Letters to the Editor
To the Editors:
In the October 2005 AAII Journal, you described the risks associated with ETFs (“The Individual Investor’s Guide to Exchange-Traded Funds,” by Maria Crawford Scott and Jean Henrich). However, you gave only brief mention of a risk that concerns me—the risk of supply and demand determining the selling price, not the net asset value of the underlying stocks in the ETF. This risk is also associated with closed-end mutual funds. As these mutual funds typically sell at a discount to their intrinsic value, I’m concerned that ETFs may evolve the same way in the future.
Robert J. Hayduk
AAII’s next issue will feature our 2006 Guide to Exchange-Traded Funds and will address this issue.
To the Editors,
Thanks for Paula Hogan’s helpful article (“Get Organized! How to Maintain Your Personal Financial Files,” May 2006 AAII Journal). Here are two more considerations in deciding how long to keep records:
1.) I recommend keeping confirmations of purchase and sale of securities for more than the seven years required for income tax purposes.
Participation in a settlement of a class-action securities lawsuit requires that one give proof of the purchase of the securities. These settlements may be worked out more than seven years after a sale of the stock. I think I have received notices of settlement as much as 10 years later, but can’t give an example. After my spouse’s death, I found that evidence of his purchases and sales was needed for class actions.
Although most class-action settlements are not worth the small investor’s time to file a claim, there are exceptions.
If you file confirmations of purchase and sale with your copy of your income tax return, it is easy to pull these out before you destroy the tax return.
2.) I have also seen advice that one retain the original or a copy of the checks paying taxes, along with at least the first two pages of the tax return. These documents are needed to prove the date that the return was filed and the tax paid, thus starting the running of the statute of limitations period during which the IRS can challenge the return. If the IRS has lost track of the return and tax payment, the taxpayer can’t count on the expiration of the seven-year period to avoid problems unless the taxpayer can prove when the period started.
To the Editors:
Concerning the Shadow Stock Portfolio [most recently reviewed in the July 2006 AAII Journal; see the Model Portfolios area at AAII.com], there doesn’t seem to be information on what to do in the case of a proposed buyout, such as is happening currently with Bairnco Corp. Any thoughts?
James Cloonan Responds:
Since the model portfolio only acts quarterly, I don’t have to do anything in many cases because the buyout is complete. When I do act, I use the following process. If the board has approved the buyout and it seems firm, I look at the discount. If holding the stock until the buyout is complete will yield over 1% a month, I hold; otherwise, I sell. This is mitigated if I have a number of stocks that I want to buy but do not have the funds. In this case, I would sell unless I was getting 1½% a month. In the case of Bairnco, I wouldn’t consider it even if it was in my action period because the board hasn’t approved it and it seems a low ball prior to a higher bid. I will devote space to this in my next article in the October Journal.
To the Editors:
Peter Katt’s article about annuities was quite good (“Annuities: The Good, the Bad and the Ugly,” July 2006 AAII Journal). However, he neglected to mention one very important aspect of annuities. In the majority of (though not all) states, funds in insurance products, including annuities, are exempt from most legal judgments. Take someone who could be subject to frequent legal actions, such as a plastic surgeon. If that surgeon wanted to invest in mutual funds, he would be well advised to do so in variable annuities despite the tax disadvantage. The asset protection aspect of that variable annuity would trump the related cost issues.