Choose wisely. There is only one correct answer to each question.
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1.
If you have the resources and want to buy stocks and save on mutual fund expenses, _______.
Assemble a collection of two dozen stable, leading companies that represent a variety of industries and hold them for years to come. If you've put together a truly diverse group of the largest U.S. companies, you'll likely get marketlike results. Active trading will make the strategy less cost effective, because it costs to trade.
2.
Why do stockholders have more control over their capital gains taxes than mutual fund holders do?
With stocks, there are no capital gains until the owner decides to sell her stock, and only if there is a profit. Mutual funds, however, must distribute any gains made during the year, whether fundholders want them or not. This can create a tax headache.
3.
If you want to control how much you pay in capital gains taxes each year, which of the options below is your best choice?
Own stocks directly. Mutual funds are required to distribute capital gains that their managers realize during the year; as a result, fund investors often receive taxable distributions that they didn't want or expect. When you own stocks directly, however, you control when you buy or sell, thereby controlling your own tax destiny.
4.
As a rule, which is more volatile?
Stocks. Stocks are more volatile than funds.
5.
Stocks are required to distribute capital gains to their shareholders every year.
False. Mutual funds are required to do this if there are any to distribute, but stocks are not. With stocks, there are no capital gains until the owner sells them for a profit.
