Monday, August 27, 2012

Ask the Experts: What to study when investing in index funds - Sacramento Bee

This week, we're introducing two new Sacramento-based financial experts to our "Ask the Experts" lineup.

They are Tony Bell, investment adviser and managing director of Bell & Co. Private Wealth Management, who answers readers' questions on investing; and Gregory Burke, CPA and tax expert with John Waddell & Co., who handles Internal Revenue Service tax questions.

Here's a sampling of their recent advice to readers.

QUESTION: My wife and I (both retired) have a Roth IRA invested with Fidelity Balanced Fund for the past seven years. The fund's performance has been dismal. We are thinking of changing to an index fund or maybe a secure Treasury investment. Our main goal is to avoid the risk of investing in stocks or bonds. I would appreciate your guidance on which options to consider.

BELL: I am pleased (that) you are evaluating your investment portfolio and considering ways to enhance performance. This is a habit many retail investors should practice annually.

When evaluating the performance of your portfolio, be sure to address the motivation behind the changes. You mentioned that you would like to avoid stocks and bonds.

Eliminating exposure to stocks and bonds entirely should be a careful decision based on your time frame, liquidity needs and risk tolerance.

An investment term you may want to familiarize yourself with is beta, which is a number describing the volatility of an asset in relation to a particular benchmark, such as the S&P 500. A fund's beta number can be found in the official prospectus, provided through your broker or shown online by discount broker sites.

Lastly, utilizing an index fund may not eliminate risk but may reduce fund expenses. In your case, if your goal is to reduce portfolio volatility, searching for an index fund with a low beta may be the way to go.

Just be aware: Funds with higher return expectations often have higher volatility. Conversely, funds with lower volatility may have lower performance expectations. The science is finding the right fit for both your short- and long-term goals.

Q: How do I claim gambling losses on my state/federal taxes?

Whether a person is a professional or merely a casual gambler is often a point of controversy with the IRS.

BURKE: Assuming that you're not a professional gambler, gambling losses are claimed as an itemized deduction on Schedule A of the federal IRS 1040 tax form. On the 2011 Schedule A, for example, losses would have been listed on Line 28, "Other Miscellaneous Deductions."

The deduction for gambling losses is limited, however, to the taxpayer's total amount of gambling winnings. Both must be reported in full on the tax return. Losses cannot be netted against winnings for this purpose.

In addition, the person claiming gambling losses must keep adequate documentation to prove the losses. The IRS requires a diary or other contemporaneous record of a person's gambling activities in order to support a deduction for gambling losses. A mere record of withdrawals from a bank account will not suffice.

If you're a professional gambler, your winnings must be reported as gross receipts on Schedule C, "Profit or Loss from Business (Sole Proprietor)." Losses and other ordinary business expenses directly related to the gambling activity are deducted on Schedule C.

For more information, see IRS Publication 529 at

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