To Avoid Tax, Sell Shares Carefully

Q. I began investing in Southern California Edison in 1973 and enrolled in its dividend reinvestment program in 1982 at ever-increasing share prices. Overall, I have a nice capital gain on my purchases, but about a third of the shares were bought at prices higher than the stock’s current trading value. I want to sell this portion of the stock and take a capital loss. I have assigned specific certificates to the various shares. Will my plan pass muster with the Internal Revenue Service? -- E.Z .

A. If you can readily identify each block of stock you own and are prepared to deliver those certificates at the time you sell the shares, you should have no problem with the IRS.

Typically, the IRS takes the position that unless you can precisely identify the shares you are selling, you are deemed to be selling the first ones you purchased. This is the “first in, first out,” or FIFO, method of accounting. However, if you can deliver the certificate for the stock you want to sell or can get your broker to produce a statement of purchase verifying that you are selling shares bought on a certain date, you can sell whatever shares you want.

A Rule of Thumb for Age and Investments

Q. I am retired, single and can’t afford to lose my investment principal. I have two annuities, some life insurance and a bank account. I have invested in first trust deeds with an established mortgage lending firm and that gives me a steady income. Does my plan make sense? -- S.Q .

A. For starters, why do you, a single person, have life insurance? Do you have dependents or heirs for whom you want to provide? Absent significant beneficiaries, you may want to reconsider the wisdom of maintaining the policy, especially if it requires a large outlay on your part.

You may also want to evaluate the percentage of your portfolio invested in trust deeds. By far, this is the riskiest part of your portfolio, and if you pay attention to the news at all, you are surely aware of the large number of scams law enforcement officials have discovered in this industry, particularly in Southern California.

Overall, your goal should be to hold a diversified investment portfolio that is appropriate to your age. Some personal finance advisers recommend that one’s age should match the percentage of the portfolio that is invested in safe, stable holdings such as cash, bonds and fixed-rate annuities, and the remainder should be in equities and other, equally volatile instruments.

Mutual Fund Choice--Too Conservative?

Q. I have been retired for nine months. My home and car are paid off and my wife and I are able to live easily on my pension and Social Security benefits. I have rolled my 401(k) funds into an IRA that is invested in two mutual funds, Sierra and Vanguard Winsor II. Have I done the right thing? -- D.B .

A. Unfortunately, you haven’t provided enough information about your financial status or the specific funds you are enrolled in to permit a full answer. Perhaps some general comments would be useful.

We can’t comment on your Sierra investment because you haven’t said which of its many funds you joined. Vanguard’s Winsor II is generally regarded as a stable, if not spectacular, fund run by a respected and trusted company. It is, however, a conservatively invested growth and income fund whose performance has lagged the industry this year. According to industry statistics, Winsor II has grown 0.84% in the first three quarters of 1994, while the respected Lipper Index of Growth and Income Funds places the industry average at a 1.24% increase.

You may want to reduce the amount of money you have in your emergency fund. Since you are retired and receiving a pension and Social Security, you are not in any danger of losing your income stream.

As to the allocation of your investments, the maxim offered to the reader above holds true for you as well: Consider your numerical age as a guide to the percentage of your portfolio that should be invested in safe, stable investments, with the remainder in equities and equally volatile instruments.

Putting a Trust’s Idle Cash to Work

Q. I manage a small trust that currently has about $30,000, or 10% of its total value, in cash. I would like to put a substantial amount of that in a conservative income fund with some growth potential. Any recommendations? -- J.W .

A. With interest rates volatile and on the rise, our experts say now may not be the right time to invest in income funds, which are basically just bond mutual funds. If you are determined to get into this market, you should enter it slowly and incrementally with a “dollar cost averaging” strategy. Under this method of buying, you space out your purchases over months, and preferably years, to minimize exposure to any single market condition.

Funds to consider, says Margie Mullen, a Los Angeles investment adviser, include Benham Prime Money Market Fund and Vanguard Wellesley.