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Automatic reinvestment
Old 12-21-2007, 11:18 AM   #1
 
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Automatic reinvestment

Do you automatically reinvest interest & dividends?
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Old 12-21-2007, 11:29 AM   #2
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When I was new at investing, I had all dividends re-invested in the mutual funds they came from. Later on, when I learned a little more (but was still in the accumulation phase), I had the proceeds sent to a Money Market account. Once per year I'd re-invest that money according to my desired asset allocation (i.e. whichever asset classes had lagged the most got the injection until the categories were to closer to my target allocation windows). When I start withdrawing funds, I'll still have the proceeds go to a Money Market MF (or ETF), use them at tax time to pay Uncle Sam, take my money for the year (to live on) and redistribute anything left to rebalance asset classes.
Sending the dividends to a "holding account" allows you to use the money to pay taxes, if this is an issue for you. This is a smart way to avoid having to sell shares to scrape up the tax money. Selling shares can cause more cap gains taxes and also might drive you to liquidate shares when the market is down--both are bad things.
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Old 12-21-2007, 11:43 AM   #3
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I do now, for convenience, since I am in the accumulation phase and add more than enough for rebalancing each year. If I need extra for taxes, I just pay them out of what I would be contributing to those taxable accounts, and send the rest in.

However, I am going to change all of this and have the proceeds directed to a money market account by the time I retire so that I can use it for rebalancing and living expenses.
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Old 12-21-2007, 12:02 PM   #4
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What I do...

Since I'm retired, and 99+% are held in tax advantage funds, I just let the distribution reinvest in the same fund.

At the end of the year (in fact, I've been doing this "exercise" this month), I "harvest" that gains on the funds that have shown an excessive profit, and move the profits to the appropriate (Vanguard or Fidelity) MM fund (due to holding taxable distributions to the next year).

On Jan 1, I will place an order to move my gross income for 2008 to my (in this case) Fidelity Income Management Account. Fidelity gives you the option to take out the Federal tax (4 me, 10%) and sends the net proceeds to the IMA. On a monthly basis, I ACH move $$$ from the IMA to my two checking accounts (low/no interest - that's why I leave them in Fidelity). This mitigates the requrement to file quarterly tax forms. Yes, I know I would make a few extra $$$ by delaying distributions to a monthly basis (but I can afford it )...

I understand why you would want to re-allocate if you were still in the accural phase, but could you not manage that through annual re-balance (as I will do, in January even though I'm retired)?

BTW - for those of you (retired) wondering why I manage my income distributions through Fidelity, Vanguard charges $30 ($60 total for me/wife) to perform the same function, and I'm "frugal" (OK, I'm cheap ). Even though our funds are 50/50 Fidelity/Vanguard, there are some things that move me to have Fidelity handle my account distributions...

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Old 12-21-2007, 12:07 PM   #5
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All dividends get combined monthly and then reinvested.
Interest typically goes toward taxes.
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Old 12-21-2007, 03:22 PM   #6
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I use selective reinvestment do to some of my portfolio rebalancing. If a given fund is way ahead of the others, I do not reinvest the distribution. Otherwise, I do the automatic reinvestment. This is more tax efficient than selling some of the outperforming funds.

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Old 12-21-2007, 03:43 PM   #7
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Now that I am retired and in withdrawal mode, all distributions and dividends are taken in cash for me to use (or re-invest) as the case may be. I prefer the flexibility.
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Old 12-21-2007, 03:58 PM   #8
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I do automatic investment only when it's tax efficient (like inside an IRA) and when the investment is diverse enough that there's no "moving" effect.

For example, if everybody reinvested dividends in a single stock, all of those purchases happening at the same time would artificially raise the purchase price. Generally not something you want.
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Old 12-21-2007, 05:20 PM   #9
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I just changed my options to NOT reinvest dividends & capital gains distributions to prepare for ER. Same reasoning as Want2Retire above.

I also plan to stop all my automatic monthly investments into funds starting 1/1/08.
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Old 12-21-2007, 07:05 PM   #10
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Do you automatically reinvest interest & dividends?
Yes, still in accumulation phase.
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Old 12-21-2007, 07:45 PM   #11
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We have gains/dividends reinvested in tax sheltered accounts. It's easy there to move among funds for rebalancing without creating any tax issues (and with automatic reinvestment, there's no "time out of the market" while getting around to reinvest).

In taxable accounts, gains/dividends go to money market, from which we then purchase funds we're trying to build up for asset allocation. The downside is I can let it sit too long in the money market before getting around to reinvestment purchase (like perhaps the last couple days, when small caps I meant to buy took a nice bump).

When it comes time to sell in taxable, staging in the money market also helps with bookeeping for identifying particular blocks of shares to sell for managing capital gains/loss.
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Old 12-22-2007, 03:11 AM   #12
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I'm in the accumulation phase and do it exactly the same as Sparkythewonderdog -- reinvest in the tax-sheltered accounts, and put distributions into money market for taxable accounts. My Fidelity and Vanguard accounts make this very easy to do.

I learned about the latter strategy -- taking cash in taxable accounts and manually reinvest to meet asset allocation targets -- from this forum. Using different strategies for taxable vs. tax-sheltered accounts works well for me.

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Old 12-22-2007, 08:46 AM   #13
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Currently, all of it is automatically reinvested. All of my portfolio 60/40 and 3 yr ER are in our IRA accounts - we have no taxable investments. I have moved profits into the ER when needed as well as rebalance when needed.
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Old 12-22-2007, 09:28 AM   #14
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In our taxable accounts, we are not auto-reinvesting. We have mostly ETFs now, but do have some legacy actively managed funds that we do not want to sell and take a tax bite. In order to avoid buying more shares of those actively managed funds, we are taking the distributions in cash. That cash is then used to buy ETFs in the same asset class. We do not let the money sit more than a few weeks before getting it into ETFs.

In our tax-deferred accounts, we are auto-reinvesting in to the same accounts.
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Old 12-22-2007, 12:56 PM   #15
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I auto reinvest it all in my tax deferred account but do not in my taxable account. I live off my taxable account distributions.
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Old 12-22-2007, 01:52 PM   #16
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Quote:
Originally Posted by Dawg52 View Post
I auto reinvest it all in my tax deferred account but do not in my taxable account. I live off my taxable account distributions.

I do the same !
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Old 12-22-2007, 03:00 PM   #17
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Originally Posted by Dawg52 View Post
I auto reinvest it all in my tax deferred account but do not in my taxable account. I live off my taxable account distributions.

LOL! had posted a link to this doc in another thread
https://institutional.vanguard.com/i...P_TotalRet.pdf

It shows how it is more tax-efficient to sell holdings to get your living expenses than to use distributions. Its recommendation is to use tax-managed funds that have very low distributions.

I think it makes sense, but for me (and you may be in the same situation) - I'll realize huge capital gains if I move my taxable money from current mutual funds into tax-managed ones.

But for people still accumulating, that is very good advice, I think.

I only have a few more months to accumulate funds & then its ER time.
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Old 12-22-2007, 05:30 PM   #18
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Originally Posted by walkinwood View Post
LOL! had posted a link to this doc in another thread
https://institutional.vanguard.com/i...P_TotalRet.pdf

It shows how it is more tax-efficient to sell holdings to get your living expenses than to use distributions. Its recommendation is to use tax-managed funds that have very low distributions.

I think it makes sense, but for me (and you may be in the same situation) - I'll realize huge capital gains if I move my taxable money from current mutual funds into tax-managed ones.
That's the kicker.
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