Television news thought it was a big deal: We’re all richer, newscasters said, citing the newly released findings from the 1998 Survey of Consumer Finances. Between 1995 and 1998, the average family net worth zoomed from $224,800 to $282,500, expressed in dollars of 1998 purchasing power. Real family net worth, in other words, had increased 25.7 percent. Nice. Well, maybe not so nice. If you compare the gain to the stock market, it starts to look anemic. One clue comes from the performance of what may soon be the nation’s largest mutual fund, the Vanguard 500 Index. From mid-1995 to mid-1998, $10,000 invested in the Vanguard 500 Index would have grown 115.67 percent to nearly $21,567. Then again, suppose you had started the three-year period employed but dead broke as a renter who took the bus to work and didn’t have a dime in investments. If you had been able to invest $1,000 a month in the same fund for 36 months, your investment would have been worth $55,905 at the end of the period. If you had saved $1,250 a month the maximum sum most employees save when the employer 401(k) match is included your net worth would be nearly $70,000, very close to the $71,600 median net worth of the American household. The “median” means that half the families have a greater net worth, and half have a smaller net worth. In other words, starting from zilch, a family that invested $1,250 a month in common stocks could have risen to the midway point of American net worth in only three years, probably one of the greatest opportunities to rise in wealth standing in our history. If you take a longer-term view and start in 1989, the figures are even more stunning. From a stone-broke start in mid-1989, every $100 a month invested in common stocks would have grown to $27,945 by mid-1998. A mere $256 a month would have taken you from no net worth to the middle of the wealth pyramid. And just more than $500 a month would have taken you into the top 25 percent of all wealth in America. Instead, the median net worth of all families increased only from $59,700 in 1989 to $71,600 in 1998, an increase of $11,900. That could have been done by saving $1.42 a day and investing it in the index fund. Now let’s look at what really happened during the period. The median net worth of families with incomes under $10,000 actually declined. Ditto for families with incomes of $10,000 to $24,999. And families with income of $25,000 to $49,999 saw their net worth rise from a median $56,700 to $60,300. That’s not too impressive. Nor is it impressive that the median net worth of families with incomes of more than $100,000 declined slightly over the period. The situation doesn’t improve much if you compare changes in the average net worth of each income category rather than the medians. The very best performance was the 22.4 percent increase in the average net worth of families with incomes above $100,000, from $1.4 million to $1.7 million but that’s so far over the average net worth of all families that most people won’t care. What does it all mean? Simply this. For all the media attention to Internet billionaires, soaring stock prices and the importance of investing, saving barely budged over the period. It increased from 55.2 percent of all families to 55.9 percent of all families. The message: At least half the families in America missed the easiest ticket to wealth in two generations. Q & A I would appreciate a “plain English” explanation of a situation that I’ve been trying to figure out for some time now vis-a-vis my tax expectations on my mutual fund earnings. My wife and I started a mutual fund portfolio several years ago. It has grown consistently in value and continues to look like a very good investment. We have an automatic purchase that continually adds shares to the four different accounts, and we have our capital gains and dividends reinvested automatically. We also purchase additional shares periodically when we get some cash built up in our checking account. My question concerns the “real value” of the account at any given time, specifically with regard to the tax liability if I were to cash out. How would the potential tax liability of additional growth show up? J.B., Seabrook, Texas This issue is probably more vexing to mutual fund investors than any other, with the exception of picking a losing fund. When you buy shares in a fund, your money is added to a portfolio that is constantly changing in value. By law, mutual funds must distribute all realized dividend and capital gain income each year and that’s the tax liability you get when you receive your Form 1099 from each fund. Regardless of when you purchased your shares (or at what price), you will receive year-end distributions that reflect what happened to the portfolio during the year. That’s why many people don’t buy shares toward the end of the year: The shares they bought may be unchanged in value, but they could receive a taxable capital gains distribution and have to pay taxes on it. If every fund realized all capital gains every year, there would be no other tax considerations. Most funds, however, don’t realize all gains every year. Some realize virtually none, in spite of large increases in net assets per share. These funds have large “unrealized capital gains” that will someday be realized and will become a tax liability. Here’s an example: Suppose you bought shares of a fund several years ago for $10 a share. This year the fund is worth $20 a share, so your shares have an unrealized capital gain of $10. If the fund managers decided to sell all their stocks and realize all capital gains, they would have to distribute a $10 capital gain, per share, at year-end. Similarly, if you decide to sell the shares, your capital gain would be the difference between your $10-per-share cost and the $20-per-share selling price: $10 a share. The hard part is that you didn’t buy shares just once. You’ve got shares purchased at different times (and at different values), plus shares acquired through distributions. Each transaction has a different tax liability. If you use the average cost basis information provided by the mutual fund company, you may inflate your tax liability. Before you get mad and start thinking that someone invented all this just to make you crazy, remember this: One of the biggest benefits that mutual funds have provided to the general public is ease and convenience in investing. You can buy shares at any time in almost any amount. Exercising that convenience, however, means that we also have a lot of tax record keeping. One of the reasons we like qualified tax-deferred plans so much is their tax simplicity: You don’t pay taxes until money is taken out; then all money is taxed at ordinary income rates. Syndicated columnist Scott Burns may be reached by fax at (214) 977-8776, or by e-mail at firstname.lastname@example.org.