Don't Let Y2K, Tax Fears Stymie Investment Tactics.

MUTUAL-fund investors have so many reasons to be wary going into the last few weeks of 1999 that you wonder if the case for caution isn't too pat.

There's the Y2K bug. There's the obstacle of year-end capital gains distributions. Plus other little matters like a Federal Reserve decision on monetary policy.

Whenever prudence seems the obvious course, the old doctrine of contrary opinion argues for aggressiveness instead. Or at least not backing off from any long-term plan of regular fund investments.

Please understand, this is no market forecast. If you know anything at all about where stock prices are headed, you have better information than I do. My question is, how many of the current worries will anybody even remember two or three years from now?

"Inexperienced investors' instincts may cry out to them to wait it out," said Robert Goodman, senior economic adviser at Putnam Investments Inc. in Boston, a Marsh & McLennan Cos. subsidiary that manages a $237 billion fund group. "By giving in to these instincts they may lose a rare opportunity."

Goodman concedes in his comments on Putnam's Web site that these next weeks may be dicey.

Item No. 1: The millennium bug raises uncertainty about how the world's computers will function through the transition from a year they have read as 99 to one that ends in 00.

No matter how many official assurances we get that no serious disruptions will occur, New Year's Eve 1999 is going to bring some suspense. Any rational person can see why you'd want to hang onto your hard-earned money until it all shakes down.

"Y2K is this big wild card," said William Dudley, director of U.S. economic research at Goldman Sachs Group Inc. in New York. "The reality is, nobody knows."

Item No. 2: Year-end capital gains distributions are taxable, even if you reinvest them, and will probably be large at many stock funds for the fourth year in a row. Buy shares just before a distribution, and some of your money bounces right back to you with a tax bill attached.

"Investing in a fund right before it pays a sizable, taxable capital gains distribution is a lot like joining a party as it's winding down, then getting saddled with clean-up duty," says the Vanguard Group in Valley Forge, Pa., the second-largest fund family, with $500 billion in assets.

Then there are the issues of whether the Federal Reserve is going to push short-term interest rates higher again before year-end, or whether stocks are overvalued almost nine years after the end of the last bear market.

Now, let's suppose you're in the midst of a long-term program of investing in stock funds. If you hold back on buying any more shares this quarter, you may gain something in prudence and tax planning.

That maneuver could cost you in other ways, though. If the stock market should take off as investors begin to look past year-end, you could wind up paying a much higher price for the fund shares you eventually buy.

For somebody who is investing with a five-or 10- or 20-year objective, how much does it really matter whether the Y2K bug causes some short-term disruptions? Attempting to dodge Y2K's prospective effects is a classic exercise in market-timing, which increases the danger and difficulty of your mission.

As for avoiding year-end distributions, get tangled up in too much of that and you let a secondary issue influence your primary strategy.

Yes, taxable distributions can slow you down. They are by no means a total loss, though. With each taxable pay-out that you reinvest, your cost basis increases, reducing dollar for dollar the tax you will owe when you eventually sell your shares.

In tax-deferred accounts such as employer-sponsored 401(k) plans, current taxes are a non-issue. In taxable accounts, you can minimize distributions if you wish by putting your money in index funds, which don't often trade portfolio holdings and therefore realize few gains. Or you can look at tax-managed funds.

All these alternatives have more appeal than holding off on an investment you want to buy simply because of a tax snag.

In any program of regular investments, you may make your most fruitful purchases when doubts and worries run highest, because that's when prices are likely to be low. It's hard to buy bargains if you insist on waiting for all uncertainties and inconveniences to clear up.

Chet Currier is a columnist for Bloomberg News.