Maybe Time To Dump Dogs

Faced with a big and complicated batch of new tax rules, most mutual fund investors don’t seem to be in any hurry to change their strategies.

There’s no evidence, for instance, that they have reacted to lower tax rates on long-term capital gains, under the tax bill signed into law a few weeks ago, by scrambling to sell fund shares on which they have accumulated profits.

In the eyes of financial advisers, this is all to the good. Most of the best uses of mutual funds involve holding patiently for the long term, not maneuvering constantly because of ancillary issues like taxes.

Nevertheless, it’s certainly logical to take the occasion, as you study the reshuffled tax system, to review what you own and where you want to go from here.

“This is a good time to sell dogs that you’ve been holding purely for tax reasons,” said Sheldon Jacobs in his newsletter, The No-Load Fund Investor. “Switch into better-performing funds.”

The top tax rate on long-term capital gains for most fund investors has been lowered from 28 percent to 20 percent, while the holding period to qualify for long-term status has been increased to 18 months.

Following Jacobs’ suggestion, you might consider selling an investment now in a fund that you bought years ago, when it was turning in strong performance but that has been languishing in recent years, perhaps after a change of managers.

For longer-term investment planning purposes, note that the tax-rate differential has grown between long-term gains and ordinary income, which can be taxed at rates as high as 39.6 percent.

“As the spread between ordinary-income and capital gains rates widens, you’re going to want to favor long-term capital gains over income,” said Eric Kobren, an adviser in Wellesley Hills, Mass.

Kobren said income-conscious investors have a fresh incentive to look beyond dividend- and interest-paying investments and to consider using partial periodic redemptions of stock-fund shares as a way to meet some of their cash-flow needs.

Kobren isn’t suggesting a sudden lurch into riskier investments. But in the new scheme of things, he said, “selling off some of your old Fidelity Magellan shares to meet current living expenses may make more sense.”