Investment Expenses: What You Can Deduct

Deductible investment-related items include:

• Fees for investment counsel and advice, including subscriptions to financial publications
• Software or on-line services used to manage investments
• Safe deposit box rent, if used for certificates or investment-related documents
• Transportation to a broker’s or investment adviser’s office
• Attorney, accounting or clerical costs necessary to produce or collect taxable income

Non-deductible items include:

• Trading commissions (these are capitalizable costs that increase basis or reduce proceeds)
• Travel costs to attend a shareholder’s meeting
• Investment advisory fees related to tax-exempt income
• Borrowing costs associated with life insurance

Investment interest expenses also are deductible if the borrowed money is used to purchase taxable investments. For example, investors can deduct the interest on a margin loan that was used to buy stock. However, the interest would not be deductible if the margin loan was used to buy a car.

Source: Schwab Center for Investment Research.

Can an Investor Own Too Many Funds?

Although diversification doesn’t guarantee a profit or protect against a loss, it can help to minimize the impact of a big loss in any single fund on overall portfolio return.

But owning more funds doesn’t always mean you are more diversified. In fact, the opposite may be true. The more funds you own, the greater the chance that several may be invested in the same securities. If you own five stock funds, for example, but each one has a big stake in ABC Widget Co., that overlap means you’re less diversified than you think.

It’s a good idea to periodically check out the top 10 holdings of each fund you own, to make sure there’s minimal overlap. That’s easier to do, of course, if you own only a handful of funds.

When you own a very large number of funds, it’s difficult to pay attention to all of them. As a result, you may fail to notice excessive duplication of holdings, a slumping performance, or an important change in a fund manager’s investment strategy.

Source: MFS Investment Management.

Two Views of Wealth-Building: Individuals vs. Financial Planners

Two recent surveys, released by the Consumer Federation of America (CFA) and the Financial Planning Association (FPA), reveal that financial planners believe it is easier for Americans to accumulate personal wealth than do Americans themselves.

The study surveyed a representative sample of 1,000 adult Americans and 360 financial planners, and it revealed a significant divergence in the way personal wealth is viewed:

• 77% of financial planners think it is very important for Americans to understand what net personal wealth is, and nearly all of the rest (22%) believe this understanding is somewhat important.

• In contrast, only 49% of Americans know what constitutes this wealth—financial assets plus home equity and other tangible assets minus consumer debts. And, after they learn this definition of wealth, only 48% say they know exactly or approximately how much wealth they have.

• Financial planners typically feel that over four-fifths of young American adults could accumulate $250,000 in net wealth over 30 years, and that half of young Americans could accumulate $1 million in this period.

• In contrast, only 26% of Americans think they could save even $200,000 at any point in their life, and only 9% believe they could accumulate $1 million.

• Both planners and individuals view workplace savings, homeownership and investments in stocks and bonds as an important wealth-building strategy.

• However, individuals also viewed strategies such as winning the lottery, inheriting money and getting a large insurance settlement as very important.

Source: Financial Planning Association.