Tax changes help individual, growth stocks

The Ticker

November 12, 1997|By JULIUS WESTHEIMER

WITH THE Taxpayer Relief Act of 1997 bringing many changes, where should you put your money?

"The message is clear," says the November issue of Financial Planning Perspectives, written by the Institute of Financial Planners. "The new tax bill significantly lowers capital gains tax rates on profits made from selling stocks and bonds.

"It is clear that making money from profits, compared with receiving dividend or interest income, is more attractive now than ever. Stocks typically generate more of their return from gains than from dividends. This is the time to overhaul your portfolio."

When overhauling your portfolio, remember:

Growth stocks -- drugs, pharmaceuticals, high-tech, small-cap issues -- are more attractive now than dividend stocks, such as public utilities and real estate investment trusts, because dividends are still taxed at the investors' top personal rate. Growth companies generally plow back most of their earnings into research and development, rather than pay big dividends to stockholders.

Low-turnover mutual funds are more appealing than other funds, because mutuals that hold stocks longer can take better advantage of lower capital-gains rates than funds which sell stocks quickly.

Since maximum long-term stock gains now will be taxed at 20 percent, down from 28 percent, individual stocks are more appealing than mutual funds. You can control how long you hold a stock, but you can't control what a mutual fund does.

An investment should be bought only if it's a sound investment. Certainly, taxes play a part, but they cannot offset poor performance. As we warned before, never let taxes dictate investment judgment.

Even with the new tax bill favoring stocks over bonds, an investment must serve the individual's needs. Many older investors, for example, need at least some income-producing investments with security of principal in their later years.

QUICKIES: If you feel you might hold too much of any stock, ask yourself this question: "If I had cash to invest, would I buy this many shares?" If the answer is no, cut back. Don't let capital gains taxes get in your way.

"With the stock market going haywire in both directions, folks are willing to listen to my gospel: Bonds are a better buy than stocks." (Bill Gross, manager, Pimco Total Return Fund)

"When the dust settles, you may find some real bargains in European small-cap stocks." (Forbes, Nov. 17)

"Don't go bargain-hunting yet. Interest rates will decline, but until they do, the stock market will be a risky place." (R. S. Salomon Jr., mutual fund manager)

Pub Date: 11/12/97

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