What if it’s all been a big fat lie?

http://www.nytimes.com/2002/07/07/magazine/what-if-it-s-all-been-a-big-fat-lie.html?pagewanted=all&src=pm

also read rebuttal at http://www.cspinet.org/nah/11_02/bigfatlies.pdf

If the members of the American medical establishment were to have a collective find-yourself-standing-naked-in-Times-Square-type nightmare, this might be it. They spend 30 years ridiculing Robert Atkins, author of the phenomenally-best-selling ”Dr. Atkins’ Diet Revolution” and ”Dr. Atkins’ New Diet Revolution,” accusing the Manhattan doctor of quackery and fraud, only to discover that the unrepentant Atkins was right all along. Or maybe it’s this: they find that their very own dietary recommendations — eat less fat and more carbohydrates — are the cause of the rampaging epidemic of obesity in America. Or, just possibly this: they find out both of the above are true.

When Atkins first published his ”Diet Revolution” in 1972, Americans were just coming to terms with the proposition that fat — particularly the saturated fat of meat and dairy products — was the primary nutritional evil in the American diet. Atkins managed to sell millions of copies of a book promising that we would lose weight eating steak, eggs and butter to our heart’s desire, because it was the carbohydrates, the pasta, rice, bagels and sugar, that caused obesity and even heart disease. Fat, he said, was harmless.

Atkins allowed his readers to eat ”truly luxurious foods without limit,” as he put it, ”lobster with butter sauce, steak with béarnaise sauce . . . bacon cheeseburgers,” but allowed no starches or refined carbohydrates, which means no sugars or anything made from flour. Atkins banned even fruit juices, and permitted only a modicum of vegetables, although the latter were negotiable as the diet progressed.

Atkins was by no means the first to get rich pushing a high-fat diet that restricted carbohydrates, but he popularized it to an extent that the American Medical Association considered it a potential threat to our health. The A.M.A. attacked Atkins’s diet as a ”bizarre regimen” that advocated ”an unlimited intake of saturated fats and cholesterol-rich foods,” and Atkins even had to defend his diet in Congressional hearings.

Thirty years later, America has become weirdly polarized on the subject of weight. On the one hand, we’ve been told with almost religious certainty by everyone from the surgeon general on down, and we have come to believe with almost religious certainty, that obesity is caused by the excessive consumption of fat, and that if we eat less fat we will lose weight and live longer. On the other, we have the ever-resilient message of Atkins and decades’ worth of best-selling diet books, including ”The Zone,” ”Sugar Busters” and ”Protein Power” to name a few. All push some variation of what scientists would call the alternative hypothesis: it’s not the fat that makes us fat, but the carbohydrates, and if we eat less carbohydrates we will lose weight and live longer.

The perversity of this alternative hypothesis is that it identifies the cause of obesity as precisely those refined carbohydrates at the base of the famous Food Guide Pyramid — the pasta, rice and bread — that we are told should be the staple of our healthy low-fat diet, and then on the sugar or corn syrup in the soft drinks, fruit juices and sports drinks that we have taken to consuming in quantity if for no other reason than that they are fat free and so appear intrinsically healthy. While the low-fat-is-good-health dogma represents reality as we have come to know it, and the government has spent hundreds of millions of dollars in research trying to prove its worth, the low-carbohydrate message has been relegated to the realm of unscientific fantasy.

Over the past five years, however, there has been a subtle shift in the scientific consensus. It used to be that even considering the possibility of the alternative hypothesis, let alone researching it, was tantamount to quackery by association. Now a small but growing minority of establishment researchers have come to take seriously what the low-carb-diet doctors have been saying all along. Walter Willett, chairman of the department of nutrition at the Harvard School of Public Health, may be the most visible proponent of testing this heretic hypothesis. Willett is the de facto spokesman of the longest-running, most comprehensive diet and health studies ever performed, which have already cost upward of $100 million and include data on nearly 300,000 individuals. Those data, says Willett, clearly contradict the low-fat-is-good-health message ”and the idea that all fat is bad for you; the exclusive focus on adverse effects of fat may have contributed to the obesity epidemic.”

These researchers point out that there are plenty of reasons to suggest that the low-fat-is-good-health hypothesis has now effectively failed the test of time. In particular, that we are in the midst of an obesity epidemic that started around the early 1980’s, and that this was coincident with the rise of the low-fat dogma. (Type 2 diabetes, the most common form of the disease, also rose significantly through this period.) They say that low-fat weight-loss diets have proved in clinical trials and real life to be dismal failures, and that on top of it all, the percentage of fat in the American diet has been decreasing for two decades. Our cholesterol levels have been declining, and we have been smoking less, and yet the incidence of heart disease has not declined as would be expected. ”That is very disconcerting,” Willett says. ”It suggests that something else bad is happening.”

The science behind the alternative hypothesis can be called Endocrinology 101, which is how it’s referred to by David Ludwig, a researcher at Harvard Medical School who runs the pediatric obesity clinic at Children’s Hospital Boston, and who prescribes his own version of a carbohydrate-restricted diet to his patients. Endocrinology 101 requires an understanding of how carbohydrates affect insulin and blood sugar and in turn fat metabolism and appetite. This is basic endocrinology, Ludwig says, which is the study of hormones, and it is still considered radical because the low-fat dietary wisdom emerged in the 1960’s from researchers almost exclusively concerned with the effect of fat on cholesterol and heart disease. At the time, Endocrinology 101 was still underdeveloped, and so it was ignored. Now that this science is becoming clear, it has to fight a quarter century of anti-fat prejudice.

The alternative hypothesis also comes with an implication that is worth considering for a moment, because it’s a whopper, and it may indeed be an obstacle to its acceptance. If the alternative hypothesis is right — still a big ”if” — then it strongly suggests that the ongoing epidemic of obesity in America and elsewhere is not, as we are constantly told, due simply to a collective lack of will power and a failure to exercise. Rather it occurred, as Atkins has been saying (along with Barry Sears, author of ”The Zone”), because the public health authorities told us unwittingly, but with the best of intentions, to eat precisely those foods that would make us fat, and we did. We ate more fat-free carbohydrates, which, in turn, made us hungrier and then heavier. Put simply, if the alternative hypothesis is right, then a low-fat diet is not by definition a healthy diet. In practice, such a diet cannot help being high in carbohydrates, and that can lead to obesity, and perhaps even heart disease. ”For a large percentage of the population, perhaps 30 to 40 percent, low-fat diets are counterproductive,” says Eleftheria Maratos-Flier, director of obesity research at Harvard’s prestigious Joslin Diabetes Center. ”They have the paradoxical effect of making people gain weight.”

Scientists are still arguing about fat, despite a century of research, because the regulation of appetite and weight in the human body happens to be almost inconceivably complex, and the experimental tools we have to study it are still remarkably inadequate. This combination leaves researchers in an awkward position. To study the entire physiological system involves feeding real food to real human subjects for months or years on end, which is prohibitively expensive, ethically questionable (if you’re trying to measure the effects of foods that might cause heart disease) and virtually impossible to do in any kind of rigorously controlled scientific manner. But if researchers seek to study something less costly and more controllable, they end up studying experimental situations so oversimplified that their results may have nothing to do with reality. This then leads to a research literature so vast that it’s possible to find at least some published research to support virtually any theory. The result is a balkanized community — ”splintered, very opinionated and in many instances, intransigent,” says Kurt Isselbacher, a former chairman of the Food and Nutrition Board of the National Academy of Science — in which researchers seem easily convinced that their preconceived notions are correct and thoroughly uninterested in testing any other hypotheses but their own.

What’s more, the number of misconceptions propagated about the most basic research can be staggering. Researchers will be suitably scientific describing the limitations of their own experiments, and then will cite something as gospel truth because they read it in a magazine. The classic example is the statement heard repeatedly that 95 percent of all dieters never lose weight, and 95 percent of those who do will not keep it off. This will be correctly attributed to the University of Pennsylvania psychiatrist Albert Stunkard, but it will go unmentioned that this statement is based on 100 patients who passed through Stunkard’s obesity clinic during the Eisenhower administration.

With these caveats, one of the few reasonably reliable facts about the obesity epidemic is that it started around the early 1980’s. According to Katherine Flegal, an epidemiologist at the National Center for Health Statistics, the percentage of obese Americans stayed relatively constant through the 1960’s and 1970’s at 13 percent to 14 percent and then shot up by 8 percentage points in the 1980’s. By the end of that decade, nearly one in four Americans was obese. That steep rise, which is consistent through all segments of American society and which continued unabated through the 1990’s, is the singular feature of the epidemic. Any theory that tries to explain obesity in America has to account for that. Meanwhile, overweight children nearly tripled in number. And for the first time, physicians began diagnosing Type 2 diabetes in adolescents. Type 2 diabetes often accompanies obesity. It used to be called adult-onset diabetes and now, for the obvious reason, is not.

So how did this happen? The orthodox and ubiquitous explanation is that we live in what Kelly Brownell, a Yale psychologist, has called a ”toxic food environment” of cheap fatty food, large portions, pervasive food advertising and sedentary lives. By this theory, we are at the Pavlovian mercy of the food industry, which spends nearly $10 billion a year advertising unwholesome junk food and fast food. And because these foods, especially fast food, are so filled with fat, they are both irresistible and uniquely fattening. On top of this, so the theory goes, our modern society has successfully eliminated physical activity from our daily lives. We no longer exercise or walk up stairs, nor do our children bike to school or play outside, because they would prefer to play video games and watch television. And because some of us are obviously predisposed to gain weight while others are not, this explanation also has a genetic component — the thrifty gene. It suggests that storing extra calories as fat was an evolutionary advantage to our Paleolithic ancestors, who had to survive frequent famine. We then inherited these ”thrifty” genes, despite their liability in today’s toxic environment.

