Q: If I buy a mutual fund and it grows, then I will pay both capital gains along its growth as it distributes those gains, plus I will have to pay capital gains when I finally sell the fund. This sounds like I am taxed twice on the same growth of capital. Is this right?

A: Nope. And here's why:
The distribution is taxed when it is paid to you, regardless if you actually take possession of the money. The fund sends you and the IRS a note saying they paid you a distribution. If you have those distributions reinvested in your fund, it is as if you made a deposit. So when the next gain is calculated, you are only paying tax on those new gains. When you sell the fund, all your gains are from the appreciation only, as the fund does not count a redeposited distribution as part of the gain it (or you) will declare to the IRS.

Here is an example and some math:

You put $1000 in a fund. It grows to $1200, and at year end your fund sells some stocks and makes a distribution of $200. Let's say you are in the 28% tax bracket, so you owe the IRS $56 on that gain (distribution). If you had your fund send you a check for $200, you would keep only $144 and would send a check to the IRS for $56.

But, let's say that you are having your fund redeposit that gain in your account. The next year, instead of having a $1000 initial balance, you have a $1200 balance, because the $200 distribution is now classed as a deposit. You still had to pay the $56 tax last year, but this year, when you fund goes to $1500, you will get a $300 distribution ($1500-$1200=$300) and need to pay tax on the $300.

The distribution comes from the gain the fund made of stocks that it SOLD that year. Let's say that your fund only sells 20% of its holdings a year, and that although the other stocks inproved in value, the fund did not sell them - that way the NAV goes up, but the distribution is only from the stocks it sold at a profit.

So when you retire, if your fund is now worth $150,000, and you only deposited $100,000, including the distributions you told the fund to redeposit, then you will be taxed on the $50,000 gain ($150,000-$100,000=$50,000) if you take ALL the money out. However, that tax is on the gain from stocks that went up in value that the fund never sold, and never paid a distribution for. So your tax would be on the $50,000 gain you were never taxed on.

This is the reason that many people attempt to reinvest forever and live on just the distributions when they retire, instead of taking the principal and undistributed gain out of the fund.

Scott McCormick

Q: What is Arthur Hill's track record for the Market Chart Tour and Stockwatch?

A: I do not keep a performance record for the Market Chart Tour or Stockwatch. Our goals for StockCharts.com go beyond simple buy/sell recommendations. We aim to:

• Provide Perspective: I convey my view through the trading and investing positions. Definitions of the position ratings can be found on the Market tour and Stockwatch home pages. These provide a relative idea of bullishness and bearishness, but are as close as I get to recommendations.
• Educate: In each commentary, I refer to specific chart formations, price action, volume, indicator set ups, candlesticks and much more. This is real-time, real-world technical analysis in action.
• Stimulate: Under position points, I list my key technical observations. Some agree and some may conflict with the trading or investing position. These are offered to balance out my perspective and show potential caveats.

If I were offering specific recommendations, especially for trading, then commentaries would have to be sent daily (perhaps even twice daily) with exact buy and sell points. In addition, such a daily service would most likely be fee-based. For the time being, we are committed to providing a free and weekly commentary with more stimulation and less recommendation.

In addition to our methodology, other reasons for less recommendation include:

• Investors and traders are unique: one style does not fit all.
• Risk: some people like a lot, some like a little.
• Tax considerations: everyone has a different tax profile.
• Portfolio size: trading is different with $500,000 than with $5000.
• Activity: there are active and no-so-active traders/investors

Our goal is to provide the tools that allow traders and investors to make their own decisions. To quote an old proverb: give a man a fish and he eats for a day; teach a man to fish and he eats for a lifetime. We aim to teach technical analysis that lasts a lifetime.