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How to Prepare for the Obama Tax Trap

December 22, 2008 – by Richard Band

The Bush tax cuts that reduced taxes on both dividends and long-term capital gains to 15% boosted the fortune of dividend stocks from 2003 through 2007. Those cuts could be lost for good.

The chain reaction could not only wipe away the gains tax-favored dividend stocks that have enjoyed for the past five years, but also blindside throngs of retiring baby boomers now hopping on the dividend-stock bandwagon as a way to safely pay for their retirement.

Investments across the board are likely to be repriced to reflect the new tax realities, and the slide may have already begun in the midst of the current financial crisis. Over the past few months, even the biggest diversified stock funds are down significantly, and the most vulnerable banks, retailers and even some utilities have cut dividends.

That’s why it’s important that you reposition your assets now. Part of your repositioning is to unload stocks that are irreparably damaged or whose future is bleak to free up your cash for the right investments for these times. Let me help get you started with several stocks and mutual funds you should sell now if you own them.

Investments to Avoid

Over the past six months, dividend cuts (and speculation about further cuts) have knocked high-yielding stocks for a loop. Fear of falling payouts has gripped investors to such a degree that dividend-rich stocks haven’t provided nearly the kind of safe haven they did in past bear markets.

The scenario is even bleaker when you look ahead to the increase on dividend taxes looming on the horizon, so let’s talk about investments to sell…

Homebuilders: I advise selling Toll Brothers (TOL) if you own it.

Coal Producers: I harbor real concerns about coal producers right now. If not from President Obama himself, his allies in Congress will probably try to slap punitive taxes and regulations on the use of coal as a fuel. Sell Arch Coal (ACI).

Get the names of two more coal producers to avoid, in How to Avoid the Obama Tax Trap. It’s yours free when you join Profitable Investing today. Click here to learn more.

Healthcare: We can also expect a pushback by Medicare and other federal agencies against healthcare companies that manufacture extremely high-cost gizmos like coronary stents.

Emerging Markets: Emerging markets offer tremendous long-term growth potential…

…but they’re also acutely exposed to the downside of the global economic cycle. Many emerging countries earn the bulk of their livelihood from producing raw materials. Others rely heavily on manufacturing.

In a worldwide economic slowdown, these sectors will take a harder hit than the service industries that dominate the developed nations, and capital preservation ranks even higher than usual on our list of priorities right now.

One of my jobs at Profitable Investing is to help subscribers balance risk against reward. That’s why I recently advised that my readers sell iShares MCSI Emerging Markets Index Fund (EEM).

Get the names of three more emerging market funds to sell here.

Banks: We also closed out our position in Citigroup (C). Unfortunately, Citi made too many loans in the earlier part of this decade to borrowers of lesser quality, with consequences that have ravaged the bank’s earnings.

CEO Vikram Pandit, brought in last December to clean up the mess, has begun to slash costs. However, I’m not nearly so impressed with the flurry of takeover bids he launched — especially the attempted tie-up with Wachovia in September. Why would a troubled bank want to merge with another even more troubled than itself?

For complete details on all the sectors and investments Richard Band is advising his readers to avoid, join Profitable Investing risk-free today and get your free copy of How to Avoid the Obama Tax Trap.

Sell These Mismanaged Funds

You don’t need me to tell you it has been a tough year — no, a disastrous year — for many mutual fund managers. Even some of the greats, with the finest long-term track records, have stumbled.

And that’s precisely what makes it tricky to decide which funds you should hang on to during this year-end tax-selling season, and which you should cut loose.

You don’t want to get rid of a fund if the manager is about to come roaring back to glory. On the other hand…

…if this year’s performance reflects a fundamental problem that may linger for years, it’s not too late to bail — even now.

Some funds just aren’t worth keeping. It’s not simply a matter of poor performance or high expenses. You should also sell a fund if the manager is taking reckless risks: concentrating a huge percentage of the fund in one industry, or "doubling down" on stocks that have collapsed in price since the fund first bought them.

I’m wary, too, of managers who refuse to acknowledge their mistakes. If a fund manager insists that his or her analysis of a company that hurtled into bankruptcy was "fundamentally on target," I have to question whether that person is capable of basic critical thinking. Self-delusion can be fatal in this business.

I recommend selling the following poorly managed funds. Performance is a problem for all of them, and some are guilty of other deficiencies I mentioned:

  • AIM Constellation
  • Legg Mason Value Trust
  • Fidelity Aggressive Growth
  • Pioneer Value
  • Hotchkis & Wiley Core Value
  • Putnam Voyager
  • Janus Worldwide
  • RiverSource Large Cap Equity
  • John Hancock Classic Value

How About Some Good News?

Some fund managers have come surprisingly well through this trial by fire. Yes, they’re still down for the year. But they’ve proved much more nimble than their peers at sidestepping Wall Street’s pitfalls in 2008. These are the players with the best chance to rise to the top of the charts in the next bull market.

Here’s one that makes the grade.

Oakmark Equity & Income (OAKBX, 800/625-6275; $1,000 minimum investment)

Stocks got you scared stiff?

Clyde McGregor, another old hand (1995), knows just the right tonic for frayed nerves: a carefully calibrated mix of stocks and bonds. After trumping his fellow "blend fund" managers for seven of the past eight years, McGregor is turning in what may be his most brilliant performance ever in 2008.

Granted, OAKBX was off 4.9% as of September 30. But that’s a spectacular 1,045 basis points ahead of the competition. This guy wins my vote as portfolio manager of the decade. May he live to be 120 — and never retire! Fee-free through all leading discount brokers.

Get details on two more funds that make the grade in How to Avoid the Obama Tax Trapclick here now.

Now more than ever it’s important that you bolster your defenses and cushion your portfolio. Richard Band’s Profitable Investing can help. As the newsletter world’s #1 authority on investing for low-risk growth, his Total Return Portfolio has quadrupled investors’ money since inception in 1990 — while taking far less risk than the popular stock indexes. Get the same advantage for your portfolio. Click here to get started with this special offer!