This theory makes perfect sense and plays to our puritanical prejudice that fat, fast food and television are innately damaging to our humanity. But there are two catches. First, to buy this logic is to accept that the copious negative reinforcement that accompanies obesity — both socially and physically — is easily overcome by the constant bombardment of food advertising and the lure of a supersize bargain meal. And second, as Flegal points out, little data exist to support any of this. Certainly none of it explains what changed so significantly to start the epidemic. Fast-food consumption, for example, continued to grow steadily through the 70’s and 80’s, but it did not take a sudden leap, as obesity did.

As far as exercise and physical activity go, there are no reliable data before the mid-80’s, according to William Dietz, who runs the division of nutrition and physical activity at the Centers for Disease Control; the 1990’s data show obesity rates continuing to climb, while exercise activity remained unchanged. This suggests the two have little in common. Dietz also acknowledged that a culture of physical exercise began in the United States in the 70’s — the ”leisure exercise mania,” as Robert Levy, director of the National Heart, Lung and Blood Institute, described it in 1981 — and has continued through the present day.

As for the thrifty gene, it provides the kind of evolutionary rationale for human behavior that scientists find comforting but that simply cannot be tested. In other words, if we were living through an anorexia epidemic, the experts would be discussing the equally untestable ”spendthrift gene” theory, touting evolutionary advantages of losing weight effortlessly. An overweight homo erectus, they’d say, would have been easy prey for predators.

It is also undeniable, note students of Endocrinology 101, that mankind never evolved to eat a diet high in starches or sugars. ”Grain products and concentrated sugars were essentially absent from human nutrition until the invention of agriculture,” Ludwig says, ”which was only 10,000 years ago.” This is discussed frequently in the anthropology texts but is mostly absent from the obesity literature, with the prominent exception of the low-carbohydrate-diet books.

What’s forgotten in the current controversy is that the low-fat dogma itself is only about 25 years old. Until the late 70’s, the accepted wisdom was that fat and protein protected against overeating by making you sated, and that carbohydrates made you fat. In ”The Physiology of Taste,” for instance, an 1825 discourse considered among the most famous books ever written about food, the French gastronome Jean Anthelme Brillat-Savarin says that he could easily identify the causes of obesity after 30 years of listening to one ”stout party” after another proclaiming the joys of bread, rice and (from a ”particularly stout party”) potatoes. Brillat-Savarin described the roots of obesity as a natural predisposition conjuncted with the ”floury and feculent substances which man makes the prime ingredients of his daily nourishment.” He added that the effects of this fecula — i.e., ”potatoes, grain or any kind of flour” — were seen sooner when sugar was added to the diet.

This is what my mother taught me 40 years ago, backed up by the vague observation that Italians tended toward corpulence because they ate so much pasta. This observation was actually documented by Ancel Keys, a University of Minnesota physician who noted that fats ”have good staying power,” by which he meant they are slow to be digested and so lead to satiation, and that Italians were among the heaviest populations he had studied. According to Keys, the Neapolitans, for instance, ate only a little lean meat once or twice a week, but ate bread and pasta every day for lunch and dinner. ”There was no evidence of nutritional deficiency,” he wrote, ”but the working-class women were fat.”

By the 70’s, you could still find articles in the journals describing high rates of obesity in Africa and the Caribbean where diets contained almost exclusively carbohydrates. The common thinking, wrote a former director of the Nutrition Division of the United Nations, was that the ideal diet, one that prevented obesity, snacking and excessive sugar consumption, was a diet ”with plenty of eggs, beef, mutton, chicken, butter and well-cooked vegetables.” This was the identical prescription Brillat-Savarin put forth in 1825.

It was Ancel Keys, paradoxically, who introduced the low-fat-is-good-health dogma in the 50’s with his theory that dietary fat raises cholesterol levels and gives you heart disease. Over the next two decades, however, the scientific evidence supporting this theory remained stubbornly ambiguous. The case was eventually settled not by new science but by politics. It began in January 1977, when a Senate committee led by George McGovern published its ”Dietary Goals for the United States,” advising that Americans significantly curb their fat intake to abate an epidemic of ”killer diseases” supposedly sweeping the country. It peaked in late 1984, when the National Institutes of Health officially recommended that all Americans over the age of 2 eat less fat. By that time, fat had become ”this greasy killer” in the memorable words of the Center for Science in the Public Interest, and the model American breakfast of eggs and bacon was well on its way to becoming a bowl of Special K with low-fat milk, a glass of orange juice and toast, hold the butter — a dubious feast of refined carbohydrates.

In the intervening years, the N.I.H. spent several hundred million dollars trying to demonstrate a connection between eating fat and getting heart disease and, despite what we might think, it failed. Five major studies revealed no such link. A sixth, however, costing well over $100 million alone, concluded that reducing cholesterol by drug therapy could prevent heart disease. The N.I.H. administrators then made a leap of faith. Basil Rifkind, who oversaw the relevant trials for the N.I.H., described their logic this way: they had failed to demonstrate at great expense that eating less fat had any health benefits. But if a cholesterol-lowering drug could prevent heart attacks, then a low-fat, cholesterol-lowering diet should do the same. ”It’s an imperfect world,” Rifkind told me. ”The data that would be definitive is ungettable, so you do your best with what is available.”

Some of the best scientists disagreed with this low-fat logic, suggesting that good science was incompatible with such leaps of faith, but they were effectively ignored. Pete Ahrens, whose Rockefeller University laboratory had done the seminal research on cholesterol metabolism, testified to McGovern’s committee that everyone responds differently to low-fat diets. It was not a scientific matter who might benefit and who might be harmed, he said, but ”a betting matter.” Phil Handler, then president of the National Academy of Sciences, testified in Congress to the same effect in 1980. ”What right,” Handler asked, ”has the federal government to propose that the American people conduct a vast nutritional experiment, with themselves as subjects, on the strength of so very little evidence that it will do them any good?”

Nonetheless, once the N.I.H. signed off on the low-fat doctrine, societal forces took over. The food industry quickly began producing thousands of reduced-fat food products to meet the new recommendations. Fat was removed from foods like cookies, chips and yogurt. The problem was, it had to be replaced with something as tasty and pleasurable to the palate, which meant some form of sugar, often high-fructose corn syrup. Meanwhile, an entire industry emerged to create fat substitutes, of which Procter & Gamble’s olestra was first. And because these reduced-fat meats, cheeses, snacks and cookies had to compete with a few hundred thousand other food products marketed in America, the industry dedicated considerable advertising effort to reinforcing the less-fat-is-good-health message. Helping the cause was what Walter Willett calls the ”huge forces” of dietitians, health organizations, consumer groups, health reporters and even cookbook writers, all well-intended missionaries of healthful eating.

Few experts now deny that the low-fat message is radically oversimplified. If nothing else, it effectively ignores the fact that unsaturated fats, like olive oil, are relatively good for you: they tend to elevate your good cholesterol, high-density lipoprotein (H.D.L.), and lower your bad cholesterol, low-density lipoprotein (L.D.L.), at least in comparison to the effect of carbohydrates. While higher L.D.L. raises your heart-disease risk, higher H.D.L. reduces it.

What this means is that even saturated fats — a k a, the bad fats — are not nearly as deleterious as you would think. True, they will elevate your bad cholesterol, but they will also elevate your good cholesterol. In other words, it’s a virtual wash. As Willett explained to me, you will gain little to no health benefit by giving up milk, butter and cheese and eating bagels instead.

But it gets even weirder than that. Foods considered more or less deadly under the low-fat dogma turn out to be comparatively benign if you actually look at their fat content. More than two-thirds of the fat in a porterhouse steak, for instance, will definitively improve your cholesterol profile (at least in comparison with the baked potato next to it); it’s true that the remainder will raise your L.D.L., the bad stuff, but it will also boost your H.D.L. The same is true for lard. If you work out the numbers, you come to the surreal conclusion that you can eat lard straight from the can and conceivably reduce your risk of heart disease.

The crucial example of how the low-fat recommendations were oversimplified is shown by the impact — potentially lethal, in fact — of low-fat diets on triglycerides, which are the component molecules of fat. By the late 60’s, researchers had shown that high triglyceride levels were at least as common in heart-disease patients as high L.D.L. cholesterol, and that eating a low-fat, high-carbohydrate diet would, for many people, raise their triglyceride levels, lower their H.D.L. levels and accentuate what Gerry Reaven, an endocrinologist at Stanford University, called Syndrome X. This is a cluster of conditions that can lead to heart disease and Type 2 diabetes.

It took Reaven a decade to convince his peers that Syndrome X was a legitimate health concern, in part because to accept its reality is to accept that low-fat diets will increase the risk of heart disease in a third of the population. ”Sometimes we wish it would go away because nobody knows how to deal with it,” said Robert Silverman, an N.I.H. researcher, at a 1987 N.I.H. conference. ”High protein levels can be bad for the kidneys. High fat is bad for your heart. Now Reaven is saying not to eat high carbohydrates. We have to eat something.”

Surely, everyone involved in drafting the various dietary guidelines wanted Americans simply to eat less junk food, however you define it, and eat more the way they do in Berkeley, Calif. But we didn’t go along. Instead we ate more starches and refined carbohydrates, because calorie for calorie, these are the cheapest nutrients for the food industry to produce, and they can be sold at the highest profit. It’s also what we like to eat. Rare is the person under the age of 50 who doesn’t prefer a cookie or heavily sweetened yogurt to a head of broccoli.

”All reformers would do well to be conscious of the law of unintended consequences,” says Alan Stone, who was staff director for McGovern’s Senate committee. Stone told me he had an inkling about how the food industry would respond to the new dietary goals back when the hearings were first held. An economist pulled him aside, he said, and gave him a lesson on market disincentives to healthy eating: ”He said if you create a new market with a brand-new manufactured food, give it a brand-new fancy name, put a big advertising budget behind it, you can have a market all to yourself and force your competitors to catch up. You can’t do that with fruits and vegetables. It’s harder to differentiate an apple from an apple.”

