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and aren’t subject to market fluctuations; money market funds, which don’t vary with the market; or real estate investment trusts, which pay the client quarterly dividends.

One last point about diversification: beware of overlapping indi- vidual securities within different mutual funds.You may feel that you want to stay as light in the technology sector as possible, and think that you are invested in mutual funds accordingly. Ask your advisor to do some research to make sure that is the case. Many funds invest in the same, or similar, individual stocks, thus making your portfolio heavier in certain sectors than you may want it to be.


Where you own your assets is as important as what asset classes you own. Certain investments have tax benefits that may be lost if owned in a retirement plan, whereas there are distinct advantages to holding directly owned investments.

There are many advantages to holding directly owned assets. There are also limitations. With directly owned investments, capital gains aren’t realized and taxable until the asset is sold or exchanged in a tax- able transaction. For example, you hold 100 shares of Microsoft stock that you bought at $89 per share. The ups and downs of the stock price won’t affect your taxes until you decide to sell. Should you sell the stock at $85 per share, you will realize a $4-per-share capital loss. However, if you were to sell at $95 per share, then you would be taxed on a $6-per-share gain. Depending on how long you have owned the asset, you will be subject to capital gains taxes. If you held the stock for less than one year, the gain will be taxed as a short-term gain, which is at your ordinary income tax rate. However, if you held the stock more than one year prior to the sale, then the gain is taxed at the long-term capital gains rate, which, as of 2002, is at a 20-percent maximum. This 20-percent maximum is an advantage for all taxpayers who are in the higher tax brackets. For those in the lower brackets, the maximum long-term capital gains rate is 10 percent.

Another advantage to directly owned assets is called a “step-up” in basis at death. While the original cost is usually the starting point when calculating basis, when a directly owned capital asset, such as

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