Year-end paperwork: Don't just file it

Your Funds

Your Money

February 01, 2004|By CHARLES JAFFE

Now that your fund's annual statement has arrived, it's time to do the right thing with your paperwork. That means something more than filing it away.

Your final statement from 2003 should show all of your account activity - purchases, redemptions, gains payouts and the like - from the calendar year, making it a valuable tax document for the future. It makes every other account statement you got last year from the fund obsolete.

If you're the average investor and hold on to funds for years, not months, the monthly statement or the account activity sheet that comes with the occasional fund purchase serves more to create a fire hazard than to provide valuable information in the files.

Here's why: Say your March statement showed monthly deposits you made during the first three months of the year. Those purchases are shown again in the year-end statement, so there is no reason to hang on to the older sheet any more.

Shred the 11 statements you got earlier in the year and keep the year-ender. (Be sure you destroy all account numbers and personal information as you toss the older paperwork. You want to purge the extra papers but you don't want to become a victim of identity theft.)

Over the years you own a fund, having all of the year-end statements will allow you to identify specific shares you might want to sell. This involves notifying the fund company in writing to say you are unloading specific lots of shares purchased, which allows you to take a loss or minimize your taxable gain as you alter your portfolio.

It also gives you information on all of the dividends and gains that were reinvested into the fund, which allows you to properly adjust your cost basis over time (failing to do this, you would pay taxes twice on those distributions).

In short, you lose nothing but the extra paperwork.

But in taking the time to file away the year-ender and review the older materials, you also gain the chance to update some of the most important paperwork you keep on a fund. If you're like most investors, it's paperwork that you don't even have now.

Whenever you buy a mutual fund, the first thing that should go in your files is a list of your reasons for making this specific investment choice.

All of the key factors should be there, from the ratings the fund gets from firms like Morningstar or Lipper to the account minimums, management style or other factors that put the fund at the top of your purchase list.

Included on that list of reasons for buying the fund should be your performance expectations and what you hoped the fund would deliver.

The paper allows you to look back and review your thinking so that you can adequately answer the question: "Would I buy this fund again today?"

It also allows you to see whether a fund has measured up to your expectations. That helps you stay the course in a fund, rather than jumping to the hottest issue on the most recent performance charts.

When you file the year-end statement, review the original statement on why you bought the fund to see if it has met your expectations. It will help you decide whether a change might be warranted.

If you never wrote the why-I-invested sheet when you first invested, it's never too late to start.

Instead of writing why you bought the fund, however, write why you still own it. In this way, any factors that might have changed - you might have first invested in a low-minimum fund years ago when you could only afford to save a few bucks - are excluded from your analysis.

The exercise of writing why you still own the fund will force you to go back and do some new analysis - when was the last time you checked the fund's ratings and rankings? - and decide whether you would buy the fund again today.

In the end, you clean up your paperwork, analyze each issue in your portfolio and decide whether you will want to get a year-end statement next year.

That's a lot better than just letting the statements pile up.

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