Nutrition researchers also played a role by trying to feed science into the idea that carbohydrates are the ideal nutrient. It had been known, for almost a century, and considered mostly irrelevant to the etiology of obesity, that fat has nine calories per gram compared with four for carbohydrates and protein. Now it became the fail-safe position of the low-fat recommendations: reduce the densest source of calories in the diet and you will lose weight. Then in 1982, J.P. Flatt, a University of Massachusetts biochemist, published his research demonstrating that, in any normal diet, it is extremely rare for the human body to convert carbohydrates into body fat. This was then misinterpreted by the media and quite a few scientists to mean that eating carbohydrates, even to excess, could not make you fat — which is not the case, Flatt says. But the misinterpretation developed a vigorous life of its own because it resonated with the notion that fat makes you fat and carbohydrates are harmless.

As a result, the major trends in American diets since the late 70’s, according to the U.S.D.A. agricultural economist Judith Putnam, have been a decrease in the percentage of fat calories and a ”greatly increased consumption of carbohydrates.” To be precise, annual grain consumption has increased almost 60 pounds per person, and caloric sweeteners (primarily high-fructose corn syrup) by 30 pounds. At the same time, we suddenly began consuming more total calories: now up to 400 more each day since the government started recommending low-fat diets.

If these trends are correct, then the obesity epidemic can certainly be explained by Americans’ eating more calories than ever — excess calories, after all, are what causes us to gain weight — and, specifically, more carbohydrates. The question is why?

The answer provided by Endocrinology 101 is that we are simply hungrier than we were in the 70’s, and the reason is physiological more than psychological. In this case, the salient factor — ignored in the pursuit of fat and its effect on cholesterol — is how carbohydrates affect blood sugar and insulin. In fact, these were obvious culprits all along, which is why Atkins and the low-carb-diet doctors pounced on them early.

The primary role of insulin is to regulate blood-sugar levels. After you eat carbohydrates, they will be broken down into their component sugar molecules and transported into the bloodstream. Your pancreas then secretes insulin, which shunts the blood sugar into muscles and the liver as fuel for the next few hours. This is why carbohydrates have a significant impact on insulin and fat does not. And because juvenile diabetes is caused by a lack of insulin, physicians believed since the 20’s that the only evil with insulin is not having enough.

But insulin also regulates fat metabolism. We cannot store body fat without it. Think of insulin as a switch. When it’s on, in the few hours after eating, you burn carbohydrates for energy and store excess calories as fat. When it’s off, after the insulin has been depleted, you burn fat as fuel. So when insulin levels are low, you will burn your own fat, but not when they’re high.

This is where it gets unavoidably complicated. The fatter you are, the more insulin your pancreas will pump out per meal, and the more likely you’ll develop what’s called ”insulin resistance,” which is the underlying cause of Syndrome X. In effect, your cells become insensitive to the action of insulin, and so you need ever greater amounts to keep your blood sugar in check. So as you gain weight, insulin makes it easier to store fat and harder to lose it. But the insulin resistance in turn may make it harder to store fat — your weight is being kept in check, as it should be. But now the insulin resistance might prompt your pancreas to produce even more insulin, potentially starting a vicious cycle. Which comes first — the obesity, the elevated insulin, known as hyperinsulinemia, or the insulin resistance — is a chicken-and-egg problem that hasn’t been resolved. One endocrinologist described this to me as ”the Nobel-prize winning question.”

Insulin also profoundly affects hunger, although to what end is another point of controversy. On the one hand, insulin can indirectly cause hunger by lowering your blood sugar, but how low does blood sugar have to drop before hunger kicks in? That’s unresolved. Meanwhile, insulin works in the brain to suppress hunger. The theory, as explained to me by Michael Schwartz, an endocrinologist at the University of Washington, is that insulin’s ability to inhibit appetite would normally counteract its propensity to generate body fat. In other words, as you gained weight, your body would generate more insulin after every meal, and that in turn would suppress your appetite; you’d eat less and lose the weight.

Schwartz, however, can imagine a simple mechanism that would throw this ”homeostatic” system off balance: if your brain were to lose its sensitivity to insulin, just as your fat and muscles do when they are flooded with it. Now the higher insulin production that comes with getting fatter would no longer compensate by suppressing your appetite, because your brain would no longer register the rise in insulin. The end result would be a physiologic state in which obesity is almost preordained, and one in which the carbohydrate-insulin connection could play a major role. Schwartz says he believes this could indeed be happening, but research hasn’t progressed far enough to prove it. ”It is just a hypothesis,” he says. ”It still needs to be sorted out.”

David Ludwig, the Harvard endocrinologist, says that it’s the direct effect of insulin on blood sugar that does the trick. He notes that when diabetics get too much insulin, their blood sugar drops and they get ravenously hungry. They gain weight because they eat more, and the insulin promotes fat deposition. The same happens with lab animals. This, he says, is effectively what happens when we eat carbohydrates — in particular sugar and starches like potatoes and rice, or anything made from flour, like a slice of white bread. These are known in the jargon as high-glycemic-index carbohydrates, which means they are absorbed quickly into the blood. As a result, they cause a spike of blood sugar and a surge of insulin within minutes. The resulting rush of insulin stores the blood sugar away and a few hours later, your blood sugar is lower than it was before you ate. As Ludwig explains, your body effectively thinks it has run out of fuel, but the insulin is still high enough to prevent you from burning your own fat. The result is hunger and a craving for more carbohydrates. It’s another vicious circle, and another situation ripe for obesity.

The glycemic-index concept and the idea that starches can be absorbed into the blood even faster than sugar emerged in the late 70’s, but again had no influence on public health recommendations, because of the attendant controversies. To wit: if you bought the glycemic-index concept, then you had to accept that the starches we were supposed to be eating 6 to 11 times a day were, once swallowed, physiologically indistinguishable from sugars. This made them seem considerably less than wholesome. Rather than accept this possibility, the policy makers simply allowed sugar and corn syrup to elude the vilification that befell dietary fat. After all, they are fat-free.

Sugar and corn syrup from soft drinks, juices and the copious teas and sports drinks now supply more than 10 percent of our total calories; the 80’s saw the introduction of Big Gulps and 32-ounce cups of Coca-Cola, blasted through with sugar, but 100 percent fat free. When it comes to insulin and blood sugar, these soft drinks and fruit juices — what the scientists call ”wet carbohydrates” — might indeed be worst of all. (Diet soda accounts for less than a quarter of the soda market.)

The gist of the glycemic-index idea is that the longer it takes the carbohydrates to be digested, the lesser the impact on blood sugar and insulin and the healthier the food. Those foods with the highest rating on the glycemic index are some simple sugars, starches and anything made from flour. Green vegetables, beans and whole grains cause a much slower rise in blood sugar because they have fiber, a nondigestible carbohydrate, which slows down digestion and lowers the glycemic index. Protein and fat serve the same purpose, which implies that eating fat can be beneficial, a notion that is still unacceptable. And the glycemic-index concept implies that a primary cause of Syndrome X, heart disease, Type 2 diabetes and obesity is the long-term damage caused by the repeated surges of insulin that come from eating starches and refined carbohydrates. This suggests a kind of unified field theory for these chronic diseases, but not one that coexists easily with the low-fat doctrine.

At Ludwig’s pediatric obesity clinic, he has been prescribing low-glycemic-index diets to children and adolescents for five years now. He does not recommend the Atkins diet because he says he believes such a very low carbohydrate approach is unnecessarily restrictive; instead, he tells his patients to effectively replace refined carbohydrates and starches with vegetables, legumes and fruit. This makes a low-glycemic-index diet consistent with dietary common sense, albeit in a higher-fat kind of way. His clinic now has a nine-month waiting list. Only recently has Ludwig managed to convince the N.I.H. that such diets are worthy of study. His first three grant proposals were summarily rejected, which may explain why much of the relevant research has been done in Canada and in Australia. In April, however, Ludwig received $1.2 million from the N.I.H. to test his low-glycemic-index diet against a traditional low-fat-low-calorie regime. That might help resolve some of the controversy over the role of insulin in obesity, although the redoubtable Robert Atkins might get there first.

The 71-year-old Atkins, a graduate of Cornell medical school, says he first tried a very low carbohydrate diet in 1963 after reading about one in the Journal of the American Medical Association. He lost weight effortlessly, had his epiphany and turned a fledgling Manhattan cardiology practice into a thriving obesity clinic. He then alienated the entire medical community by telling his readers to eat as much fat and protein as they wanted, as long as they ate little to no carbohydrates. They would lose weight, he said, because they would keep their insulin down; they wouldn’t be hungry; and they would have less resistance to burning their own fat. Atkins also noted that starches and sugar were harmful in any event because they raised triglyceride levels and that this was a greater risk factor for heart disease than cholesterol.

Atkins’s diet is both the ultimate manifestation of the alternative hypothesis as well as the battleground on which the fat-versus-carbohydrates controversy is likely to be fought scientifically over the next few years. After insisting Atkins was a quack for three decades, obesity experts are now finding it difficult to ignore the copious anecdotal evidence that his diet does just what he has claimed. Take Albert Stunkard, for instance. Stunkard has been trying to treat obesity for half a century, but he told me he had his epiphany about Atkins and maybe about obesity as well just recently when he discovered that the chief of radiology in his hospital had lost 60 pounds on Atkins’s diet. ”Well, apparently all the young guys in the hospital are doing it,” he said. ”So we decided to do a study.” When I asked Stunkard if he or any of his colleagues considered testing Atkins’s diet 30 years ago, he said they hadn’t because they thought Atkins was ”a jerk” who was just out to make money: this ”turned people off, and so nobody took him seriously enough to do what we’re finally doing.”

In fact, when the American Medical Association released its scathing critique of Atkins’s diet in March 1973, it acknowledged that the diet probably worked, but expressed little interest in why. Through the 60’s, this had been a subject of considerable research, with the conclusion that Atkins-like diets were low-calorie diets in disguise; that when you cut out pasta, bread and potatoes, you’ll have a hard time eating enough meat, vegetables and cheese to replace the calories.

