Fagan Associates Columns

the consumer.  These rules take effect Monday, February 22^nd, 2010.  These changes are outlined below and are mostly taken from a website of the Federal Reserve.  If you would like to visit this site yourself, please go to http://www.federalreserve.gov/consumerinfo/wyntk/creditcardrules.htm.

The first such change is that when credit card companies plan to increase the interest rate that they charge on outstanding balances, they must notify you at least forty-five days ahead.  Furthermore, they must also provide this advanced notice regarding the changing of other terms such as the annual fee charged to have the card, cash advance fees and late fees.  However, this forty-five day rule is waived if you have purchased a card with a variable interest rate tied to an underlying index, a pre-determined introductory rate has expired or you are in a workout agreement and you haven’t kept up your end of the deal.

“If your credit card company is going to make changes to the terms of your card, it must give you the option to cancel the card before certain fee increases take effect.”  However, it is important to note that if the cardholder chooses to “opt-in” to this agreement, your credit card company may close your account, increase your monthly payment and provide an amortization period, all of which are subject to certain limitations.  As an aside, the concerns callers are expressing when they phone our Channel 6 Answers Team is one in which they have opted-in, but the credit card companies have raised their minimum monthly payment so much that now the payment is unaffordable.

You will notice another change when you read over your statement.  These statements from the credit card companies must now include information on how long it will take to pay off your balance if you make only minimum monthly payments.  However, the statement will also include information on how much you will need to pay each month to pay your balance off in three years.  The website noted above provides an example of a consumer with a credit card balance of $3,000 and an interest rate of 14.4%.  The minimum monthly payment is $90.00 in which the card balance will be paid off in eleven years.  However, the table highlights that should the cardholder pay a mere $13.00 more or $103.00 per month, the payoff period drops from eleven years to only three.  Furthermore, the statement details that the customer will save $1,033 in interest that would have been levied.

In addition to these rule changes, credit card companies are no longer allowed to increase interest rates on new cards during the first twelve months unless the rate is one which is variable and tied to an index, is an introductory rate or you are more than sixty days late in paying your bill.  Even so, if your credit card company raises your rate during the first year or at any time thereafter, it can do so only on new charges.

THE BOTTOM LINE – Let’s make this short and sweet.  Americans have spent more than they have taken in over the past twenty-five years creating credit card nightmares for millions.  Are we any happier?  We suggest that we are not.  While discussing this issue with our Dad and Mom, he noted that with six kids a night out was a treat and not a routine event.  We remembered evenings of playing Monopoly and Bingo and not sitting in front of a 50” television.  We thought we were rich.  He reminded us the other day we were not.  Perhaps we can all learn from this.  Life is about relationships, experiences and spending time with the ones you love.  That is what we will remember when all is said and done.  It is not about who acquires the most toys.  Spend within your means.

This article is the first of a four part series that pertains to year-end financial planning.  The articles will appear on consecutive Sundays over the next four weeks in “The Record” and include, in order, this article, “Year-End Tax Planning for Shareholders of Mutual Funds; “Year-End Charitable Bequest Planning” and “Investment Portfolio Re-Balancing for the New Year.” Following this series, we will provide readers with a Review of 2009 and our Investment Outlook for 2010.

One of the least time consuming and most profitable tasks one can assume during December as it pertains to their investment portfolio is to attempt to offset realized capital gains with capital losses in your portfolio.  Calendar year came in like a bear and went out like a bull.  In fact, through early March the major indices were down more than twenty percent.  Couple this with the fact that 2008 was a horrible year for stocks and there is a good chance that investors some securities that have declined in market value relative to their purchase price.  Assuming that the shares of the depreciated security are held in a non-qualified taxable account (not an IRA or pension plan), one might sell these shares and claim the loss on Schedule D of Federal Filing Form 1040.

Please note the following important IRS regulation that pertains to Capital Gains and Losses.  If when comparing your realized (those securities sold or where the company has been purchased for cash by another company) gain with your realized loss, the net result is a loss, only up to $3,000 can be deducted from ordinary income.  The balance can be carried forward, indefinitely.

