. Diversification and low fees are the best ways to minimize risk and maximize long-term returns. Dump anything with high fees - I did it a few years ago. Painful in the short term but worth it now.
Great moves - I’d argue that you had a triple whammy if you include the higher expenses of the mutual fund which will end up being the biggest cost over time.
Excellent site.
Mike
@Raymond - I found that many international funds invest very little in Japan and Asian markets. Based on another comment, I chose an Asian fund specifically this time.
@Brip Blap - I agree. I try to limit my investment to no more than 20% in any particular thing. I still have room for improvement though.
@FourPillars - I sounds like a good plan, I hope it does work out. Anyway, reducing cost should work out better regardless. Now I wish I have the courage to get out of my old mutual funds; I am afraid of capital gains though.
Good choice Pinyo, the sign of a good investor is knowing when to cut and run so that you can reinvest elsewhere.