That, however, raised the question of why such a low-calorie regimen would also suppress hunger, which Atkins insisted was the signature characteristic of the diet. One possibility was Endocrinology 101: that fat and protein make you sated and, lacking carbohydrates and the ensuing swings of blood sugar and insulin, you stay sated. The other possibility arose from the fact that Atkins’s diet is ”ketogenic.” This means that insulin falls so low that you enter a state called ketosis, which is what happens during fasting and starvation. Your muscles and tissues burn body fat for energy, as does your brain in the form of fat molecules produced by the liver called ketones. Atkins saw ketosis as the obvious way to kick-start weight loss. He also liked to say that ketosis was so energizing that it was better than sex, which set him up for some ridicule. An inevitable criticism of Atkins’s diet has been that ketosis is dangerous and to be avoided at all costs.

When I interviewed ketosis experts, however, they universally sided with Atkins, and suggested that maybe the medical community and the media confuse ketosis with ketoacidosis, a variant of ketosis that occurs in untreated diabetics and can be fatal. ”Doctors are scared of ketosis,” says Richard Veech, an N.I.H. researcher who studied medicine at Harvard and then got his doctorate at Oxford University with the Nobel Laureate Hans Krebs. ”They’re always worried about diabetic ketoacidosis. But ketosis is a normal physiologic state. I would argue it is the normal state of man. It’s not normal to have McDonald’s and a delicatessen around every corner. It’s normal to starve.”

Simply put, ketosis is evolution’s answer to the thrifty gene. We may have evolved to efficiently store fat for times of famine, says Veech, but we also evolved ketosis to efficiently live off that fat when necessary. Rather than being poison, which is how the press often refers to ketones, they make the body run more efficiently and provide a backup fuel source for the brain. Veech calls ketones ”magic” and has shown that both the heart and brain run 25 percent more efficiently on ketones than on blood sugar.

The bottom line is that for the better part of 30 years Atkins insisted his diet worked and was safe, Americans apparently tried it by the tens of millions, while nutritionists, physicians, public- health authorities and anyone concerned with heart disease insisted it could kill them, and expressed little or no desire to find out who was right. During that period, only two groups of U.S. researchers tested the diet, or at least published their results. In the early 70’s, J.P. Flatt and Harvard’s George Blackburn pioneered the ”protein-sparing modified fast” to treat postsurgical patients, and they tested it on obese volunteers. Blackburn, who later became president of the American Society of Clinical Nutrition, describes his regime as ”an Atkins diet without excess fat” and says he had to give it a fancy name or nobody would take him seriously. The diet was ”lean meat, fish and fowl” supplemented by vitamins and minerals. ”People loved it,” Blackburn recalls. ”Great weight loss. We couldn’t run them off with a baseball bat.” Blackburn successfully treated hundreds of obese patients over the next decade and published a series of papers that were ignored. When obese New Englanders turned to appetite-control drugs in the mid-80’s, he says, he let it drop. He then applied to the N.I.H. for a grant to do a clinical trial of popular diets but was rejected.

The second trial, published in September 1980, was done at the George Washington University Medical Center. Two dozen obese volunteers agreed to follow Atkins’s diet for eight weeks and lost an average of 17 pounds each, with no apparent ill effects, although their L.D.L. cholesterol did go up. The researchers, led by John LaRosa, now president of the State University of New York Downstate Medical Center in Brooklyn, concluded that the 17-pound weight loss in eight weeks would likely have happened with any diet under ”the novelty of trying something under experimental conditions” and never pursued it further.

Now researchers have finally decided that Atkins’s diet and other low-carb diets have to be tested, and are doing so against traditional low-calorie-low-fat diets as recommended by the American Heart Association. To explain their motivation, they inevitably tell one of two stories: some, like Stunkard, told me that someone they knew — a patient, a friend, a fellow physician — lost considerable weight on Atkins’s diet and, despite all their preconceptions to the contrary, kept it off. Others say they were frustrated with their inability to help their obese patients, looked into the low-carb diets and decided that Endocrinology 101 was compelling. ”As a trained physician, I was trained to mock anything like the Atkins diet,” says Linda Stern, an internist at the Philadelphia Veterans Administration Hospital, ”but I put myself on the diet. I did great. And I thought maybe this is something I can offer my patients.”

None of these studies have been financed by the N.I.H., and none have yet been published. But the results have been reported at conferences — by researchers at Schneider Children’s Hospital on Long Island, Duke University and the University of Cincinnati, and by Stern’s group at the Philadelphia V.A. Hospital. And then there’s the study Stunkard had mentioned, led by Gary Foster at the University of Pennsylvania, Sam Klein, director of the Center for Human Nutrition at Washington University in St. Louis, and Jim Hill, who runs the University of Colorado Center for Human Nutrition in Denver. The results of all five of these studies are remarkably consistent. Subjects on some form of the Atkins diet — whether overweight adolescents on the diet for 12 weeks as at Schneider, or obese adults averaging 295 pounds on the diet for six months, as at the Philadelphia V.A. — lost twice the weight as the subjects on the low-fat, low-calorie diets.

In all five studies, cholesterol levels improved similarly with both diets, but triglyceride levels were considerably lower with the Atkins diet. Though researchers are hesitant to agree with this, it does suggest that heart-disease risk could actually be reduced when fat is added back into the diet and starches and refined carbohydrates are removed. ”I think when this stuff gets to be recognized,” Stunkard says, ”it’s going to really shake up a lot of thinking about obesity and metabolism.”

All of this could be settled sooner rather than later, and with it, perhaps, we might have some long-awaited answers as to why we grow fat and whether it is indeed preordained by societal forces or by our choice of foods. For the first time, the N.I.H. is now actually financing comparative studies of popular diets. Foster, Klein and Hill, for instance, have now received more than $2.5 million from N.I.H. to do a five-year trial of the Atkins diet with 360 obese individuals. At Harvard, Willett, Blackburn and Penelope Greene have money, albeit from Atkins’s nonprofit foundation, to do a comparative trial as well.

Should these clinical trials also find for Atkins and his high-fat, low-carbohydrate diet, then the public-health authorities may indeed have a problem on their hands. Once they took their leap of faith and settled on the low-fat dietary dogma 25 years ago, they left little room for contradictory evidence or a change of opinion, should such a change be necessary to keep up with the science. In this light Sam Klein’s experience is noteworthy. Klein is president-elect of the North American Association for the Study of Obesity, which suggests that he is a highly respected member of his community. And yet, he described his recent experience discussing the Atkins diet at medical conferences as a learning experience. ”I have been impressed,” he said, ”with the anger of academicians in the audience. Their response is ‘How dare you even present data on the Atkins diet!’ ”

This hostility stems primarily from their anxiety that Americans, given a glimmer of hope about their weight, will rush off en masse to try a diet that simply seems intuitively dangerous and on which there is still no long-term data on whether it works and whether it is safe. It’s a justifiable fear. In the course of my research, I have spent my mornings at my local diner, staring down at a plate of scrambled eggs and sausage, convinced that somehow, some way, they must be working to clog my arteries and do me in.

After 20 years steeped in a low-fat paradigm, I find it hard to see the nutritional world any other way. I have learned that low-fat diets fail in clinical trials and in real life, and they certainly have failed in my life. I have read the papers suggesting that 20 years of low-fat recommendations have not managed to lower the incidence of heart disease in this country, and may have led instead to the steep increase in obesity and Type 2 diabetes. I have interviewed researchers whose computer models have calculated that cutting back on the saturated fats in my diet to the levels recommended by the American Heart Association would not add more than a few months to my life, if that. I have even lost considerable weight with relative ease by giving up carbohydrates on my test diet, and yet I can look down at my eggs and sausage and still imagine the imminent onset of heart disease and obesity, the latter assuredly to be caused by some bizarre rebound phenomena the likes of which science has not yet begun to describe. The fact that Atkins himself has had heart trouble recently does not ease my anxiety, despite his assurance that it is not diet-related.

This is the state of mind I imagine that mainstream nutritionists, researchers and physicians must inevitably take to the fat-versus-carbohydrate controversy. They may come around, but the evidence will have to be exceptionally compelling. Although this kind of conversion may be happening at the moment to John Farquhar, who is a professor of health research and policy at Stanford University and has worked in this field for more than 40 years. When I interviewed Farquhar in April, he explained why low-fat diets might lead to weight gain and low-carbohydrate diets might lead to weight loss, but he made me promise not to say he believed they did. He attributed the cause of the obesity epidemic to the ”force-feeding of a nation.” Three weeks later, after reading an article on Endocrinology 101 by David Ludwig in the Journal of the American Medical Association, he sent me an e-mail message asking the not-entirely-rhetorical question, ”Can we get the low-fat proponents to apologize?”

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Good Calories, Bad Calories

I am not endorsing this book. Just bookmarking the summary.

In this groundbreaking book, the result of seven years of research in every science connected with the impact of nutrition on health, award-winning science writer Gary Taubes shows us that almost everything we believe about the nature of a healthy diet is wrong.

For decades we have been taught that fat is bad for us, carbohydrates better, and that the key to a healthy weight is eating less and exercising more. Yet with more and more people acting on this advice, we have seen unprecedented epidemics of obesity and diabetes. Taubes argues persuasively that the problem lies in refined carbohydrates (white flour, sugar, easily digested starches) and sugars–via their dramatic and longterm effects on insulin, the hormone that regulates fat accumulation–and that the key to good health is the kind of calories we take in, not the number. There are good calories, and bad ones.

Good Calories
These are from foods without easily digestible carbohydrates and sugars. These foods can be eaten without restraint.
Meat, fish, fowl, cheese, eggs, butter, and non-starchy vegetables. 