An additional component to consider prior to realizing a capital gain or loss in your portfolio is whether the transaction would trigger a long-term versus short-term capital gain/loss.  Long-term transactions are defined as those in which the underlying security has been held for one year or longer and are generally taxed at either zero percent for those taxpayers that are in the 10% to 15% marginal tax brackets or at 15% for those in the twenty-eight percent bracket.  Short-term transactions, those which the security has been held for less than one year are taxed as ordinary income and subject to the same tax rate as your wages or dividend income.  For most taxpayers, the rate is twenty-eight percent for the Federal Government.  In both instances, for taxpayers in New York State, long-term and short-term capital gains are taxed as ordinary income.

One final consideration prior to executing a stock or bond trade for tax purposes would be to determine if, by executing this trade, a wash sale would result.  A wash sale exists when the transaction results in a loss and a “substantially identical security” is purchased within thirty days.  If this should occur, the tax loss created by the sale would not be deductible.  Please note that should the wash sale result in a gain, the gain is taxable.

As an aside, never forget that it is always prudent to consider the impact of selling a stock upon your portfolio.  Simply put, it is seldom wise to make a transaction solely for the purpose of saving money on your tax return!

A sale or sales of appreciating and/or depreciated securities represent only one tactic an investor can deploy when tax planning at year end.  Furthermore, please note that this decision must be made in conjunction with and in full knowledge of the resulting impact on your other investments, such as mutual funds.  Be certain to check with your tax advisor prior to making any year-end portfolio transactions!

This time of year, we all have a lot on our minds.  If you are like us, you are still raking leaves and cleaning up the year.  For our family, it is certainly time (and perhaps a little past time) to begin to get ready for the holidays and unfortunately, it will soon be time to retrieve our snow shovels.  As calendar year 2009 draws to a close, it is also time to clean up your portfolio and begin to prepare for next year.  With this in mind, we have put together a small list of some “portfolio chores” that may put more bucks in your wallet in the form of tax savings.  Please note that some of these suggestions only pertain to investments in non-qualified or currently taxable accounts.

Despite the recent rally, as of this writing the Standard & Poor’s 500 remains nearly thirty percent below its record high set back in early October 2007.  For this reason, it is likely that many of our readers have stocks that are well below your purchase price.  However, you may also believe in the long term growth prospects of the investment.  Assuming the investment is in a taxable account (non-qualified), one might double up on the current share balance in an investment, wait thirty days, and then sell the shares he/she initially held.  The benefit would be a deductible loss on the shares you ultimately sold without losing your position in the security.  The risk would be that over the next thirty days, the stock declines thereby increasing your loss due to the additional shares.  Another risk would be that your portfolio becomes too heavily weighted in a particular stock or industry for those thirty days.  Nonetheless, the widely practiced strategy merits a look.  Here’s how it works.  Let’s assume that you purchased 100 shares of General Electric at $50.00 per share.  Despite the climb from its lows to its current prices of approximately $16.00, you have still lost $3,400 in this investment.  According to the “doubling up” model, you would purchase another 100 shares of G.E. at its current price, wait thirty days and then sell your initial shares.  This exercise would enable you to deduct the loss on G.E. up to a limit of $3,000.  It would also not compromise your investment in G.E. over the next thirty days, should the stock begin to move upward.

One thought regarding the above paragraph, take out your calendar year 2008 Federal Income Tax return, look at Schedule D and determine if you are carrying forward any losses beyond the $3,000 limit mentioned above.  If you are, include this in your year-end investment planning.

Call your mutual fund and ask them if they are planning any year-end distributions.  Do not add insult to injury by having to pay taxes on capital gain distributions despite the fact that you are losing money in the fund.  Remember, capital gains declared by mutual funds are taxable despite the fact that you, as an individual, may not have benefited from the investment, and may indeed be losing money.  Furthermore, that capital gain is taxable despite the fact that you may be reinvesting in additional shares.  Upon calling, should you learn that your mutual fund is intending to declare a capital gain, find out how much it will be on a per share basis and on what date it will be paid.  This information will help you determine what steps need to be taken in order to minimize the impact.

Swap the mutual fund that you are losing money in for a similar fund.  Two thoughts pertain to this statement, the first being that, given the fact that there are over seven thousand mutual funds to choose from, there is always an appropriate alternative for your current fund.  The second thought is more of a reminder.  Remember that your basis for tax purposes in your investment consists of any out of pocket deposits you have made into the fund plus any dividends and/or capital gains that you have reinvested into the fund either during this calendar years or prior years minus any withdrawals you have taken from the fund.  Once again, given the length and depth of this bear market, many investors may be in a position that they are losing money when comparing the current market value of their fund versus their cost basis.

