May 31, 2008: Investing To Accomodate Change

Individual investors should always look ahead to probable tax consequences of investments. Surprisingly, little attention has been paid to two significant tax issues should a BHO victory occur in November, especially if a super majority of Democrats are inhabiting the House and Senate.

First,it is highly likely that brokerages will be required to report the cost basis of all securities transactions to the IRS. Now, only sales of securities are reported. Investors can minimize this new tax wrinkle by selling securities that will be hit hard by front/back government access to security records beginning in 2009 before December 31st, 2008, and then shift assets into tax efficient index funds, ETFs and tax-managed funds in taxable accounts. I would go so far as to recommend that individual stock purchases be minimized or eliminated completely unless they are tax advantaged in some way (such as with Master Limited Partnerships). Unfortunately,stock speculation risk taking will be taxed up the ying-yang and may not be worth the time or trouble after Uncle Sam gets his cut, if future tax plans become a reality.

Second,BHO's current position is a 25% long term capital gain and dividend tax rate, with ordinary income tax rates as high as 39.6%, The estate tax would qualify for a $3.5m exemption and a 45% top taxable rate afterwards.

As for other tax schemes to fund mammoth government undertakings, who knows? With talk of John McCain being a Bush third term by Democrats, is it possible that an Obama victory will result in a Jimmy Carter second term? Investors hope not.

For non-taxable accounts, which almost always are designed towards a conservative bias, individual stocks,funds that trade frequently (such as small-cap growth funds) and otherwise taxable, dividend-rich securities are advisable.

According to FORBES (June 2, 2008), the following index funds and ETFs are the least expensive in their respective sectors. They will likely outperform comparitive objective managed funds. The following may fit your taxable account(s):

VANGUARD LARGE-CAP INDEX ETF (US Equity) expenses $0.07
E-TRADE INTERNATIONAL INDEX (International) expenses $0.09
VANGUARD EUROPEAN STOCK INDEX-INV (Europe) expenses $0.22
VANGUARD PACIFIC STOCK INDEX-INV (Asia) expenses $0.22
ISHARES MSCI KOKUSAI INDEX (Global) expenses $0.25
BLDRS EMERGING MARKETS 50 ADR INDEX (Emerging Markets) expenses $0.30

Managed ETFs will play in increasingly large role in adapting to tax policy and what some would regard as the scheme to redistribute wealth are hatched by governmental entities at all levels.

The recently launched PowerShares Global Diversified ETF Portfolio ETFs(of ETFS) have received notoriety from myself and others. This type of ETF may be the investment vehicle of the future for many. Look them up at www.PowerShares.com (PCA, PAO, PTO). I like PTO.

Regarding tax-advantaged securities, I have long advocated pipeline MLPs as an excellent investment vehicle. A current Forbes article (dated above) agrees. Although my selections are a bit different, I won't quarrel with the list presented by Gabriel Hammond, a young man with a pedigree resume. Here are his picks:

ATLAS PIPELINE PARTNERS yield 8.6%
COPANO ENERGY yield 5.0%
ENBRIDGE ENERGY PARTNERS yield 7.5%
ENERGY TRANSFER PARTNERS yield 7.3%
ENTERPRISE PRODUCT PARTNERS yield 6.1%
INERGY yield 8.5%
LINN ENERGY yield 10.9%
MAGELLAN MIDSTREAM HOLDINGS yield 4.8%
PLAINS ALL-AMERICAN PIPELINE yield 7.2%

Planning ahead is smart. Planning ahead with research and a conviction to succeed in spite of the barriers government installs to take away your hard-earned money is divine.