Bad Calories
These are from foods that stimulate excessive insulin secretion and so make us fat and increase our risk of chronic disease—all refined and easily digestible carbohydrates and sugars. The key is not how much vitamins and minerals they contain, but how quickly they are digested. (So apple juice or even green vegetable juices are not necessarily any healthier than soda.)
Bread and other baked goods, potatoes, yams, rice, pasta, cereal grains, corn, sugar (sucrose and high fructose corn syrup), ice cream, candy, soft drinks, fruit juices, bananas and other tropical fruits, and beer.

Taubes traces how the common assumption that carbohydrates are fattening was abandoned in the 1960s when fat and cholesterol were blamed for heart disease and then –wrongly–were seen as the causes of a host of other maladies, including cancer. He shows us how these unproven hypotheses were emphatically embraced by authorities in nutrition, public health, and clinical medicine, in spite of how well-conceived clinical trials have consistently refuted them. He also documents the dietary trials of carbohydrate-restriction, which consistently show that the fewer carbohydrates we consume, the leaner we will be.

With precise references to the most significant existing clinical studies, he convinces us that there is no compelling scientific evidence demonstrating that saturated fat and cholesterol cause heart disease, that salt causes high blood pressure, and that fiber is a necessary part of a healthy diet. Based on the evidence that does exist, he leads us to conclude that the only healthy way to lose weight and remain lean is to eat fewer carbohydrates or to change the type of the carbohydrates we do eat, and, for some of us, perhaps to eat virtually none at all.

The 11 Critical Conclusions of Good Calories, Bad Calories:

1. Dietary fat, whether saturated or not, does not cause heart disease.
2. Carbohydrates do, because of their effect on the hormone insulin. The more easily-digestible and refined the carbohydrates and the more fructose they contain, the greater the effect on our health, weight, and well-being.
3. Sugars—sucrose (table sugar) and high fructose corn syrup specifically—are particularly harmful. The glucose in these sugars raises insulin levels; the fructose they contain overloads the liver.
4. Refined carbohydrates, starches, and sugars are also the most likely dietary causes of cancer, Alzheimer’s Disease, and the other common chronic diseases of modern times.
5. Obesity is a disorder of excess fat accumulation, not overeating and not sedentary behavior.
6. Consuming excess calories does not cause us to grow fatter any more than it causes a child to grow taller.
7. Exercise does not make us lose excess fat; it makes us hungry.
8. We get fat because of an imbalance—a disequilibrium—in the hormonal regulation of fat tissue and fat metabolism. More fat is stored in the fat tissue than is mobilized and used for fuel. We become leaner when the hormonal regulation of the fat tissue reverses this imbalance.
9. Insulin is the primary regulator of fat storage. When insulin levels are elevated, we stockpile calories as fat. When insulin levels fall, we release fat from our fat tissue and burn it for fuel.
10. By stimulating insulin secretion, carbohydrates make us fat and ultimately cause obesity. By driving fat accumulation, carbohydrates also increase hunger and decrease the amount of energy we expend in metabolism and physical activity.
11. The fewer carbohydrates we eat, the leaner we will be.

Good Calories, Bad Calories is a tour de force of scientific investigation–certain to redefine the ongoing debate about the foods we eat and their effects on our health.

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Mutual Fund Expense Calculator

http://apps.finra.org/fundanalyzer/1/fa.aspx
http://www.finra.org/Investors/ToolsCalculators/index.htm
http://www.sec.gov/answers/mffees.htm

Mutual Fund Fees and Expenses

As with any business, running a mutual fund involves costs. For example, there are costs incurred in connection with particular investor transactions, such as investor purchases, exchanges, and redemptions. There are also regular fund operating costs that are not necessarily associated with any particular investor transaction, such as investment advisory fees, marketing and distribution expenses, brokerage fees, and custodial, transfer agency, legal, and accountants fees.

Some funds cover the costs associated with an individual investor’s transactions and account by imposing fees and charges directly on the investor at the time of the transactions (or periodically with respect to account fees). These fees and charges are identified in a fee table, located near the front of a fund’s prospectus, under the heading “Shareholder Fees.”

Funds typically pay their regular and recurring, fund-wide operating expenses out of fund assets, rather than by imposing separate fees and charges on investors. (Keep in mind, however, that because these expenses are paid out of fund assets, investors are paying them indirectly.) These expenses are identified in the fee table in the fund’s prospectus under the heading “Annual Fund Operating Expenses.”

A frequently asked question is whether the SEC imposes any specific limits on the size of the fees that a fund may charge. The short answer is the SEC generally does not, although the SEC limits redemption fees to 2% in most situations. The Financial Industry Regulatory Authority (FINRA), however, does impose limits on some fees.

In the fee table, under the heading of “Shareholder Fees,” you will find:

Sales Loads (including Sales Charge (Load) on Purchases and Deferred Sales Charge (Load))

Redemption Fee

Exchange Fee

Account Fee

Purchase Fee (Although the fee table in Form N-1A does not specifically include “purchase fees,” if a fund imposes one, it would be included in the fee table under this heading.

In the fee table, under the heading of “Annual Fund Operating Expenses,” you will find:

Management Fees

Distribution [and/or Service] (12b-1) Fees

Other Expenses

Total Annual Fund Operating Expenses

Shareholder Fees

Sales Loads

Funds that use brokers to sell their shares typically compensate the brokers. Funds may do this by imposing a fee on investors, known as a “sales load” (or “sales charge (load)”), which is paid to the selling brokers. In this respect, a sales load is like a commission investors pay when they purchase any type of security from a broker. Although sales loads most frequently are used to compensate outside brokers that distribute fund shares, some funds that do not use outside brokers still charge sales loads.The SEC does not limit the size of sales load a fund may charge, but FINRA does not permit mutual fund sales loads to exceed 8.5%. The percentage is lower if a fund imposes other types of charges. Most funds do not charge the maximum.

There are two general types of sales loads—a front-end sales load investors pay when they purchase fund shares and a back-end or deferred sales load investors pay when they redeem their shares.

Sales Charge (Load) on Purchases

The category “Sales Charge (Load) on Purchases” in the fee table includes sales loads that investors pay when they purchase fund shares (also known as “front-end sales loads”). The key point to keep in mind about a front-end sales load is it reduces the amount available to purchase fund shares. For example, if an investor writes a $10,000 check to a fund for the purchase of fund shares, and the fund has a 5% front-end sales load, the total amount of the sales load will be $500. The $500 sales load is first deducted from the $10,000 check (and typically paid to a selling broker), and assuming no other front-end fees, the remaining $9,500 is used to purchase fund shares for the investor.

Deferred Sales Charge (Load)

The category “Deferred Sales Charge (Load)” in the fee table refers to a sales load that investors pay when they redeem fund shares (that is, sell their shares back to the fund). You may also see this referred to as a “deferred” or “back-end” sales load. When an investor purchases shares that are subject to a back-end sales load rather than a front-end sales load, no sales load is deducted at purchase, and all of the investors’ money is immediately used to purchase fund shares (assuming that no other fees or charges apply at the time of purchase). For example, if an investor invests $10,000 in a fund with a 5% back-end sales load, and if there are no other “purchase fees,” the entire $10,000 will be used to purchase fund shares, and the 5% sales load is not deducted until the investor redeems his or her shares, at which point the fee is deducted from the redemption proceeds.Typically, a fund calculates the amount of a back-end sales load based on the lesser of the value of the shareholder’s initial investment or the value of the shareholder’s investment at redemption. For example, if the shareholder initially invests $10,000, and at redemption the investment has appreciated to $12,000, a back-end sales load calculated in this manner would be based on the value of the initial investment—$10,000—not on the value of the investment at redemption. Investors should carefully read a fund’s prospectus to determine whether the fund calculates its back-end sales load in this manner.The most common type of back-end sales load is the “contingent deferred sales load,” also referred to as a “CDSC,” or “CDSL.” The amount of this type of load will depend on how long the investor holds his or her shares and typically decreases to zero if the investor hold his or her shares long enough. For example, a contingent deferred sales load might be 5% if an investor holds his or her shares for one year, 4% if the investor holds his or her shares for two years, and so on until the load goes away completely. The rate at which this fee will decline will be disclosed in the fund’s prospectus.

A fund or class with a contingent deferred sales load typically will also have an annual 12b-1 fee.

A Word About No-Load Funds

Some funds call themselves “no-load.” As the name implies, this means that the fund does not charge any type of sales load. As described above, however, not every type of shareholder fee is a “sales load,” and a no-load fund may charge fees that are not sales loads. For example, a no-load fund is permitted to charge purchase fees, redemption fees, exchange fees, and account fees, none of which is considered to be a “sales load.” In addition, under FINRA rules, a fund is permitted to pay its annual operating expenses and still call itself “no-load,” unless the combined amount of the fund’s 12b-1 fees or separate shareholder service fees exceeds 0.25% of the fund’s average annual net assets.

Redemption Fee

A redemption fee is another type of fee that some funds charge their shareholders when the shareholders redeem their shares. Although a redemption fee is deducted from redemption proceeds just like a deferred sales load, it is not considered to be a sales load. Unlike a sales load, which is used to pay brokers, a redemption fee is typically used to defray fund costs associated with a shareholder’s redemption and is paid directly to the fund, not to a broker. The SEC limits redemption fees to 2%. The SEC has adopted a rule addressing the imposition of redemption fees by mutual funds in Rule 22c-2 of the Investment Company Act of 1940.

Exchange Fee

An exchange fee is a fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group.

Account Fee

An account fee is a fee that some funds separately impose on investors in connection with the maintenance of their accounts. For example, some funds impose an account maintenance fee on accounts whose value is less than a certain dollar amount.

Purchase Fee

A purchase fee is another type of fee that some funds charge their shareholders when the shareholders purchase their shares. A purchase fee differs from, and is not considered to be, a front-end sales load because a purchase fee is paid to the fund (not to a broker) and is typically imposed to defray some of the fund’s costs associated with the purchase.