Finally, keep in mind that the Internal Revenue Service suspended all Mandatory Retirement Distributions for 2009 due to the poor market conditions that existed during 2008.  Therefore, if you do not need the money to maintain your standard of living, there is no need to take a distribution.

Don’t wait.  Take a couple of hours to clean up your portfolio.  Our guess is that it will be time well spent.  We will be touching on other tax-savings techniques regarding your investments in the coming weeks.

Sure, we could write a column that you might find more interesting than what you will find below.  However, what the Open Market Committee of the Federal Reserve (FOMC) does or does not do and what the FOMC says or does not say has a profound and lasting impact on the economy and therefore interest rates, stocks and bonds.  This past Wednesday the FOMC concluded its two-day meeting and, as they always do, issued a press release, detailing policy action and the rationale behind their decision.

The press release begins on an optimistic note, stating that “information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up.”  Implied within this statement is the belief by the FOMC that we are at the end of the recession and quite possibly at the beginning of recovery, one which remains somewhat fragile at this time.

The second noteworthy observation by the FOMC, summarizes the financial challenges faced by millions of Americans.  “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”  At this point in time, the Fed appears to be encouraged by the pace at which the economy is recovering from the worst recession in nearly three decades, but wary that the recovery will be one that lasts.

After addressing the challenges faced by consumers, the Fed turns its attention to how businesses are coping with the slowdown.  “Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.”  The belief of many is that once the recovery begins, there is the likelihood that the rate of growth will be subpar when compared to past recoveries, hence the wording “bringing inventory stocks into better alignment with sales.”

Finally, the FOMC addresses another concern of many, that due to the expansionist monetary policy, inflation is becoming an issue.  “With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”  Two thoughts, one, we believe that inflation will perhaps become an issue down the road.  But, two, at this time, we believe that it is a “back-burner item.”

Going into the meeting economists as well as market pundits were concerned with the portion of prior releases that pertained to inflation.  For example, after its meeting in September, the Fed concluded that the “Committee expects that inflation will remain subdued for some time.”  Some believed that, given the pick-up in economic activity, the words “for some time” would be removed, thus indicating that the Fed would perhaps raise rates sooner rather than later.  Obviously, the words “for some time” remained, which, in our opinion, indicates that the Fed has no intentions of raising interest rates any time soon.  We believe that given the fragile nature of the recovery, this is wise.

THE BOTTOM LINE – Don’t expect the Fed to raise interest rates any time soon.  In fact, rate hikes will most likely not occur until the latter part of the second quarter or even the third quarter of 2010.  The result will be a continuation of low interest rates for borrowers, and unfortunately, low interest rates for holders of Certificates of Deposit and Money Market Accounts.

Every once in awhile, several topics arise that merit comment, but are either not sufficient in scope or are merely meant as “food for thought” and do not command a full column.  This is one of those times.  Therefore, what follows is some commentary pertaining to the market or perhaps investing that we believe are very worthy of mention.  We’ll even give our take, where appropriate.

We remember back to early March, when understandably, investors were rattled and indeed, after meeting with them, less than a handful of our clients called to get them out of their investments until “things looked better.”  We candidly informed them that the stock market is an anticipatory mechanism, anticipating economic activity six to nine months down the road and will move prior to receiving confirmation that the economy is recovering.  Indeed, stocks moved during these dark hours and have not looked back, rising more than fifty percent on all of the major averages.

An observation that we have made several times within the body of recent columns in The Record and over various other medium, the final half of the move downward on stocks, from let’s say Dow 10,000 to where it bottomed at 6,547 on March 9^th, 2009 was driven by panic.  The move back up has been a recovery of that panic.  Our take is that now we will have to earn the gains.  The easy money has been made and now stocks will respond to the efficiency and effectiveness of the stimulus package and a pick-up in personal consumption, which represents nearly 70% of the U.S. economy.

A follow up to the preceding paragraph, this is not the popular poker game, Texas Hold’em.  Investors should not go “all in” or for that matter “all out” unless their situation changes.  Everything in moderation.  If you are bearish, then scale back your allocation to the stock market.  If you are bullish, then increase that exposure.  However, make certain that your asset allocation, that is your percentage allotment to stocks, bonds and cash should conform to your long-term objectives.  The further out your objectives are, generally speaking, the higher percentage an investor would allocate to stocks.

