Short Term Vs Long Term Capital Gains

Short Term vs Long Term Capital Gains

When you make money on an investment, it is called a capital gain.

Here in the U.S., we are taxed on capital gains.

It is worth noting, though, that you aren’t taxed on the gain until you actually realize it. That is, you aren’t taxed until you sell and the investment earnings are yours.

When you sell makes a difference in how you are taxed. There is a tax advantage to holding on to an investment for a longer period of time, since the tax rate on long term capital gains is usually lower than what you would find on short term capital gains.

Let’s look at the differences between short term vs long term capital gains.

Long Term Capital Gains Tax

Whether or not your investment gain is taxed as long term or short term depends on how long you have held it. In order to qualify as a long term investment, you need to hold the investment for more than one year. This means that you need to have the investment for at least one year and one day for it to qualify.

Your “tax bracket” for long term capital gains is based on your marginal tax bracket. Right now, the lowest tax rate on capital gains right now is 0%. This is a temporary situation for capital gains taxes. If you are in the 10% or 15% tax bracket (this is total income, including your capital gains), you don’t owe anything extra for capital gains taxes.

If you are higher than those tax brackets, you will owe 15% in capital gains taxes. Even though this tax rate was extended, it could expire if Congress doesn’t change things. But, for 2019, you can potentially avoid paying long term capital gains taxes.

However, even with a shift in the way long term capital gains are figured, the top rate is likely to be no more than 20% or 25% over time.

Short Term Capital Gains Tax

By contrast, there is no special tax rate for short term capital gains. If you hold an investment for a year or less, you will be taxed at your regular income rate. If income tax rates go up, or if your capital gains bump you into another tax bracket, you will pay whatever income tax is “normal” for you.

As you can see, if you are in a higher income tax bracket, it might make sense to hold on to your investments until they qualify as long term. That way, part of your income would be taxed at a lower rate.

Tax on Collectibles

You should be aware that there are different rules for collectible assets. While you might consider them investments, the IRS looks at them as a different class, “collectible assets.” If you hold collectibles for a year or less, and then sell, you are taxed at your marginal rate.

However, if you hold collectible assets for more than a year, you will be taxed at a 28% rate. For those in lower tax brackets, holding collectibles for a long time can actually be detrimental when it comes to tax liability.

Part of your investment planning should include considering the tax ramifications associated with when you sell your investments.

How Do Mutual Funds Work

How Do Mutual Funds Work

So how do mutual funds work?  Well, mutual funds are a type of communal investment that gathers money together from numerous different investors to purchase stocks, bonds, and other securities on a larger scale than what an individual investor could afford independently.

When you contribute money to a mutual fund, you get a stake in all of the fund’s investments, and your portfolio becomes more diverse and potentially more profitable.

You also get an investment professional who actively manages the fund; a real plus if you don’t have the market experience or wisdom necessary to make accurate investment decisions.

Mutual Fund Shares

One of the first questions you might ask is, “Since mutual funds are a collection of securities instead of a single company, who determines the cost of each mutual fund share?”

The net asset value (NAV) determines the price per share of a mutual fund. The NAV is calculated by taking the total value of securities that the fund owns and dividing it by the number of outstanding shares.

If a mutual fund’s total value is $50 million and there are 2 million shares, then the NAV would be $25. So if you wanted to invest $3,000 into a mutual fund with a NAV of $25, you would own 120 shares of that mutual fund.

Benefits of Mutual Funds

A Diverse Portfolio – Many financial experts will tell you that a person needs at least $100,000 to adequately diversify their portfolio with individual stock purchases. But what if you only have a few thousand dollars to start with?

Investing in a mutual fund is a great way to have a well-diversified stock portfolio with a minimum initial investment because mutual funds are already diverse and they have a low minimum requirement.

You need diversification to limit your potential risk of losing money. A decline in the value of a particular security within a mutual fund is often offset by the strength or increasing value of other securities within that fund.

Managed by Investment Professionals – Mutual funds are managed and supervised by professional investment administrators. The goals of the fund managers are directly related to the investors’ success because the managers are paid based on the performance of the mutual fund.

The fund manager uses his or her market experience, wisdom, and expertise to decide when to buy and sell securities. Because the manager is making decisions for the mutual benefit of the fund, the individual investor doesn’t have the difficult job of trying to time the market.

The resources and research expertise of mutual fund managers far exceed those of the average investor.

Mutual Fund Risk and Diversity

There are always risks associated with every type of investing, and mutual funds are not immune. Mutual funds also have management fees (although minimal) that don’t normally accompany individual stock purchases.

Instead of labeling these items as disadvantages, think of them as necessary information needed to make wise and accurate investment decisions.