Annual Fund Operating Expenses

Management Fees

Management fees are fees that are paid out of fund assets to the fund’s investment adviser (or its affiliates) for managing the fund’s investment portfolio , and administrative fees payable to the investment adviser that are not included in the “Other Expenses” category (discussed below).

Distribution [and/or Service] (12b-1) Fees

This category identifies so-called “12b-1 fees,” which are fees paid by the fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses.”12b-1 fees” get their name from the SEC rule that authorizes a fund to pay them. The rule permits a fund to pay distribution fees out of fund assets only if the fund has adopted a plan (12b-1 plan) authorizing their payment. “Distribution fees” include fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.The SEC does not limit the size of 12b-1 fees that funds may pay. But under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75 percent of a fund’s average net assets per year.

Some 12b-1 plans also authorize and include “shareholder service fees,” which are fees paid to persons to respond to investor inquiries and provide investors with information about their investments. A fund may pay shareholder service fees without adopting a 12b-1 plan. If shareholder service fees are part of a fund’s 12b-1 plan, these fees will be included in this category of the fee table. If shareholder service fees are paid outside a 12b-1 plan, then they will be included in the “Other expenses” category, discussed below. FINRA imposes an annual .25% cap on shareholder service fees (regardless of whether these fees are authorized as part of a 12b-1 plan).

Other Expenses

Included in this category are expenses not included in the categories “Management Fees” or “Distribution [and/or Service] (12b-1) Fees.” Examples include: shareholder service expenses that are not included in the “Distribution [and/or Service] (12b-1) Fees” category; custodial expenses; legal expenses; accounting expenses; transfer agent expenses; and other administrative expenses.

Total Annual Fund Operating Expenses

This line of the fee table is the total of a fund’s annual fund operating expenses, expressed as a percentage of the fund’s average net assets.

A Word About Mutual Fund Fees and Expenses

As you might expect, fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858. It takes only minutes to use a mutual fund cost calculator to compute how the costs of different mutual funds add up over time and eat into your returns.

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Why we still don’t favor commodities

http://www.fundadvice.com/articles/investing-basics/why-we-still-dont-favor-commodities.html

By Dennis Tilley
Director of Alternative Investments
Do commodities have a rightful place in a broadly diversified portfolio? The obvious answer seems to be yes, they do. However, after a lot of careful study and thought we have concluded that the right answer is still no, they don’t.
Commodity prices across the board are at all time highs. Experts say the world is running out of natural resources and that production will not keep up with the rising demand from fast growing emerging economies.
From a portfolio point of view, commodities also have attractive characteristics. While commodity prices are quite volatile, they tend to zig and zag independently of stock and bond prices. Due to the uncorrelated price movements, adding a small amount of commodity exposure can actually lower overall portfolio risk for a given expected return.

There is also a small measure of portfolio insurance gained from commodity exposure. During a rare commodity-related crisis, such as the Arab oil embargo in 1973, a dramatic rise in commodity prices will help buffer the decline in both stocks and bonds. Commodity exposure can also provide some insurance against political risk, since many of the nations currently rich in natural resources also tend to be somewhat politically unstable.
For all of the reasons briefly described, we were keenly interested in adding commodities to our model portfolios. This was a hard problem with many subtleties and conflicting expert opinions to work through. Contrary to our expectations, after careful study, we recommend leaving commodities out of a diversified investment portfolio.
Here is a quick summary of why we made that decision. First, we expect long-term investment returns of commodity funds to be less than that of ultra-safe T-bills. Second, adding commodity funds to our value and small-tilted equity portfolios lowers expected investor returns. Finally, we believe that our well-diversified equity portfolio offers plenty of exposure to energy, basic material, and emerging market stocks that stand to benefit directly from commodity inflation. For more details, please read on.

Investing in Commodities

How do you go about investing in commodities? One way is to purchase the actual commodity and store it yourself. Over time, your wealth will grow as commodity prices rise – hopefully by a lot thanks to China and India. However, there are a few serious issues with this approach, and you may want to finish this article before restocking the wine cellar with barrels of light sweet crude.
I’ll highlight just a couple of problems. First, storage costs are high for even a modest investment. For instance, at a current price of $95/barrel, a modest $10,000 investment in crude oil would require a small warehouse to store all the barrels. To diversify into copper, livestock and grains is just as impractical.
A second problem is that commodities don’t pay dividends while sitting in a warehouse. There is an opportunity cost of having your money tied up in copper bar stock, when you could easily invest your money in ultra-safe T-Bills. Storage costs, opportunity costs, insurance costs, and trading costs all can eat a huge chunk of potential returns out of a “physical” commodity investment approach.

Commodity Funds.

To relieve these problems, financial services companies have developed new exchange traded funds (ETF) and exchange traded notes (ETN) that use futures contracts to gain exposure to commodity prices. A sampling of the more popular funds is shown in the table below. Also listed are three open-ended mutual funds which have been around longer, but are only available with front-end loads or load-waived via an advisor.
As of 9/30/07, commodity funds’ one and five-year performance numbers have been great, comparable to the S&P 500. Three and ten-year annualized returns don’t look that great – this variability and lack of consistency is an illustration of the high volatility associated with commodity funds. Commodity funds also have higher fees than typical equity and bond index funds (for the latter two, expense ratios range from 0.1 to 0.4%).

Fund Ticker Load Expense Ratio
1-Yr Return
3-Yr Return
5-Yr Return
10-Yr Return
iPath DJ-AIG Commodity Index ETN DJP 0.75% 16.2%
iPath S&P GSCI Total Return ETN GSP 0.75% 12.8%
Powershares DB Commodity Index Fund DBC 0.83% 13.2%
Credit Suisse Commodity Strategy A CRSAX 3% 1.20% 16.3%
Oppenheimer Commodity Strategy A QRAAX 5.75% 1.47% 12.5% 5.2% 14.3% 4.5%
PIMCO Commodity Real Return Strategy A PCRAX 5.50% 1.24% 15.5% 8.3% 15.5%

U.S. Treasury
3-month T-Bills
5.2% 4.3% 3.0% 3.8%
S&P 500 16.4% 13.1% 15.5% 6.6%
Table 1. Comparison of Commodity funds (as of 9/30/07, data from Morningstar).

How do these funds work? Commodity funds hold a fully collateralized, diversified portfolio of commodity futures contracts. The portfolio weighting of each commodity is typically held in proportion to its share of the annual world production of all commodities. Since oil, and oil-based products, make up a significant portion of all commodity indices, commodity funds are heavily influenced by the price of oil.
What does fully-collateralized mean? It’s a technical way of saying that commodity funds do not exploit the leverage that futures contracts offer. For every $1 of commodity exposure purchased via futures contracts, $1 is invested in T-bills serving as collateral.
Futures contracts also expire over time. Before a futures contract expires, the contract is sold and the proceeds are “rolled over” to the next nearest futures contract (typically a month out). This rolling process occurs every month.
These funds solve all of the problems associated with the physical commodity approach. First, just like any mutual fund, the pooling of many small accounts allows the fund to take advantage of scale. You are instantly diversified, there’s no need for a warehouse, and transaction costs become very small compared to the asset base. A second important benefit of commodity funds is that the T-Bills used as collateral are earning interest. There is no opportunity cost penalty with commodity funds.
Interestingly, back-testing of this strategy has shown one further addition to returns that occurs from the rolling process. Historically, on average, futures prices tend to be higher when sold compared to the purchase price. Depending on the time period, estimates of the roll return range from 1-5%/year. In theory, commodity funds provide the roll return in addition to interest from T-bills and the return from the change in commodity prices.
Sellers of commodity funds quote famous economist John Maynard Keynes who proposed that the roll return was akin to an insurance premium paid by commercial producers to hedge falling commodity prices. As purchasers of commodity futures, the roll return is a premium, albeit a highly variable one, to compensate investors for relieving price risk for commercial producers.
Unfortunately, there are a few important and subtle drawbacks associated with commodity funds. Wall Street loves subtleties – that is how they make money from Main Street.

Drawbacks

At first glance, the commodity funds have solved all the problems associated with investing in commodities. Why not include them? For us, the fundamental question is: what is the long-term expected return of commodity funds? We believe commodity funds will deliver long-term returns similar to that of T-Bills minus management fees. An asset class doesn’t belong in a portfolio if the expected return is less than ultra-safe T-Bills.
Why do we believe this? Ultimately, a futures contract is just a bet. There is a winner and a loser. This is a fundamental difference between commodities funds and asset classes with real returns, such as stocks, bonds and real estate.
Equity investing is win-win. As an equity investor, you supply capital to a company with the expectation of achieving a return that is higher than T-Bills. Otherwise, you wouldn’t make the investment. It’s a risky investment, and you may lose all your money. Yet by diversifying among thousands of companies, it is reasonable to expect a long-term return that is higher than T-Bills. Likewise, a company accepts your investment because they expect the value of the company will increase at a rate better than T-Bills with further investment. It’s win-win. We can also express similar arguments for bonds and real estate.
When a commodity fund purchases a futures contract, the institutional trader on the other side of the transaction also knows about the growth story of China and India. The trader knows about peak oil theory. The trader will not purchase or sell a futures contract at a price that doesn’t fully account for all the fundamental reasons to be long commodities. This is the first subtlety associated with these investment vehicles. Commodity funds will not benefit from a long-term secular rise in commodity prices if market participants already expect it to occur.
Here’s another way of looking at this. Over the short-term (days or weeks), essentially all the price movement is unexpected, and we see commodity funds rise and fall pretty much in synch with commodity prices. The subtlety is that over the long term all unexpected movements tend to cancel each other out – leading to no expected return above T-Bills due to commodity price inflation.
What about the roll return? An enormous amount of money has streamed into these commodity funds in recent years. As you might expect, when there are many insurance providers (commodity fund investors) going after an existing pool of insurance seekers (commodity producers), profits (the roll return) will shrink. Actually, commodity producers also know the emerging market growth story and may decide that they don’t need much insurance after all.
The roll return has indeed trended lower over the last few decades. While back-testing suggests that a roll return was present in the past, the more investors become aware of a profitable trading strategy, the lower future returns. Unfortunately, we have not found a long-term mechanism to support a positive roll return in the future. At some point the roll return may even turn negative, indicating that holders of the commodity funds are now the ones paying for insurance to protect the portfolio from commodity price spikes.
The win-lose aspect of commodity futures contracts, the reliance on historical back-testing, and the mechanical approach of buying and selling contracts each month, suggest that commodity funds are not really an asset class at all, but a commodity futures trading strategy.
The bottom line is that we expect the commodity funds to provide a long-term gross return that is roughly equal to T-bills. From this expected long-term return, we can subtract management fees (~ 1%) and most likely hidden transaction costs associated with turning over the portfolio once a month.