Don’t let your politics completely cloud your investment philosophy.  We’re not making a political statement, but with several hundred clients, let us tell you that some disliked George W. Bush with a passion and some dislike President Barack Obama with that same level of disdain.  Please keep in mind that your political bent can cloud your belief in our economy and therefore the stock and bond markets.  Furthermore, should you be conservative in nature, listening to, watching and conversing with those similar in opinion to you, chances are, at this point, you are not very bullish on the stock market.  However, recognize that you were also not very bullish back in March, some fifty percent ago.  Bottom line, invest according to your objectives.  We believe that politicians will come and go, but the spirit of America is lasting and the vibrancy of the economy is cyclical and this combination will outlast politicians, with both sides of the political aisle well-intended, but sometimes misguided.

Invest on a regular basis.  Investors tend to not invest near the bottom of the market cycle, believing that by so doing are throwing good money after bad.  Conversely, now we are getting a continuous stream of calls.  We believe that stocks, bonds or mutual funds that invest in these areas are, for most of us, the best path in which to achieve wealth.  It does not guarantee it, but, if history is any guide, is your best chance.  Therefore, invest regularly, in good times and in bad, according to your objective, time horizon and tolerance to risk.

That’s it.  Some issues, thoughts that we had to get off of our mind.  I hope at least one of these gets you closer to your financial objectives.  The BOTTOM LINE, think for yourself.  Don’t be part of the herd and recognize that, if history is any guide, it is time IN the market and not timing OF the market that will ultimately pay off.

Break out the party hats, this past Wednesday the Dow Jones Industrial Average closed above the psychologically important 10,000 mark for the first time since closing at 10,325 on October 3^rd, 2008, finishing at 10,015.86, buoyed by positive earnings reports from tech-giant Intel and JP Morgan.  Like the proverbially roadrunner, stocks have moved more than fifty percent off their bottoms set in early March 2009, but like that gerbil running frantically along the wheel in a cage (sorry for the analogies), they have gone nowhere for more than a decade.

For others like us who have been in this industry for over a quarter of a century, it is important to put this milestone into context of what has transpired over the past six months, over the past year and indeed over the past decade.  That, and to answer the question, what does this move in the Dow along with the other more important, broader indices mean for investors, and where do we go from here is the intention of this column.

First and foremost, the Dow first closed above 10,000 back on March 29, 1999, closing at 10,006.  Peter Boockvar, equity strategist at Miller Tabak, did some research and discovered that back on this date gasoline was $1.20 per gallon and gold was $280 per ounce as compared to $2.50 per gallon and $1,060 per ounce today.  Furthermore, the total U.S. debt back in March 1999 was $24.6 trillion as compared to the total today of $50.8 trillion while the U.S. population was approximately 272,690,000 back then as compared to 304,000,000 now.

Has it been ten and one-half years of little or no movement in this closely watched index?  Of course not.  If you’ll put on your memory caps, , as the fourth quarter of 1999 came to a close, academicians and computer geeks were all worried about what would happen to computers when the calendar turned to 2000.  This “Y2K” issue was supposed to cause computers to crash and bank accounts to appear empty.  This did not happen.  However, what did happen was an historic doubling in the tech-heavy NASDAQ Composite in less than a year, beginning March 29, 1999 that eventually culminated in a subsequent eighty percent collapse in the index, a collapse now known as the “pricking of the dot-com bubble.”

The Dow, comprised of a cross-section of U.S. Industry fared much better during this collapse, but could not overcome one of the darkest days in our nation’s history, September 11, 2001.  The Dow closed at 10,033 on September 5, 2001 and three days later at 9,606 on Friday, September 7.  The attacks occurred and miraculously the New York Stock Exchange was shut down for just five trading days before reopening on September 17^th.  The attacks as well as the fact that American economy was mired in a recession, was too much for stocks to overcome.  This combination, along with illegalities surrounding Worldcom and Enron pushed the Dow down to a then low of 7,286 one year later.

Despite the wars in Iraq and Afghanistan, the Dow began to push its way higher, closing back above the 10,000 mark on December 11, 2003, its first time above this benchmark in over 1½ years.  From that point on, the Dow climbed higher, peaking ultimately at a record 14,164.53 on October 9, 2007.  However, the economy once again entered a recession and this time, it was brutal.  As a result of shoddy verification procedures as well as complicated mortgage-backed securities, Housing Prices collapsed and foreclosures mounted.  Too add insult to injury, unemployment which once stood at under five percent within the past three years, is now approaching ten percent.