Mutual funds can add diversity, stability, convenience, and high quality purchases to any investment portfolio, no matter if you want to spend $1,000 or $1,000,000.

Financial Risk Tolerance vs. Emotional Risk Tolerance

Financial Risk Tolerance vs. Emotional Risk Tolerance

One of the terms that you might have heard when you are getting ready to invest is “risk tolerance.” As you might imagine, this term refers to the amount of risk you can handle when you invest.  As you evaluate potential investments, it’s a good idea to take some time to review your risk tolerance. For the most part, risk tolerance can be divided into two parts: financial and emotional. Before you make an investing decision, it helps to understand your own risk tolerance; you will make better decisions if you know your own limits.

Financial Risk Tolerance

First, consider your financial risk tolerance. This is represented by how your finances can handle different risks. The old rule is to avoid investing money that you can’t afford to lose. Your first consideration is to figure out, financially, what makes sense for your investment portfolio.

If you are struggling financially, risking a large portion of your paycheck might not be the best plan. You probably need that money for other purposes; you can’t afford to lose it on a risky investment that has the potential to go bad.

In such cases, it might make sense to put a little aside , and take advantage of dollar cost averaging to help you prepare for the future, without sacrificing today.

On the other hand, if you have extra money, you might think it fun to do a little day trading, and take bigger risks. As long as you won’t miss the money if you lose it, it shouldn’t be a problem.

However, be careful when trading on margin. While you could magnify your gains, you will also need to make sure you have a high enough financial risk tolerance to handle magnified losses.

Emotional Risk Tolerance

Determining your financial risk tolerance is fairly straightforward: You just need to run the numbers. Emotional risk tolerance, though, is another matter. Emotional risk tolerance is all about what you can handle emotionally, and has only a little to do with money (although your money situation can contribute to how you emotionally handle risk).

Before you invest, consider your emotional state relative to risk. Some people have a high emotional risk tolerance. They enjoy the thrill of the “game.” Investing in volatile markets, or taking a chance to make it big, holds a great deal of appeal. (Incidentally, you have to be careful if you have a high emotional risk tolerance but a low financial risk tolerance — it can be easy to get carried away and ruin yourself.)

If you have a high emotional risk tolerance, you can mentally handle risks that others have problems with.

A low emotional risk tolerance, though, can mean problems in high risk situations. Constant worry about what will happen next will eventually take its toll on your own health and on your relationships. While you shouldn’t avoid investing altogether, it is a good idea to stick with “safer” investments, such as solid value/dividend stocks, index funds, and stable bonds.

You will need to overcome your risk aversion to some degree, though, since a very high emotional risk tolerance (leading you only to cash products or low yielding bonds) can cripple your ability to build wealth.

Bottom Line

The first rule of just about anything is “know thyself.” Carefully consider the financial and emotional aspects of your risk tolerance so that you can make investing decisions that work better for you.

Best Vanguard Funds

Best Vanguard Funds To Invest In

Which Index (and Other) Funds Should I Invest In?

Index mutual funds are a sound long-term investment

If you’ve read any of my material you know I’m a huge proponent of index mutual funds.  The specific reasons on why I believe investing in index mutual funds is a sound investment strategy is a topic for other articles.  This article is less about the “why” of index mutual fund investing and is more about the “what,” or what specific index mutual funds should you consider investing in.  Finding the best vanguards funds for retirement will vary depending on your current age, retirement age and goals.

Vanguard is the flagship index mutual fund company

Below I recommend several Vanguard index (and other) mutual funds for you to consider.  But why Vanguard?  The Vanguard Group, better known as “Vanguard,” is a U.S.-based investment management company.  Like other investment brokerage firms it sells many financial products and services, but what I’m going to focus on here is some of their index mutual fund offerings.  But again, why Vanguard?  Aren’t there other investment companies that offer index mutual funds as well?  The answer is yes, but Vanguard is a solid option because of the following:

  • Founded in 1975, it is a stable, well-run firm.
  • It has a wide offering of index mutual funds to choose from.
    • Target Date, Emerging Markets, Growth Stock, Large Gap, S&P 500 Index, ect.
  • The expense ratios to invest in Vanguard index funds are very, VERY low – some of the very best in the industry.
  • You can conveniently manage your investments using Vanguard’s well-organized website (

Specific Index Mutual Funds to Consider

Whether you have $10,000 or $10,000,000, following are specific mutual funds for you to consider investing in. Now lets look at some of the best Vanguard funds out there.

Vanguard Prime Money Market Account (VMMXX)

The Vanguard Prime Money Market Account is invested in conservative, short-term, high-quality securities.  It’s an excellent place to save money that you want to be safe and yet still earn a competitive interest rate.[1]  Unlike a CD, a money market account is liquid; you can write checks against it and you can also connect it to your bank account to wire money to and from it.