Commodities or Equities?

Another more practical issue is that in order to add commodities to the portfolio, we must take from something else. It doesn’t make sense to carve out a piece from bonds, since commodity funds can easily be down 30-40% in a single year.
So the allocation must come from equities. Even if we assume that commodity funds provide a small return premium compared to T-Bills (after fees), the long-term return expectation is still much lower than that of an equity portfolio that’s tilted toward value and small cap stocks.
The difference in expected return can be large, on the order of 4-5% per year. Adding a 10% slice to commodities lowers expected equity portfolio returns by 0.4-0.5% per year. Granted overall portfolio risk may be reduced slightly, but most people will not boost their equity exposure when adding commodities – thus, for all practical purposes, their expected returns are hurt by adding commodities.

Summary

The bottom line regarding commodity funds is that we believe long-term expected returns will be lower than T-Bill returns. Even though the correlation with stocks and bonds is small, no asset class belongs in a diversified portfolio if it has a return expectation below T-Bills.
There are better inflation hedges and ways to play the rise in commodity prices. Ultimately, the best exposure to commodities is through equities; our recommended equity portfolio offers plenty of exposure to energy and basic materials stocks and to asset classes with heavy exposure to commodity production, such as emerging market stocks. Although not perfect, TIPS and short-term treasuries also provide some protection against a commodity price spike.
Commodity funds have done well over the past few years. Think back to 1999 during the height of the NASDAQ bubble, and maybe you’ll remember that no one was thinking about commodities at that time. Oil was priced as low as $12/barrel in 1999. Much of the commodity fund returns over the past 10 years is due to a rapid rise in expectations for commodity inflation. This is a one-time benefit. At this time, with all the attention commodities are receiving in the press, it’s difficult to believe that expectations for commodity inflation will continue to rise as fast in the next 10 years.
I’ll admit that I’m opening myself to look foolish on this conclusion because I could be very wrong over the next decade. The volatility of commodity funds can make an advisor look like a hero one year and a goat the next year. However, our decision to avoid commodity funds is consistent with an efficient markets view and our long-term approach to designing portfolios.

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Understanding WCF Faults

Summary:

  • FaultExceptions don’t fault the channel. All other unhandled exceptions fault the channel. It doesn’t matter what is there in the FaultContract, or if there is even one.
  • When you are doing development, set includeExceptionDetailInFaults equal to true on server. On client catch FaultException<ExceptionDetail> e. All the information (e.g., stack trace on server) can be obtained by examining e.Detail.
  • In production, you will set includeExceptionDetailInFaults equal to false.
  • If service throws a FaultException<T>, it will reach the client as a FaultException<T> no matter what is there in the contract. However, if the service does not apply a FaultContract(typeof(T)) attribute to the service method, client has no way of knowing that a FaultException<T> can occur. T can be anything that WCF can serialize.
  • All unhandled exceptions translate into a FaultException on client.
  • Say you apply a FaultContract(typeof(DivideByZeroException)) and your method throws a DivideByZeroException. Client gets a FaultException. If you want the client to get a FaultException<DivideByZeroException> you have two options:
    • catch the DivideByZeroException and instead throw a FaultException<DivideByZeroException>.
    • use Juwal Lowy’s PromoteException helper method in his ServiceModelEx library to automagically transform the returned SOAP message so that client in fact gets a FaultException<DivideByZeroException>.
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Calculating WCF message size

on service:

using System;
using System.Diagnostics;
using System.IO;
using System.ServiceModel.Channels;
using System.ServiceModel.Description;
using System.ServiceModel.Dispatcher;
using System.Xml;

namespace Service1
{
    class Interceptor : IEndpointBehavior, IDispatchMessageInspector
    {
        private object o = new object();
        private int lineNo;
        private class Info
        {
            public int Row { get; set; }
            public int Col { get; set; }
            public Stopwatch Stopwatch { get; set; }
        }

        public void AddBindingParameters(ServiceEndpoint endpoint, System.ServiceModel.Channels.BindingParameterCollection bindingParameters)
        {
           
        }

        public void ApplyClientBehavior(ServiceEndpoint endpoint, System.ServiceModel.Dispatcher.ClientRuntime clientRuntime)
        {
           
        }

        public void ApplyDispatchBehavior(ServiceEndpoint endpoint, System.ServiceModel.Dispatcher.EndpointDispatcher endpointDispatcher)
        {
            endpointDispatcher.DispatchRuntime.MessageInspectors.Add(this);
        }

        public void Validate(ServiceEndpoint endpoint)
        {
            
        }

        public object AfterReceiveRequest(ref System.ServiceModel.Channels.Message request, System.ServiceModel.IClientChannel channel, System.ServiceModel.InstanceContext instanceContext)
        {
            lock (o)
            {
                Console.Write("{0} Received Request...", ++lineNo);
                var info = new Info { Row = Console.CursorTop, Col = Console.CursorLeft, Stopwatch = Stopwatch.StartNew() };
                Console.WriteLine();
                return info;
            }
        }

        public void BeforeSendReply(ref System.ServiceModel.Channels.Message reply, object correlationState)
        {
            var buffer = reply.CreateBufferedCopy(int.MaxValue);
            reply = buffer.CreateMessage();           
            var size = CalculateSize(buffer.CreateMessage());
            buffer.Close();
            lock (o)
            {
                var x = correlationState as Info;
                var top = Console.CursorTop;
                var left = Console.CursorLeft;
                Console.CursorTop = x.Row;
                Console.CursorLeft = x.Col;
                Console.Write("Sending Response {0:N} bytes in {1:0.0} sec", size, x.Stopwatch.Elapsed.TotalSeconds);
                Console.CursorTop = top;
                Console.CursorLeft = left;
            }            
        }

        private static long CalculateSize(Message message)
        {
            using(var ms = new MemoryStream())
            {
                using (var writer = XmlDictionaryWriter.CreateBinaryWriter(ms))
                {
                    message.WriteMessage(writer);
                    return ms.Position;
                }
            }
        }
    }
}

service host:

using (var host = new ServiceHost(typeof(Service1)))
                {
                    host.Opening += host_Opening;
                    host.Opened += host_Opened;
                    foreach (var endpoint in host.Description.Endpoints)
                    {
                        endpoint.EndpointBehaviors.Add(interceptor);
                        Console.WriteLine("opening {0}...", endpoint.Address);
                    }

client:

using System;
using System.Diagnostics;
using System.IO;
using System.ServiceModel.Channels;
using System.ServiceModel.Description;
using System.ServiceModel.Dispatcher;
using System.Threading;
using System.Xml;

namespace Client1
{
    class Interceptor : IEndpointBehavior, IClientMessageInspector
    {
        private object o = new object();
        private int lineNo;
        private class Info
        {
            public int Row { get; set; }
            public int Col { get; set; }
            public Stopwatch Stopwatch { get; set; }
        }

        public void AddBindingParameters(ServiceEndpoint endpoint, System.ServiceModel.Channels.BindingParameterCollection bindingParameters)
        {
            
        }

        public void ApplyClientBehavior(ServiceEndpoint endpoint, ClientRuntime clientRuntime)
        {
            clientRuntime.ClientMessageInspectors.Add(this);
        }

        public void ApplyDispatchBehavior(ServiceEndpoint endpoint, EndpointDispatcher endpointDispatcher)
        {
            
        }

        public void Validate(ServiceEndpoint endpoint)
        {
            
        }

        public void AfterReceiveReply(ref System.ServiceModel.Channels.Message reply, object correlationState)
        {
            var buffer = reply.CreateBufferedCopy(int.MaxValue);
            reply = buffer.CreateMessage();
            var size = CalculateSize(buffer.CreateMessage());
            buffer.Close();
            lock (o)
            {
                var x = correlationState as Info;
                var top = Console.CursorTop;
                var left = Console.CursorLeft;
                Console.CursorTop = x.Row;
                Console.CursorLeft = x.Col;
                Console.Write("Received Response {0:N} bytes in {1:0.0} sec", size, x.Stopwatch.Elapsed.TotalSeconds);
                Console.CursorTop = top;
                Console.CursorLeft = left;
            }
        }

        public object BeforeSendRequest(ref System.ServiceModel.Channels.Message request, System.ServiceModel.IClientChannel channel)
        {
            lock (o)
            {
                Console.Write("[{0}] {1} Sending Request...", Thread.CurrentThread.ManagedThreadId, ++lineNo);
                var info = new Info { Row = Console.CursorTop, Col = Console.CursorLeft, Stopwatch = Stopwatch.StartNew() };
                Console.WriteLine();
                return info;
            }
        }

        private static long CalculateSize(Message message)
        {
            using (var ms = new MemoryStream())
            {
                using (var writer = XmlDictionaryWriter.CreateBinaryWriter(ms))
                {
                    message.WriteMessage(writer);
                    return ms.Position;
                }
            }
        }
    }
}

client:

svc.Endpoint.EndpointBehaviors.Add(interceptor);

I have to say for a long time I couldn’t figure out how to tidy the formatting of my code. Finally I discovered how to do it: http://en.support.wordpress.com/code/posting-source-code/

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The Tax Consequences of a Money Market Fund Sale

http://www.ehow.com/list_7342384_tax-money-market-fund-sale.html

A money market fund sale has no tax consequences. A money market fund is a special breed of mutual fund. Due to its special structure, purchases and sales of money market fund shares generate no tax liability. However, you can be taxed on any dividend income earned, depending on the type of fund.