Since that top back in early October 2007, the Dow fell 53.78% to 6,547.05 on March 9, 2009.  However, from then it has vaulted nearly fifty-three percent to where it closed Wednesday, 10,015.  We noted above, that the last time the Dow closed above 10,000 was back on October 3, 2008.  It is important to note that one day later, the Dow closed at 9,955 some 3.6% lower than the previous day.  The downward spiral had intensified and fear of a collapse in our financial system reigned.  Finally, investor panicked and then buyers stepped in.

THE BOTTOM LINE – Investors are convinced that despite the fact that we experienced a deep recession, it is indeed coming to an end and we a depression was averted.  This cross back over 10,000 feels good because it is on the way up and not the way down.  The economy, at least for the next two to three quarters should be experiencing an upturn and that bodes well for stocks.  We believe that given this scenario, we would add to positions in your mutual funds or individual holdings on pullbacks.

There is an old saying on Wall Street that “stocks climb a wall of worry.”  Undoubtedly, we live during a period of worry.  Worry that outsourcing to other countries is killing American industry; worry that Social Security will not be there when we need it; worry that the budget deficit will result in spiraling interest rates; worry that terrorists will strike again.  With this in mind, and despite the recent run-up, investors are scared to death of stocks and would love to be out of the stock market so then they would have cash to invest!

The moral of this humorous statement is that most individuals realize that now is a good time to invest, but are too afraid to do so.  This accounts for the billions of dollars of cash still on the sidelines and in risk-free investments such as Certificates of Deposit or Money Market accounts.  Prior to making a decision, Benjamin Franklin, utilized the “T” method, writing the positives on the left of the “T” and the negatives aspects of the decision on the right.  The result was a clearer picture of the factors impacting the decision and whether or not the positives outweigh the negatives or vice-versa.  With this in mind, let us utilize this method, first concentrating on the right side of the “T,” the negatives.

The negatives include headline risk, or the risk that the company you decide to invest in announces news that negatively impacts the share price of the stock.  This risk is evident in a press release by Research In Motion this past week, in essence stating that it’s revenue and earnings growth would not be up to what Wall Street expected.  Headline risk may also pertains to acts of terrorism abroad that tend to move the markets and therefore your stocks.

Another negative includes the risk of future terrorism in the United States.  President Obama as well as the majority of the officials in his Administration refer to the potential for terrorism in the United States as not an “if” but a “when.”  We believe that this realization by investors continues to weigh down stock prices.  Only time will mitigate this concern.

Corporate governance issues also weigh on the minds of investors.  We often field the question, “do we own any potential Bear Stearns or Lehman Brothers.”  We respond that there is very little that an investor (or a regulator for that matter) can do to completely eradicate fraud.  What we can do is invest in quality companies with strong balance sheets and diversify your holdings so that one “blow-up” will not severely comproimise your portfolio.

Fundamental valuations also pose a risk to stock prices.  At the conclusion of most bear markets, valuations are approximately one-half of what they are today.  That said, we believe that what most of the bears are overlooking are the facts that stock valuations respond inversely to interest rates and that earnings are low due to the current state of the economy.

The above represents the right side of the “T” or the bear side of the argument.  Now for the left or bullish side.  First and foremost, the recovery is beginning to take hold despite the fact that approximately only one-third of the stimulus money has filtered through to the economy.  Included in this conclusion are the facts that business inventories are low, the housing market is stabilizing, interest rates are low, inflation is tame and consumer sentiment is on the rise.

Another reason for the bullish side is that there exists a record amount of cash on the sidelines, both in absolute terms and relative to total stock market capitalization thereby providing potential fuel for equity prices once investors feel they can safely re-enter.

A final reason for the bullish side is old-fashioned greed.  The only emotion greater than greed is fear because with fear comes self-preservation.  Until recently, the bears have fed on this sense of fear.  However, we now believe that the fear selling is over and we are in the midst of transitioning from fear-driven selling to greed-driven buying.

That is it.  Come up with some further issues for the market to contend with.  Then determine when it is appropriate for you to re-enter.  As far as we are concerned, and despite the potential for a pause, one that we believe would be one to refresh, now is a very good time to put money to work.  We believe that five years from now, when you look back, you will be happy that you took the plunge.

