Here’s my attempt to hopefully give you some short and easy-to-understand answers to your questions.
Although Charles Givens had some interesting opinions, I would not rely on them. His advice was written in the days when rates were much, much higher than they are now. If I remember correctly, his break point for moving out of stocks and into money market funds was around 9%, which we are no where near today. Anyway, stock have risen in rising interest rate environments, so Givens’ advice is far from a sure thing.
One of the goals with money market funds is to maintain a stable value per share (net asset value), which is not the case with bond funds. Money market funds invest in very short term debt so that if interest rates change, it won’t have an impact on such short-term securities. Bonds (and thus bond funds) are different. When interest rates rise, bond prices correspondingly fall and vise versa. How much they fall (or rise) depends on how much interest rates move and the remaining term of the bond (a longer term bond will move more dramatically in price than a shorter-term bond). Givens advice here does make sense that you should invest in money market funds when rates are rising because the money market fund’s rate will rise as well, and rising interest rates make bond prices (and stock to some degree) fall.
Regarding avoiding funds at the end of the year, all else being the same, it is better to invest in a fund after it has declared any capital gains and/or dividends so that you won’t have to pay tax on those distributions so quickly. I will emphasize, however, that what’s at stake is WHEN you pay taxes and not HOW MUCH. You will not be paying any more taxes by buying a fund before a distribution; you will only be paying the tax sooner (as in the current tax year) rather than later (as in when you ultimately sell the fund). Of course, you wouldn’t want to intentionally wait a few days to avoid the distribution if the market was going to rise during that time, since you’d lose out more in appreciation than in tax savings!
I myself have tried individual stock and funds, and although I sometimes do well with individual stocks, I personally feel that funds work out better (at least in my case). I’m also inclined to stick with index funds, as I’ve been hard pressed to find funds that consistently beat the indexes year after year.
Hope that helps. Feel free to e-mail me if you have any questions at
darrellmak@yahoo.com.