Mutual Fund Structure
A mutual fund is an investment company that raises money by selling its shares to investors and invests the proceeds in marketable securities such as stocks and bonds. Mutual fund shares fluctuate with the market value of the underlying securities. When an investor buys and sells shares in a mutual fund, he may have a capital gain or loss, depending on the difference between the price he paid and the price he received for the fund shares. But money market funds have no such tax liability.

Constant Share Price
Money market funds invest in short-term, high-quality money market instruments that mature in 200 days or less. Because of the short duration, they can keep their share price constant at $1. Instead, the yield that investors receive fluctuates daily. Since the share price remains constant at $1, there is no taxable gain or loss when money market fund shares are bought and sold.

Tax Liability
Some money market funds are tax-free because they invest in tax-free municipal securities, but most funds pay monthly dividends that are taxable. Dividend income is the only tax liability.

Losses
Mutual funds are not insured. Retail investors have never lost money in money market funds, but there is no guarantee. If a money market fund suffers a substantial loss of principal, it may be forced to lower its share price below $1. If that happens and an investor sells, she will have a tax loss, which will be the difference between the price she paid for the shares ($1) and the sales price she receives.

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If I Exchange Mutual Funds Do I Still Have to Pay Taxes?

http://www.ehow.com/about_7529089_exchange-do-still-pay-taxes.html

Exchanges between mutual funds can have significant tax ramifications in some cases. Failure to take the rules for how these transactions are taxed into account can lead to a nasty surprise come tax time. Knowing which funds you can exchange without tax consequences can drastically reduce your tax bill and make managing your finances easier.

Mutual Fund Exchange
When you exchange shares of one mutual fund for another, the fund company must liquidate the shares of the fund that you currently own and use the dollar proceeds to purchase shares of the fund into which you are transferring. Thus, a sale and purchase takes place.

Taxation of Exchanges
A taxable gain or loss must be computed on the shares of the fund that are sold. If you held the shares of the fund for less than a year, then it will be a short-term gain or loss. If you held them longer, then it will be a long-term gain or loss. This gain or loss is in addition to the annual gains or losses that the fund distributes to all of its shareholders at the end of each year. These rules apply to all mutual fund exchanges that take place in taxable retail accounts.

Retirement Plan Exchanges
Exchanges that are done entirely within any kind of retirement plan or IRA are not reportable. No tax is paid on any gain realized or loss deducted from any loss realized. This is true regardless of the type of amount of fund shares that are exchanged. However, funds inside retirement plans cannot be exchanged directly into any type of taxable account; the sale proceeds must be taken out as a fully taxable distribution first (or a nontaxable distribution if it is coming from a Roth IRA).

Variable Annuity Subaccount Mutual Funds
Exchanges from variable sub-account funds inside variable annuities are also nontaxable. Sales and purchases that take place inside the annuity contract are non-reportable in the same manner as IRAs and other retirement plans, regardless of whether the annuity contract is housed inside a tax-deferred account or not. The same goes if you move your money from one variable annuity carrier to another via a tax-free 1035 exchange.

Tax Reporting
You will receive a form 1099-B from the fund company that details any taxable gain or loss that you must report from the sale of the shares of your current fund. If you exchanged funds inside a variable annuity or retirement plan or IRA of any kind, then you will not receive this form.

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Tax Rules for Selling Mutual Funds

http://www.mint.com/blog/investing/tax-rules-for-selling-mutual-funds/
Tax Rules for Selling Mutual Funds

You might be wondering, “Goodness — mutual funds buy and sell shares of stock each day. Do I have to account for each of these transactions?” The answer is no, you don’t.

But you do have to account for the shares of the mutual fund that you sold during the year. And if you’re like many people who regularly buy shares of various funds each month, and you have your dividends reinvested in additional shares, the accounting can begin to seem impossibly complicated. It isn’t, though — as long as you’ve kept good records of when and how you got each share.

Calculating cost basis
The taxable gain or loss when you sell funds is the difference between the amount you receive from the sale and the cost basis of the shares you sold.

The first thing to calculate for the shares sold is their cost basis. This will depend on how you received them. If you purchased them, your cost basis is the purchase price. If you got the shares as part of a dividend reinvestment plan, the cost basis is their price at the time of purchase.

If you inherited the shares, the cost basis is usually their fair market value (the “net asset value”) on the date of death of the decedent. If the shares were given to you as a gift, things get a bit complicated. IRS publications 564 and 550 have detailed information about calculating the cost basis of shares you receive as a gift.

Once you have the initial cost basis for the shares, you’ll need to continue to add the cost of additional shares purchased to that basis. If you received a dividend that was reinvested back into additional shares in the fund, you should increase your basis by the amount of the dividend, thereby incorporating the value of the dividend in your basis.

Many people believe that reinvested mutual fund dividends are simply taxable income and don’t see them as a purchase of additional shares. Not so.

Look at it this way: The mutual fund company gives you a dividend check. And then you turn right around and buy more mutual fund shares with that check. You are buying additional shares — you’re just bypassing the extra paperwork of receiving the dividend check and sending the mutual fund company a different check to pay for the purchase. And you’re buying those shares at different times and at different prices. So record-keeping is crucial when dealing with mutual funds.

Identifying shares sold
When accounting for mutual fund shares sold, you have more choices than you have with individual securities. With individual stock, you’re stuck with either the First In, First Out (FIFO) method or the Specific Shares method. With mutual fund shares, you can use either of these two methods, or you can average the cost of the shares.

With the Specific Shares method, you keep records of acquiring each share of a mutual fund, and you clearly specify which ones you’re selling when placing the order, just as with stock.

The FIFO method means that the shares sold were the first ones you owned. So if you accumulated 337 shares over many years and sell 50 shares, you’ll subtract the adjusted basis for the first 50 shares you owned from the sale price in order to determine your gain or loss. The disadvantage is that this method can maximize your gain, as your earliest shares are likely to have the lowest cost basis. The upside is that because you’ve held them the longest, these shares are most likely to qualify for the lower long-term tax rate.

Your third option is averaging the cost of all your shares. That might sound simple, but again, you have a choice of two ways to do it: the Single Category method and the Multiple Category method.

With the Single Category method, you add up the purchase prices of all your shares and divide by the total. For example, say you started with 100 shares of the ABC Fund purchased for $50 each. Later, you bought 100 more shares at $60 each. Over time, your dividends are reinvested and you get a notice that you have five more shares purchased at $52 each. You then average them as follows:

100 shares at $50 = $5,000
100 shares at $60 = $6,000
5 shares at $52 = $260
205 shares = $11,260.
$11,260 divided by 205 equals a cost basis of $54.93 per share.

So if at some point you sell 50 shares for $65 each, you calculate your gain using a cost basis of $54.93. You record your gains or losses on Schedule D. This cost basis will remain in effect until you acquire more shares. Then you’ll have to recalculate.

Note also that you still have to pay attention to holding periods. Whenever you sell any share, you’ll have to figure out its holding period (a year or less, or more than a year) and its appropriate tax rate. But no matter what the holding period and tax rate, with the Single Category method, the cost basis is the same.

Next up is the Multiple Category method. This is very similar to the Single Category method, but you average the shares in subsets according to holding period. It gets more complicated when you sell off shares over time. You’ll have to recalculate, incorporating new shares acquired in the interim and recategorizing all the shares as their holding periods change.

The Multiple Category method is a little more work, but it often decreases the taxes you pay. To use it, you make all the calculations whenever you sell shares. Here’s an example of what your results might look like:

Short-term shares (held a year or less):

200 shares at $40 = $8,000 (bought in April)
100 shares at $30 = $3,000 (bought in May)
5 shares at $32 = $160 (bought in June)
305 shares = $11,160; average cost basis is $36.59 per share.
Long-term shares (held more than a year):

200 shares at $28 = $5,600 (bought last April)
200 shares = $5,600; average cost basis is $28 per share.
With this method, when selling shares, you use the cost basis that corresponds to the holding period of the shares you’re selling. So if you were selling shares you’d held for 14 months, your cost basis would be $28 per share.

Time marches on
Shares in your short-term category will become long-term holdings as long as they remain in your portfolio.

Most mutual fund companies will provide cost basis information for you when you sell your shares — averaged according to the Single Category method. That’s nice of them to do, and it might take a lot of pressure off you at tax time when you’re reporting your mutual fund sales.

But you should also remember: If you transfer mutual fund shares from one broker to another, the cost basis information could be lost. And there are still mutual fund companies out there that don’t provide you with cost basis information on shares sold, so you had better know how you stand with your broker or mutual fund company as to the computation of your cost basis for tax purposes.

If they don’t do it for you, you’re forced to do it yourself. And even if they do provide that information, you don’t have to have to use the method chosen for you by the mutual fund company. You can use the method that best suits your needs and tax planning.

One other caveat

Whatever method you select, you’re stuck with that method for that specific fund for as long as you’re invested in that fund. In our example above with the ABC Fund, the Single Category average cost method was used. That’s an election that was made, and that same method must be used for as long as you own the ABC Fund. But there is nothing in the law that prevents you from using a different method if you’re invested in the XYZ Fund, even if both of those funds are in the same fund “family.”

While we’re on the subject: Something not every investor realizes is that even tax-exempt mutual funds can leave you with taxable gains or losses. Most of the income produced from the fund might be tax-exempt, but the fund can produce some taxable income (perhaps if it sells bonds at a taxable gain) and the shares themselves remain taxable assets at the time of sale.

Many of these issues are complicated, but you should be familiar with them if you decide to invest in mutual funds.

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