Dear Carrie: I've been able to closely follow the markets in the past, but I am busy now. I've pared down speculative stocks, but I continue to carry some blue chips.
Is it smart to switch all my stock investments to mutual funds at this point? -- A Reader
Dear Reader: I'm glad you asked this question. As the market gears up a bit, a lot of people are re-evaluating their portfolios and wondering how to invest in today's economic environment. And as you mention, a change in personal circumstances can also warrant a change in investment approach. I've always been a fan of mutual funds. They take less time because, once you choose the funds, professional managers watch the market for you and make buying and selling decisions.
And funds make it easy to invest in a wider variety of stocks, which is a great way to help manage risk. So there are a lot of pluses -- as long as you do your research when choosing funds and don't rely only on past performance.
But the benefits of mutual funds aside, the wisdom of switching from individual stocks to funds depends largely on what's best for your overall portfolio -- first and foremost from an investment standpoint but also from a tax standpoint. Here are some things to consider.
LOOK AT THE PERCENTAGES
I understand your desire to pare down speculative stocks and focus on blue chips, which represent well-established and financially sound companies. It makes sense, since blue chips are usually less volatile than smaller and newer companies.
To help you decide whether to move more toward mutual funds, I recommend that you first look at the percentages. If individual stocks are just a small part of your total stock portfolio -- and you have at least some time to follow them -- that seems reasonable. However, if individual stocks represent the lion's share of your overall investments, switching more of your assets to mutual funds makes a lot of sense both in terms of saving time (SET ITAL) and (END ITAL) spreading risk.
BE TAX SMART WHEN YOU SELL
If you do decide to sell, do it in a way that puts the most money in your pocket. This means using capital gains and losses to your advantage. Here are some things to keep in mind:
-- A capital gain or loss is the difference between the amount you realize in the sale and your cost basis. What you realize is generally the sales price minus commissions. Cost basis is what you paid for the stock, plus any commissions and fees. For example, if you buy 100 shares of XYZ for $1,000 plus a $10 commission, then sell your shares two years later for $1,500 and pay a $10 commission, your capital gain would be $1,490 minus $1010, or $480.