Fidelity Select Fundranker

Fundranker Blog—Investing Category

Investing in Energy

Fidelity Viewpoints published an article back in February about opportunity for long-term investors: Time for oil stocks? They point out that there has been an unprecedented pullback in oil since late 2013, and consequently, energy stocks look really cheap compared with their history. So the article asks, “Are energy stocks a buy—or are today’s prices a value trap?” The answer, they contend, depends on your time frame and tolerance for some gut-wrenching ups and downs. Finally, they point out that the seeds of a recovery in oil have already been planted.

We see this as a golden opportunity to combine a cautiously optimistic outlook in energy with the tried and true dollar cost averaging investment technique. Investors with an appetite for long-term returns could begin now to invest a set amount periodically in four Fidelity Select funds: Energy, Energy Service, Natural Gas, and Natural Resources. With the dollar cost averaging technique, an investor would buy more shares when net asset values fall and fewer shares when they rise, thus lowering the average cost per share over the long run.

Despite these four funds performing at the top end of Select funds in March, they still dwell in the bottom half of our Fundranker rankings. Unless they continue to outperform, they could languish in the bottom rankings for some time. For investors who want to take advantage of their possible rise in our rankings before they advance into the Top Eight Model Portfolio, and who are willing to take on the associated risk of underperformance, now may be a good time to begin investing in energy sector Select funds.

Posted 3/30/16 12:55pm ET in Investing | Permalink | Comments (0)

Roth IRA for a Child

There is plenty of controversy over the relative merits of traditional IRAs and Roth IRAs for worker-age individuals who qualify for both. In general, you get to deduct contributions to a traditional IRA up front, but you pay taxes when you withdraw money from it after age 59½ on both your contributions and whatever gains accrue; you don’t get to deduct contributions to a Roth IRA up front, but you don’t have to pay taxes after age 59½ when you withdraw money from it on your contributions or any gains that accrue. Many variables make the decision very difficult to quantify, and some of the questions that arise can’t be answered without a crystal ball, such as what tax rates may be like in the future when you withdraw money from your IRA.

But what about that babysitting or lawn mowing money your child makes while she is in middle school or high school? What about that first part-time job she gets at the corner drugstore? It’s pretty likely that with her income level, she won’t even have to file an income tax return, and yet this income is considered after-tax income. You couldn’t ask for a better situation for a Roth IRA to make sense. Your child won’t pay income taxes on the income, but she can take full advantage of a Roth IRA. Plus, that money will be in your child’s Roth IRA for a long, long time; time during which it can grow and grow and grow.

Your child’s Roth IRA contribution for 2009 (contribute by April 15, 2010) is limited to her earned income or $5,000, whichever is less. With the jobs we’re talking about, she is likely to earn less than $5,000. So do you ask her to give up her hard-earned money, which, since she made the effort to earn it, she must want for something else? Well, that depends on your situation. If you think getting your child set up with a life-long investment is important, and you have the means, you can spring for all or most of the money to put in it (you can give up to $12,000 per year to an individual without the gift being taxable). After all, it probably won’t be a large amount the first few years.

You are probably asking, what if my kid only makes $50 babysitting the first year she makes any money? Check with your bank or credit union to see what their minimum requirements are for opening a Roth IRA. Many have very low minimums, so you can start very small.

Because a Roth IRA is not considered for FAFSA (Free Application for Federal Student Aid), it is a great way to save in your child’s name, shield those assets from financial aid considerations for college, and yet still have access to at least some of the money for college, as follows.

Your child can make certain withdrawals from her Roth IRA before age 59½ without including the amounts as taxable income or having to pay a penalty: for example, she can withdraw any or all of the contributions she makes over the years, or she can withdraw up to $10,000 for qualified first-time homebuyer expenses, even if they exceed all of her contributions. Investment earnings that accrue in a Roth IRA are another story; if your child withdraws earnings (other than as qualified first-time homebuyer expenses) from her Roth IRA before age 59½, she will have to include those amounts as taxable income and will have to pay a 10% penalty, as well.

Setting up a Roth IRA is a great opportunity to teach your child the importance of saving for the future. Show her how her Roth IRA may grow over the years from her contributions as well as investment returns. Review various ways her Roth IRA can be invested and decide together which to use. If you want your child to feel more ownership of her Roth IRA, you and your child could agree on a “company matching” strategy, where you play the part of the company and do the matching (probably way more generously than your company matches your 401K), and your child puts in some part of her earnings.

Posted 5/12/09 11:57am ET in Investing, Tax Tips | Permalink | Comments (0)

Select Fund Dividends

Many of Fidelity Investments’ Select funds will be paying dividends in April. On what is known as the ex-dividend date, the closing NAV of the dividend-paying fund will be adjusted downward by the amount of the dividend. The fund may gain or lose value on that trading day as well, of course, which also will affect that day’s NAV. Essentially, the fund distributes a set amount per share and reduces the closing NAV of each share by that same amount. You end up with the same value, partly as shares and partly as dividend.

