Bob Brinker: Market Savant & Radio Host Message Board

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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host

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To: hoper who wrote (3220)	2/5/1998 10:40:00 AM
From: Kirk ©	Read Replies (1) of 42834

Q: Just how big is the problem with index funds? Do a worst case scenario $100K invested, $9K basis price (i.e. 11x appreciation) and 50% shares are cashed out on a 50% market fall. Assume the fund got the worst possible of $0.50 on the Dollar. Capital gain is on $50K-$9K=$41K avg cap gain rate is 20% of $41K = $8,100 thus you are stuck with an 8.1% loss due to taxes if the market tanks 50% and everyone in your index fund bails at the bottom. Now if you sell fund shares to pay the tax, you would be left with $41,900 so your overall loss is huge. Good reason for good market timing! Your actual tax rate will be much higher if the fund sells at the top, but then you will have twice your money fi you got out then. I suppose if the fund was small and quick and sold out at the top and you stayed in as if fell, then you could be stuck with 20% of $100K-$9K=0.2x$91K=$18,100! Ouch! Sell your index funds at the bottom to pay and you are left with $50K-$18.1K=$31,900!!! WOW! Someone check my math.....PLEASE! Of course, you listen to Moneytalk and get out at $99K before the tanking and buy in again at the bottom! Maybe this analysis is worth a letter to President@WhiteHouse.gov telling him that taxes should ONLY be on earned income as this sort of tax is unfair to investors that fuel our economy. regards Kirk out suite101.com suite101.com

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