Ask the Fool

Funds and Taxes

Q: Do I have to pay capital gains taxes for stocks my mutual fund sold when the fund paid taxes on them, too? — D.S., Laramie, Wyoming

A: A mutual fund doesn’t pay taxes on capital gains of stocks its managers sold during the year — you do.

Funds are required by law to distribute all income from dividends, interest and capital gains to the fund’s shareholders. They generally do so near the end of the year and report such distributions to you (and to the IRS), typically on Form 1099-DIV. You’re responsible for reporting such distributions on your tax return and for paying any taxes due on them. It’s common to have your distributions reinvested in additional shares of the mutual fund, but that doesn’t keep you from having to pay taxes on them.

The rules are different when the mutual fund is held in a tax-deferred account such as an IRA or 401(k). In that case, you’ll likely be taxed only when you withdraw money from that account, or — if it’s a Roth IRA or Roth 401(k) and you’ve followed the rules — you won’t be taxed on your withdrawals at all. It’s smart to keep records of all your mutual fund distributions, share purchases and share sales.

Q: What can I read on the history of the stock market? — K.W., online

A: Try “Learn to Earn” by Peter Lynch (Simon & Schuster, $17), Peter Bernstein’s “Capital Ideas: The Improbable Origins of Modern Wall Street” (Wiley, $20), “Devil Take the Hindmost: A History of Financial Speculation” by Edward Chancellor (Plume, $18) and “A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation” by Scott Nations (William Morrow, $18).

Fool’s School

Investing Internationally

It’s smart to diversify your investments and not have too many eggs in one basket. You can diversify by industry — so, for example, you’re not too heavily invested in credit card companies just as some other payment system becomes dominant. Diversifying by market value can keep you from holding only small or huge companies. You can also diversify geographically.

Adding some international holdings to your portfolio is good for diversification. Such companies may also grow faster than many U.S. companies, especially if they’re based in fast-growing developing or emerging economies.

But international investing does have some risks. For starters, shareholder rights and protections are stronger in the United States than many other places. The Securities and Exchange Commission (SEC) offers many warnings at Investor.gov. Foreign stock markets may operate differently from those in the U.S., and offer fewer legal recourses to investors. Also, some countries are especially vulnerable to political, social and economic unrest. And currency exchange rates can increase or reduce your returns — a strong U.S. dollar, for example, means revenue earned abroad shrinks when converted back to dollars, which can affect the share price.

So what can you do? One way to make it easier on yourself is simply to invest in a U.S.-based mutual fund focused on international stocks, letting its managers make informed investment decisions. There are even some inexpensive index funds available that track the world’s non-U.S. stocks or even the entire global stock market — such as, respectively, the Vanguard FTSE All-World ex-US ETF (VEU) and the Vanguard Total World Stock ETF (VT).

You can also buy into U.S. companies that have extensive global operations. For example, Apple gets about 55% of its revenue outside the Americas, while about half of Johnson & Johnson’s revenue comes from outside the U.S. You don’t have to leave home to invest internationally.

My Dumbest Investment

A Cryptic Loss

My dumbest investment was in Ethereum. I learned that if it seems too good to be true, and no one seems to understand it, it probably is too good to be true. — Brian J., online

The Fool responds: Super investor Warren Buffett is famous for steering clear of businesses he doesn’t understand.

Ethereum is one of many “cryptocurrency” digital investments out there — another is bitcoin — that few people understand. Ethereum is a distributed blockchain network, meaning that it’s a platform that can run decentralized applications. If you still don’t get it, you’re not alone.

So what’s wrong with Ethereum? Well, the entire cryptocurrency market is still very young and very volatile. While some people have made good money in it, many others have lost a lot. Ethereum’s currency, Ether, was priced below $10 three years ago and topped $1,000 a year later. Recently, though, it was sitting at $131.

It’s hard to pin down cryptocurrencies’ intrinsic values. Many investors in them are just speculating, buying in the blind hope of hitting a jackpot. It’s also unclear yet whether any cryptocurrencies will be good long-term investments, as technologies can change over time and more newcomers enter the market. Many investors worry whether the digital nature of cryptocurrencies makes hacking a higher risk.

Shares of stock in public companies, by contrast, are tied to actual ongoing businesses, which generally have revenue and even profit.

The Motley Fool Take

Calling China Mobile

China Mobile (NYSE: CHL) is the largest state-backed telecommunications company in China, with 946.5 million wireless customers and 187.7 million wireline customers. However, its stock lost ground in 2019 due to several major challenges.

First, the Chinese government forced China Mobile and its peers to lower their wireless fees and eliminate data roaming charges to boost the country’s mobile penetration rates. Second, China Mobile is a major component of the Hang Seng Index in Hong Kong, and the yearlong protests rattled most Hong Kong stocks. Lastly, the U.S.-China trade war and economic slowdown in China caused many investors to shun Chinese stocks.

China Mobile’s sales growth is expected to be nearly flat, and its earnings to grow by about 2% this year, but it’s still a well-run company. The company pays semi-annual dividends of about 40% to 50% of earnings.

China Mobile increased its dividend annually from 2015 to 2018 (excluding a special dividend it paid in 2017), and the dividend’s forward-looking yield was recently 4.75%. The stock recently traded at a price-to-earnings (P/E) ratio below 10 — giving it a lower valuation than many of its American counterparts.

China Mobile isn’t out of the woods yet, but trade tensions are waning, and 5G upgrades are right around the corner. Those tailwinds could spark a rally next year.

EDITOR’S NOTE: The Motley Fool is an investment column created by brothers David and Tom Gardner and distributed by Andrews McMeel Syndication.