If you automatically reinvest your dividends, the dividend amount is used to purchase new shares at the adusted NAV, so you end up with more shares, but with the same value you would have had without the dividend being paid. Fidelity Investments shows pending dividends for your holdings online at after 4pm ET on the ex-dividend date. The following morning, your accounts will reflect the new number of shares at the new NAV.

If your Select fund holdings are in a taxable account, Fidelity Investments will send you a Form 1099-DIV shortly after the end of the year that shows dividends distributed during the year. They will be classified as ordinary dividends, qualified dividends, and capital gain distributions. Qualified dividends are included in ordinary dividends, but they are broken out because they may be eligible to receive preferential tax treatment. That is, qualified dividends that fall within the 15% tax bracket are not taxed at all, and qualified dividends that fall in the 25% or higher tax brackets are taxed at only 15%.

Unfortunately, until you receive your Form 1099-DIV, you can’t tell how much of your ordinary dividends is eligible to be treated as qualified dividends. When you do receive your Form 1099-DIV, the qualified dividends it lists really are only potentially qualified dividends. You still have to determine if you held the fund shares which paid the dividends for the required periods. You must hold the dividend-paying fund shares for at least 61 days of the 121-day period beginning 60 days before the ex-dividend date and ending 60 days after the ex-dividend date. When you count the days, include the day you sold shares in a fund, but not the day you acquired them. For example, if you acquired shares 60 days before the ex-dividend date, you could sell them 61 days later on the trading day immediately following the ex-dividend date, or if you acquired shares one day before the ex-dividend date, you could sell them 61 days later, which would be 60 days after the ex-dividend date.

Fundranker held a number of funds in 2008 that paid dividends in April and December. Assuming you made exchanges on Fundranker exchange dates, you held all of the Top Eight Model Portfolio funds that paid dividends in April and December the required 61 days, except for two funds that paid dividends in December, 2008: Select Environmental and Select Utilities (then known as Select Utilities Growth). Qualified dividends reported on your Form 1099-DIV for all other Top Eight Model Portfolio funds can and should be reported as qualified dividends on your 2008 Form 1040, which means they qualify for the preferential tax treatment discussed above.

Posted 4/9/09 1:25pm ET in Fundranker, Investing, Tax Tips | Permalink | Comments (0)

Smart Debt

Sounds like an oxymoron, doesn’t it? We all know some really good examples of dumb debt, such as high-interest credit card debt, high-interest car loans, and high-interest home equity loans. The common denominator of dumb debt is high interest rates. So smart debt has to be just the opposite--low interest rate loans.

Did you and your parents save up some money for your college expenses? Good for you. You still may qualify for low or no interest (at least while you are in school) loans to pay college expenses. Invest the money you and your parents saved where it can make a better return than the interest you pay on your college loans, which is pretty easy if you don't pay interest while you are in school. If your student loan interest rate resets higher when you graduate, be sure to rethink your situation.

Have you taken advantage of today’s low mortgage rates? Don't be in a hurry to pay off that loan. If you have extra money, don’t make extra principal payments. Instead, invest that extra money where it can make a better return than the interest you pay on your loan. Another bonus of drawing out your low-interest mortgage loan to the last drop is that you get to deduct the interest on your income taxes.

So how can you invest your extra money to make a better return than the interest you pay on your low-interest, smart debt loans? One great, sure-fire, easy idea is to pay down a high-interest, dumb debt loan. The difference in interest rates ends up in your pocket. If you are not averse to more risk and more effort, buy stocks or mutual funds. You could use your extra money for education to prepare yourself for a better job. Put it in a Roth IRA, where it will grow tax free for as long as you have it there and even when you take it out. Any kind of investment will do; it just needs a realistic, potential return that is greater than the cost of your low-interest, smart debt loan.

Here’s an incredible, probably once-in-a-lifetime, smart debt deal of which I took full advantage. We all complain about credit card offers that keep showing up in our mailboxes, but in mid-2006, I received an offer from Discover which included the option to transfer a balance and pay 0% interest on the transferred balance until it was paid off--that’s right, no time limit. The only catch was to make two purchases per month. Since the minimum monthly payments I make go first toward the transferred balance, the purchases have mounted up, and I do have to pay interest on them. I finesse this by making minimal purchases of a few cents at the self-checkout counter in the grocery store or at the gas pump. Two and a half years later, I’m still paying Discover’s minimum finance charge of $0.50 per month on my purchases balance and 0% interest on my remaining transferred balances. My wife and I and my adult daughter applied for three separate Discover accounts with this deal, and we transferred the entire balances of two second mortgages to the three accounts, about $25,000 total. So we have to make six minimal transactions each month (two each on three cards), but for that minimal effort, we have saved thousands of dollars in interest we would have paid on the second mortgages.

Posted 1/21/09 10:18pm ET in Investing | Permalink | Comments (0)