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Letters to the Editor

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To the Editors:

I enjoyed your article “15 Short-Cuts and Biases That Lead to Bad Investment Decisions,” by Paul S. Szczygiel in the May 2006 AAII Journal. I am an accountant, not a mathematician, but I believe I understood most of it. One point that I did not understand was the author’s statement that of the five stocks “there is a 73% chance of having one of the five double.”

Who cares?! I am only interested in what the entire portfolio does. I am not interested in carrying four drones just to see one stock double.

When I choose a mutual fund, one of the things I look at is how many stocks it owns. I believe that a manager can pick 100 good stocks better than he/she can pick 500 stocks, and they only have to appreciate an average of 20% to make up for the 50 out of 500 that double.

What I read in your article is that certain mutual funds build index funds and charge manager fees

Richard M. Lawrence
Via E-mail

To the Editors,

Bypassing the Broker: AAII’s 2006 Guide to Direct Purchase Plans,” by Maria Crawford Scott and Cara Scatizzi (June 2006 AAII Journal) discusses the benefits to investors, but fails to address a substantial downside to these plans that should be considered before enrolling.

When a direct purchase plan investor dies, the liquidation or redemption of shares in these plans is cumbersome, expensive, and unnecessarily difficult.

The estate’s executor is required by direct purchase plan administrators to submit certified copies of the death certificate, the letters testamentary and account statements in order to close each purchase plan account. In practice, this means that if the deceased held shares in 20 companies in 20 plan accounts, the executor must submit 20 death certificates, 20 letters testamentary and the respective account statements, regardless of whether or not all 20 companies had the same plan administrator.

The process to recover the assets for the estate is further complicated by other factors. For example, if the executor sends a letter with the required documentation to the plan and if before the account is closed the company pays a dividend, then additional shares will be purchased. To redeem or sell these additional shares, the executor must submit a second round of the same documents in order to close the account and hope that the company has not issued still another dividend or spun off part of the company, which would require yet a third submission.

Furthermore, it is a mistake to think that the plan administrators are easy to contact and helpful in the process of closing out decedents’ accounts. Just trying to identify and speak to a person handling a particular company’s direct purchase plan for assistance can be a frustrating and time-consuming process.

Many investors look at direct purchase plans as a cheap and sensible investment alternative to a broker. In the long run, these plans may not be so cost-effective when one understands the substantial downsides and costs involved in unwinding direct purchase plan accounts after an investor’s death.

Robert Warren
Via E-mail

To the Editors:

I enjoyed reading the article by Scott and Scatizzi on direct purchase plans in the June issue. I was glad to see them mention taxes. Last year I started a DRIP in July using the automatic investment feature of my plan. When my 1099-DIV arrived this year, I noted from my spreadsheet that I had received $1.40 in dividends, but box 1b gave my qualified dividends as $21.40. The actual dividend was only 6.5% of what appeared in box 1b.

Disclosure would be helpful and the right thing to do. The prospectus states there are no fees for enrolling in the plan, which is literally true, but is probably interpreted by most people as meaning you pay no fees (hidden or otherwise) for participating in the plan. The $20 in my example is a definite fee for participating. I did not pay the fee directly, but because the fee was reported as income, I paid part of it as additional tax.

John Worley
Via E-mail

 


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