Mutual Funds

Know What You Own for Your Own Sake

Know What You Own for Your Own Sake
Know What You Own for Your Own Sake

One unintended consequence of getting a divorce is that it forces people to get their financial houses in order. Often clients come to my office and have little or no idea what is actually in their portfolios, or how much any of it is worth. One of the first things I do when I sit down with clients is to educate them as to what they actually own. We are most often paralyzed into inaction because of fear. We overcome that fear with education! We then discuss both the short-term opportunities and long-term implications of their holdings.

These are some of the questions to consider when evaluating your assets:

  • How many accounts do I have, and what forms do they take?
  • In whose name(s) are they titled?
  • What are the tax implications of each asset? How does that affect my tax bracket? (see next blog article for more on that). 

One discussion I have quite frequently is explaining the difference to clients between two different, but somewhat similar, financial instruments within their portfolio: ETFs (Exchange Traded Funds) and mutual funds.

A mutual fund is a pool of funds collected from many investors for the purposes of investing in securities. An advantage of a mutual fund is that it allows an investor to participate in a selection of securities with a smaller amount of money. Your $100 investment might be able to buy small pieces of many companies for increased diversification.

An Exchange Traded Fund is basically a number of stocks packaged to sell like a single entity - same goal intended; you purchase lots of companies for a set dollar price. There are hundreds of mutual funds and ETFs on the market to sort through and understand.

Mutual funds have been around for a long time now, and most people are relatively familiar with them, but ETFs  are relatively new. Many people do not even know what they are, let alone how it might prove beneficial to their portfolios. Here are some of the key distinctions:

  • ETF fees are significantly less than those of mutual funds: Typically ETF fees range from .5% to 1%, as compared to fees of 1-3% for mutual funds.
  • ETFs can be more efficient: This is because they are traded intraday, not just after the market closes. If there's a buy or sell order you want to place, you can have it executed right away. You don't have to wait for the market to close, and for the managing company to go out and re-calculate its value before being able to make your trade.
  • ETFs allow you to control how and when you pay taxes on any profits you make: Whenever a mutual fund realizes a gain that is not balanced by a loss, the mutual fund must distribute capital gains to all its shareholders. These gains are fully taxable to each shareholder, even if the profits are reinvested. In contrast, holders of ETFs only realize taxable gains when they make the decision to sell their own shares. This leaves the tax planning in the hands of the shareholder him or herself, not a fund manager.

If you are going through a divorce, the first glance at your portfolio may seem like the junk drawer in your kitchen, but that’s why professionals are here to assist you in understanding and evaluating your finances. Organize your accounts and understanding your holdings is critical.

Once all the assets are clearly identified, valued and tax-affected, you will understand how to make better strategic decisions regarding your financial future.

Jennifer Failla, CDFA™
Principal, Strada Wealth Management
Toll Free: 866.526.7098