Click Prime Money Market Account for an overview.

Vanguard 500 Index Fund (VFINX)

The Vanguard 500 Index Fund is the granddaddy of them all, the very first index fund for individual investors.  This fund is invested in companies comprising the S&P 500, one of the most followed stock market indices in the world.  Investing in this fund gives you broad exposure to 500 large, U.S.-based multinationals that are selected to be representative of the U.S. economy as a whole.  Consider this fund a workhorse, a common holding of most anyone who invests in index mutual funds.

Click Vanguard 500 Index Fund for an overview.

Vanguard Small Cap Growth Index Fund (VISGX)

The Vanguard Small Cap Growth Index Fund is designed to track the S&P Small-Cap 600 Index.  So while the 500 Index Fund invests in larger, more established companies, this index fund gives you investment exposure to that next strata of companies – those that are smaller, leaner, and up and coming.  This fund can also provide good balance to the 500 Index Fund because smaller companies tend to perform differently than larger companies during various economic cycles, and being diversified in such a way can make your overall investment portfolio more durable.

Click Vanguard Small Cap Growth Index Fund for an overview.

Vanguard Total International Stock Index Fund (VGTSX)

The global economy doesn’t just revolve around the U.S., and Total International Stock Index Fund gives you the opportunity diversify geographically by enabling you to invest in large, non-U.S. companies based around the world.  For example, this fund has holdings in Nestle SA, Toyota Corp., Vodafone Group plc, and literally thousands of other non-U.S. companies.

Click Vanguard Total International Stock Index Fund for an overview.

Vanguard REIT Index Fund (VGISX)The Best Vanguard Funds REITs

A “REIT” is a real estate investment trust, a corporation that qualifies for favorable tax status as long as it follows certain rules, one of which is that its assets must be concentrated in real estate.  Thus REITs hold properties such as apartments, shopping malls, hotels, office parks, etc.  Thus the REIT Index Fund gives individual investors a cost-effective way to invest in a widely diversified portfolio of professionally managed commercial real estate.

Click Vanguard REIT Index Fund for an overview.

Vanguard Energy Fund (VGENX)

Energy is a vital element of the global economy.  The Vanguard Energy Fund invests the bulk of its assets in companies engaged in the production and transmission of core energies such as oil, natural gas and coal.  It also has some investments in companies engaged in energy research and conservation.  An investment in energy can add a nice element of diversification to your portfolio because energy-related investments have the potential to go up even as the broader economy struggles.  However, while energy investments can do well, they can also be quite volatile, so they’re not for the faint of heart.  Finally, it’s also important to note that the Energy Fund is NOT actually an index fund, but since it can provide a good element of investment diversification and because its management expenses are very low I included it on the list.

Click Vanguard Energy Fund for an overview.

Vanguard Precious Metals and Mining Fund (VGPMX)

While I am not personally a fan of precious metals, for the sake of completeness I did want to point out this relatively safe and inexpensive way to invest in them (but see my definition of “safe” in the footnote below).[2]  Note that this fund does not invest directly in precious metals themselves, but in companies involved in the exploration and extraction of them.  Vanguard bills this as an investment that would be “complementary to an already diversified portfolio with a long-term time horizon.”

Click Vanguard Precious Metals and Mining Fund for an overview.

Short-Term Bond Index Fund (VBISX)

The Short-Term Bond Index Fund holds a diversified mix of investment-grade debt with maturities from 1-5 years.  This fund is passively managed to follow a common bond index by using a passively managed sampling approach.  The Short-Term Bond Index Fund is an outstanding alternative to traditional 3 month to 5 year bank CDs because it can easily be sold without penalty and because it’s invested in hundreds of underlying debt securities as opposed to just 1 CD at 1 interest rate at 1 bank!

Click Short-Term Bond Index Fund for an overview.

Total Bond Market Index Fund (VBMFX)

The Total Bond Market Index Fund is, in my view, not quite what the name implies.  Rather than include a sample of ALL bonds, this fund’s holdings are concentrated in debt securities that range between 5-10 years.   As with the Short-Term Bond Index Fund, this fund employs a passively managed sampling approach, and it’s invested in a wide rage of government, corporate, and international dollar-denominated assets in an effort to track a commonly followed bond index (related to, but different than the bond index the Short-Term Bond Index Fund is designed to track).

Click Total Bond Market Index Fund for an overview.

Other Vanguard Mutual Funds

If you don’t find the list above to be comprehensive enough or if you simply want to see the full range of the best Vanguard funds, then check out:

Finding The Best Vanguard Funds

Which of the above index mutual funds should I invest in?