Periodically, the Open Market Committee of the Federal Reserve meets to determine, amongst other things, the direction of interest rates.  One such meeting concluded this past Wednesday and from it, according to their press release, came some very interesting observations.

The release notes that “conditions in financial markets have improved further” since they last met during August and “activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit.”  The key word within this portion of the policy statement and the main reason for the recent run-up in the stock market is “stabilizing.”  Think back to one year ago when first Lehman Brothers fell to be followed shortly thereafter by the collapse of American International Group (AIG), investors of all kind were in a state of panic as there was apparently no safe haven.  Even the most conservative investors, those that invested in banks, were worried.  The belief was that the United States was headed into a depression.  Fast forward ahead to early March 2009 when, in hindsight the stock market bottomed.  It did so amidst a sea of discouraging economic news as well as a preponderance of consumer and investor pessimism.  Therefore, stabilization, although perhaps not adequate enough now to move the stock market higher, is a step in the right direction.

The press release observes that although “businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.”  In other words, the supply out there is somewhat in proportion to current demand.  Furthermore, “the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.”  There is that word again, “stabilize.”  What we gather from this paragraph is that the Fed sees a stabilization of economic growth with little inflationary pressures, at least in the foreseeable future.  In fact, the Fed goes on to state that “with substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”

Concerns of economists are now beginning to center around the question of “how do we exit this period of easy monetary policy and quantitative easing?”  The Fed begins to address this issue.  “In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”  However, “the committee will gradually slow the pace of these purchases (agency mortgage-backed securities and agency debt) in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.”  The phrase “gradually slow the pace” is the equivalent of the Fed taking away the punch bowl, and to mix metaphors, eventually passing the lending baton to the private sector.

THE BOTTOM LINE comes with the assurance that “the Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.”  With this in mind, we believe that this accommodate policy by the Fed along with the Obama Administration makes for an attractive investing environment, one in where, we believe, that the risk is being out rather than in.

Given the fact that the stock market has run-up more than fifty percent from its closing low set just this past March 9^th and almost everybody is telling you to buy, we thought it would be a good idea to identify at least some of the reasons why one might sell.  Although there are many more reasons than those listed below, we thought limiting the number to ten might be a good idea.

The first reason for selling is that your situation has changed which may require a change in your asset allocation.  Perhaps you have an upcoming college tuition bill, a wedding or your retirement looms in the near future.

The second reason for selling pertains to a change in the objective of the fund or perhaps an inadvertent drifting away from its objective.  This can be as a result of the fund growing too large.

Reason number three, the fund is underperforming relative to other similar funds over an extended.  Remember to always try to improve your portfolio.

Reason number four, the mutual fund has changed managers or its management.  Many times the individual responsible for all of those gains is no longer at the helm.  This is a yellow light.

Reason number five, the fund has high expenses relative to other similar funds.  These days, gains are hard enough to come by without being encumbered by high fees and expenses.  Your job is to weigh the fees relative to the returns generated by the fund given the level of risk you are assuming.  Keep in mind that these fees can change over time and also these fees can be more onerous than other investment alternatives such as Exchange Traded Funds (ETFs).

Reason number six, after this fifty percent run-up off the bottom, perhaps you should rebalance your portfolio.  This would entail selling some of one fund and buying into another.

As we enter the final quarter of 2009, for non-qualified, taxable accounts investors should investigate selling one of their funds to claim a loss on their tax return.  For example, high yield funds may be solid performers, but given the fact that you pay tax on the interest/dividends every year, there may be an accumulated capital loss.

Reason number eight, you may own too many funds.  Consider selling one to improve the quality of your portfolio and to reduce the number of holdings.  Many investors are like kids in candy stores and accumulate way too many funds.  This generally results in mediocre performance, something we wish to avoid.

Reason number nine.  As many of you may have found late last year and early this year, you over-estimated your tolerance to risk.  Now with stocks in an uptrend you are able to look objectively at your portfolio without the emotional turmoil you might have experienced near the lows six months ago.  Determine your objectives and allocate your assets according to your risk tolerance, keeping in mind how you felt a while back.

Finally, the tenth reason you should sell a mutual fund is if you have some overlap of objectives within your portfolio.  Perhaps you have two or three “large-cap, growth” funds.  It may be time to trim one position keeping in mind reasons one thru nine prior to doing so.