Mutual Fund Double Whammy

By Pinyo, on October 24, 2007

I 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:

1. The investor is losing money, because the mutual fund price dropped below the original purchase price (this is the first whammy).
2. 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?

1. I decided to cut my losses early and sold SSREX.
2. I used the money to buy Vanguard REIT Index ETF (VNQ) and Vanguard Pacific Stock ETF (VPL)

These changes helped me accomplishes several things:

1. Capture the 20% loss from SSREX, which I can use as a tax write off against other capital gains, including the distribution.
2. Reduce my real estate exposure from 15% to 8.5%, which I think is more reasonable.
3. Increase my international equity exposure from 18% to 26%, specifically adding exposure to the Japan and other emerging Asian markets.
4. 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.

This article was featured in the Festival of Stocks hosted by Financial Alchemist.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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