Every Wednesday, Legg Mason Wood Walker financial adviser
Jonathan Murray answers e-mail on your investments. To be included
next time, send
your questions.
> From: Goldstein, Jon W.
Sent: Tuesday, March 26, 2002
To: ‘Murray, Jonathan P.’
Subject: $
Hello Jonathan,
The tax deadline is breathing down our necks and our first question is from someone looking for some filing help.
I am trying to help a friend with their taxes. They have some BGE
stock
that was purchased in February 1995. Would you let me know where I
can
find out how much they would have paid for those stocks? I called
BGE
and
couldn’t understand their terminology. Any advice would be
appreciated.
Marilyn
From: Murray, Jonathan P.
Sent: Tuesday, March 26, 2002
To: Goldstein, Jon W.
Subject: RE: $
Dear Marilyn,
You may have been confused about any adjustments in cost basis due
to stock
splits or dividends. You see, every quarter, many stocks like BGE
(now
Constellation Energy) pay a dividend. If your friend has been
reinvesting
those dividends into the purchase of additional shares, every one of
those
little purchases has its own, separate cost basis that you need to
factor
into your total.
What’s more, every time a stock splits, you need to adjust your
basis
accordingly. For example, if a stock splits 2:1, and you originally
purchased 100 shares at $20/share, you now have 200 shares with a
cost basis
of $10/share.
According to one source (you can find several historical pricing
sites on the
Internet), if your friend has been buying the shares every quarter
since
February 1995, then the split/dividend-adjusted cost for her is
about
$17/share, even though on her original purchase date of February
1995, the
shares were trading at approximately $24 1/2.
Make sure that she
sees a
qualified tax expert on this who can confirm your data.
> From: Goldstein, Jon W.
Sent: Tuesday, March 26, 2002
To: ‘Murray, Jonathan P.’
Subject: $
When choosing mutual funds, while I understand that
although past performance is not a guarantee of future success, it
is
nonetheless a significant factor to consider. In using past
performance
as a
yardstick, how far back should one go before getting to diminishing
returns? Is five years significantly better than 10 or is seven the
best
number?
Joe
From: Murray, Jonathan P.
Sent: Tuesday, March 26, 2002
To: Goldstein, Jon W.
Subject: RE: $
Hi Joe,
You are correct (sir)! Past performance is not a predictor of future
results. However, it can be helpful to see how a fund has done during
similar
periods in the past. Because of that, I like to see the fund’s
entire track
record. The longer-term, the better, since that better reflects a
broader,
more representative sampling of investment scenarios. It is
helpful, for
example, to see how a fund fared in past recessions, periods of
rising and
declining interest rates, periods of greed and fear, peace and war,
etc.
Ironically , I am more interested in seeing how a fund has done in a
poor
market (like the one we saw last year, or 1994, or 1991) than how it
did in a
fast-rising market like 1999, where so many funds did well. I want a
fund
manager who can protect me, to some degree, from downside risk.
Avoiding big
drops is important.
But, we’re all different. We have differing
risk/reward
tolerances. If you are more aggressive, perhaps you would choose to
focus
more on how much of the upside a fund captures. If that’s the case,
you
might want to look at how a fund performed during periods of rising
markets.
Just make sure that you read the prospectus and check things like
whether
the fund manager has been the same, and that no significant change
in
investment style has occured, since that can alter your analysis.
You want a
fund that sticks to its style, and doesn’t “drift” from one to
another.
> From: Goldstein, Jon W.
Sent: Tuesday, March 26, 2002
To: ‘Murray, Jonathan P.’
Subject: $
I am vested in a pension plan with my former employer. It will pay
me
$214 a month when I retire at 65 (I’m now 45). I’m wondering if I
should
take the money as a lump sum and roll it over into my IRA, or let it
stay in the pension plan. The balance is about $9,500; as long as
it’s
under $10,000 I can elect the lump sum option.
Thanks,
Mary
From: Murray, Jonathan P.
Sent: Tuesday, March 26, 2002
To: Goldstein, Jon W.
Subject: RE: $
Dear Mary,
I would need some additional information from you before I could
give you
specific advice, but generally, a lump sum has the advantages of
control (you
control the investment, not the pension company); flexibility (you
can pull
out more income or less income, depending on your needs), and
choice (you can
invest in almost anything you want in a self-directed IRA)
The advantage of the set pension payout is that you know what you’ll
get.
So, for the added security of that fixed monthly payment, you might
give up
the potential for higher returns and greater flexibility.
> From: Goldstein, Jon W.
Sent: Tuesday, March 26, 2002
To: ‘Murray, Jonathan P.’
Subject: $
Thanks Jonathan.
Talk to you next week.
