(June 13) – “If you hate taxes, you should love individual stocks,” writes Jonathan Clements in today’s Wall Street Journal.

“Investors, of course, have been romancing individual stocks for the past few years. But the allure wasn’t lower taxes. Instead, people dumped mutual funds and bought individual stocks, hoping to score dazzling gains.”

“But this year’s stock-market buzz saw has chewed up many budding stock jockeys, especially those who overdosed on technology. Thus chastened, some of these folks are no doubt contemplating a return to funds.”

“Maybe, however, these investors got it right the first time. It is possible to build a superior portfolio using individual stocks. But you need a radically different approach. The fact is, it’s hard to pick winning stocks. But it is relatively easy to hold down investment costs, especially taxes.”

“That’s the goal of Chris Cordaro, a financial planner in Chatham, N.J. He notes that stock funds tend to be tax inefficient. Shareholder redemptions can force a fund to realize capital gains. Managers tend to sell winners quickly. And if a fund does have a net tax loss, it can’t pass that loss through to shareholders.”

“For all these reasons, Mr. Cordaro eschews large-company stock funds and instead buys clients a smattering of individual stocks from the Standard & Poor’s 500-stock index. ‘The rationale is to capture the return of the S&P 500 with maximum tax efficiency,’ he explains.”

“How do you do that? First, Mr. Cordaro suggests finding out how the S&P 500 is divvied up among technology, health-care, financials and other sectors. To ensure you are well diversified, your portfolio should replicate those weightings.”

“Next, pick some representative stocks from each sector, buying them through a low-cost Internet broker. Mr. Cordaro generally uses 50 or 60 stocks for his clients, but says you can probably make do with as few as 30.”

“Sound like a lot of work? The Web makes it easy. For instance, I went to www.morningstar.com, found the asset breakdown for the Vanguard 500 Index Fund and then picked out the biggest stocks in each sector, using the Web site’s Stock Selector.”

“Once you are done, you should have a portfolio that performs like an S&P 500-index fund and doesn’t cost too much more in annual investment costs. But because you own individual stocks, you have almost total control over taxes. Your goal: Selling losers quickly, while hanging onto winners for as long as possible.”