Judy’s comment on UGMA‘s yesterday was not entirely correct. If you read it before I fixed it, you might want to go back and see where it was misleading.
BUYING A HOUSE
M. Farbiarz: ‘I want to buy a house in three years, and have my money divided into two little sections. One section is money I’m *saving* for the house downpayment—that’s in a money market account. And the other section is the excess—money I don’t think I’ll need for the downpayment that I’m *investing.* Should some of that invested money be in an REIT? The idea is that if the value of houses zooms up in the next few years, I may find that my savings is too small for a downpayment. But then I’ll be able to dip into my REIT—which should go up in value along with housing prices. Andrew, does this make sense? And while we’re at it, why do you never mention REITs?’
☞ Interesting idea. I like it. I do mention REITs from time to time, but apparently not enough. Of course, there are many different kinds of REITs, of differing risks and rewards, so do your homework and pick one you think fits your plan. (No, I don’t know which.)
HOW DO YOU SELL SHORT?
Matvey Shindel: ‘I’ve never held any short positions (and am not about to), but how does it practically work? Do you have to have cash in your brokerage account when buying or holding a ‘short’? How did the short sellers of Enron, for example, liquidated their shorts after Enron declared bankruptcy? What happens if the shorted stock is no longer traded?’
☞ First off, you don’t WANT to liquidate your short sale, because when you do, short-term capital gains tax is due. In an ideal world, you’d stay short forever, never paying the tax.
Once the security completely disappears and becomes worthless, you have to declare the loss and pay the tax. So the best short is the high-flier that falls back to earth but never entirely flattens.
All this said, I’m glad you’re not about to short anything: shorting is very, very dangerous. And the odds are against you:
- You PAY the dividend, if any, rather than getting it.
- You pay a commission to do the short sale, of course, and another if you cover your short.
- You pay a high tax on any winnings, no matter how many years you held the short. (There is no such thing as a long-term capital gain on a short sale, since you never owned the asset for even a second, let alone a year and a day. Someone else owned the asset in a margin account and, unbeknownst to him or her, loaned ti to you. If he or she sold it along the way, your broker would ordinarily, though not always, manage to find someone else to lend the shares, and you wouldn’t even know it had happened.).
- And if the stock goes up to irrational heights before it crashes (if it ever does crash), you may well not have the nerve – or the collateral – to maintain your position. Instead, YOU will be the person who, in finally covering his short sale with a huge loss, buys at the very, very top. (Most often, that’s who’s paying those crazy, tippy-top prices: not people who want the stock, but short-sellers desperate to cover their losses and get out so they can . . . finally . . . get a night’s sleep.)
Quote of the Day
In 1800, 75% of [an American's] working man's expenditures went for food alone. By 1850, that had dropped to 50%. Today it is a little more than 11%.~The Wall Street Journal, September 20, 1996
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