My purpose in providing the list above is not to tell exactly which index mutual funds to invest in and what percentage you should hold of each, because I do not believe there is some “magic formula” that works for ALL people in ALL situations.  Instead, my goal is to provide you with solid investment choices that you can use as a baseline as you determine what your own investment strategy should be.  Said another way, if all that you ever do is invest in a balanced mix of the above mutual funds according to an allocation you feel comfortable with (meaning X% in this fund, Y% in that fund, etc.) in the context of your particular goals, circumstances, preferences, risk tolerance, and personality then you’re doing what’s right for you.   It really doesn’t have to be any more complicated than that.  So make your investment choices, let your money start working for you, and then get on with the rest of your life!

What if my company’s retirement plan doesn’t offer Vanguard mutual funds?

Vanguard funds may not even be offered as choices in your company’s retirement plan (e.g., your 401k plan), and even if some are then it’s probably not going to be all of the ones you would be interested in.  So then what do you do?  Fortunately the management expenses in mutual funds offered by retirement plans usually much lower than the rates you could get on your own, so just pick investments that come as close as possible to what you’re looking for.  For example, you may really like the idea of putting some of your money in the Vanguard Small Cap Growth Index Fund, but if it’s not an investment choice then it’s likely your retirement plan offers another fund that would enable you to invest in smaller companies.

Should you invest in anything else BUT Vanguard’s index mutual funds?

Thinking beyond your company’s retirement plan, of course there are other investment options aside from Vanguard’s index mutual funds.  You could choose to invest from among hundreds of actively managed mutual funds, ETFs, raw land, rental real estate, individual stocks, gold, covered calls, etc.  So the question isn’t CAN you invest in things other than Vanguard’s index mutual funds, but SHOULD you do so?  The short answer is that if you’ve got an opportunity to invest in something that you know is comfortably below market value (meaning you’re almost sure you’ll make a profit) then it’s worth considering.  Examples might include discounted company stock or stock options, land purchased at a discount from a friend or relative, or something along those lines.[3]  However, if you’ve got no such obvious “can’t miss” investment opportunities then, again, if all you did was build a portfolio with a sensible mix of Vanguard’s index mutual funds then that alone would be a good, solid, long-term investment strategy.[4]

[1] Note that while this money market account is not FDIC insured, it is still considered to be quite safe.

[2] Note that “safe” in this context does not mean this investment is without risk.  What I do mean is that owning a publicly traded and marketable security is vastly more secure than having some gold coins stuffed under your mattress (or even in your safe deposit box!).

[3] Note that I am NOT talking here about gimmicky, “click here or call this number and I’ll tell you the secrets of getting rich using my ‘secret’ method” schemes.  No, I am talking about straightforward, real investment opportunities that you can understand up front before committing any money.

[4] This article does NOT constitute investment advice.  See the site’s legal disclaimer here.

First Time Home Buyer Guide

First Time Home Buyer Guide

5 Things to do Before Moving into Your First Family Home

When a couple moves into their first family home, they want to make sure everything goes as smoothly as possible. As such, here are five things every potential homeowner should do before moving into their first family home.  This first time home buyer guide should not only be used for your first home, but any additional homes you may purchase down the road.

1. Secure A Great Mortgage

Every applicant has a certain style of mortgage that is right for them. For instance, veterans can take advantage of A VA hybrid loan, or can research a VA hybrid review to see if this type of loan is right for them. Many first time home buyers take advantage of mortgages that cater to their budgets and needs. Still others look for a larger mortgage that can be paid off in less than 30 years. Every person has a different type of mortgage that works best for their needs, and they should know the varieties available before they settle on one.

2. Have The Home Inspected And Evaluated

A professional inspection and evaluation may cost potential homeowners a little bit of money, but it’s worth every penny for the peace of mind in the end. An inspection can detect areas of concern that can affect the value of a home, including rotting wood, unauthorized additions, and even a sinking foundation. An evaluation of the home lets potential homeowners know what their new home is actually worth so they can better bargain price at closing.

3. Know The Neighborhood

Along with knowing the safety and value of a home, a couple wishing to buy their first family home should learn about the neighborhood as well. Knowing crime rates, actual neighbors, proximity to schools and parks, and other things that can affect children is something every person should know about any home they are interested in.

4. Choose A Home A Family Can Continue Growing In

Many couples choose a home with only a few bedrooms, only anticipating the immediate future. If homeowners choose a home they can see themselves living in for 15 years or more, they are more likely to go with a home they can have several children in for the entirety of their childhoods.

5. Stay Within Budget

As a general rule, new homeowners should stay within their income level when buying a home. If a home exceeds more than twice a family’s annual income, they should seriously consider the affordability of their new home. In choosing a real budget right away, new family homeowners can keep themselves from drowning in debt from a house they cannot really afford.