AboutWarren Boroson Expertise Author of "Keys to Investing in Mutual Funds" (Barrons) and "Ultimate Mutual Fund Guide" (Probus). Columnist for Gannett News Service.
Experience Author of 20 books; winner of 1996 Personal Finance award from Investment Company Institute and Washington University. Formerly on staffs of Money and Sylvia Porter's Magazine. Had a radio program (on WEVD)about mutual funds and a newsletter, FundDigest.
I have held Putnam's Growth & Income Fund for over twenty five years now, but I'm beginning to rethink this investment. Even during the years where there was no appreciation (1% or less return) I always seem to have to pay huge capital gains and dividend taxes this time of the year (I have always had any capital gains and dividends reinvested). Is it possible that I can not make any money or in fact lose money and still have to pay capital gains and dividends taxes? How can this be?
Thank you for taking the time to answer this question that has been puzzling me for years now.
Best regards,
William P.
Answer Dear William P.
First off:
When you invest in a stock or bond, you can make money two ways: (1) Your investment can go up in value, or (2) your investment can throw off money (dividends, interest--called distributions).
The first is more important. It's the main course, not the dessert. Reason: Your principal can go DOWN in value. And if your principal does decline, you can lose money--despite whatever distributions you get.
In short, distributions are nice--but what happens to your original investment, your principal, is key. In other words, if your investment is a bond and it's returning an impressive 15% a year, but if your principal is shrinking by 15% or more a year, you are up the creek.
And having to pay taxes on your distributions while you're not making good money overall (your principal isn't doing much) is salt on your wound.
In general, if you have high taxes to pay on your distributions but have a steep loss on your principal, SELL. Deduct the losses and move elsewhere. And if you're only just coming out even, or a little above even, re-consider your investment.
Next:
As it happens, Putnam Fund for Growth & Income stinks in the nostrils of God.
It gets one star (lowest) from Morningstar. For 3 years, 5 years, 10 years.
Recently it owned Bear, Stearns, Countrytwide, and MGIC. Heavily exposed to financials in general.
Since 1996 (12 years), it has never been in the top quartile of large-value funds.
It has been in the top 50% twice.
It has been in the third quartile seven times.
It has been in the bottom quartile twice--2006, 2007. In other words, it ain't getting any better.
Its alpha is -4.1%. Meaning: yuck.
There's a 5.75% sales charge.
Over 15 years it has returned 8.96% a year--which is 3.1 percentage points a year below a value index.
So, while it hasn't lost money over the years, this fund has been a consistent disappointment.
Morningstar suggests that investors "look elsewhere."
So should you.
Considering all the taxes you have paid on distributions from this fund over the years, you shouldn't get stung with a big tax hit. Besides which, the capital-gains tax rate is sure to go up in the years to come.
Who recommended this fund to you? Do you still listen to him or her?
Finally, let me suggest that you consider a no-load target-retirement fund. Like the ones from Vanguard and T. Rowe Price.
