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Old 10-12-2017, 02:20 PM   #21
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Daydreamer,

If you buy just before the dividend is paid, you will get a distribution (which you can use for your travel, yes); BUT, the NAV of the fund will then decrease by the amount of the distribution. So, effectively, you give them money to buy shares, they give some of it back, AND you get taxed as though you somehow made a profit. Empty calories. I'd wait until after they distribute. I was once in a big hurry to just do something and made a sizeable investment in a fund only to have this happen 7 days later. An expensive lesson.

-BB
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Old 10-12-2017, 02:34 PM   #22
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It's not that expensive. You're just paying taxes earlier than you need to since the price will drop after the distribution, and eventually when you sell you'll pay a smaller capital gain (or have a larger loss). It's not like your paying taxes and getting nothing at all in return, unless you're paying 15% on dividends now and would pay nothing on cap gains later. I guess if you held them forever, your heirs would get an updated basis, so it might be that way.
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Old 10-12-2017, 04:58 PM   #23
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Ok, trying to understand the nuts and bolts of the optimum time to buy. Is this buying now an issue only because we are in the 4th quarter of 2017, and has been a block buster year, but would be an opportune time to buy in 4th quarter if it was a down year?

Please understand my naive questions. I have only been an investor in 401k's in which no money is ever taken out, only put in.

Just out of curiosity, could somebody show the math of how investing today in Wellesley admiral funds is not a good idea, and how this costs me money. Words only confuse me at this point.
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Old 10-12-2017, 05:56 PM   #24
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A blockbuster year has little to do with it. The underlying stocks pay dividends, and those come out in the fund near the end of the year. So the end of the year is a bad time to buy any mutual fund that includes a decent number of dividend paying stocks. That said, you're over 2 months away from the dividend date, so I'm not sure it's worth staying out of the market to avoid the dividends. Your call.

Here's the math, based loosely on last years numbers. They are rounded for my convenience, but close to real numbers--non-admiral, I think.

Pre-dividend price is $25. Say you buy 10,000 shares for $250K just before the dividend is paid. For simplicity, and to match your situation, you don't reinvest dividends.

After close on Dec 22, a $0.50/share dividend is paid.

You get $5K (10,000 * 0.50). You are potentially taxed 15% on that, or $750, netting you $4250.

On the open on Dec 23, the share price is adjusted to $24.50, +/- any other after hours activity. Check the daily share prices, and you'll see that happens after a dividend.

You still have 10,000 shares, and they are now worth $245,000. Your basis is still the $250K you paid, so you have an unrealized loss of $5K.

For simplicity, let's imagine unrealistically that it never pays another dividend and does not move in price, and you sell 10 years later, realizing that $5K loss. You get $245,000 in direct proceeds. If tax rates are still the same, you can cancel $5K in cap gains you might have selling other funds, which would have been taxed at 15%, or $750. So you really get $245,750 on the sale. So you get that $750 back that you paid in taxes on the original dividends, but not until years later. You essentially let the US Treasury use that $750 for years.

Now, let's say instead you waited to invest until after the dividend. You buy the same 10,000 shares, but now it only costs you $245,000 because it is post dividend. You set aside $5000 for your vacation (as opposed to the $4250 you were going to net after taxes on the dividends). Years later, when you sell, you get your $245,000 back. $750 less, because you took it upfront. Had their been gains and dividends in a more realistic scenario, the results would be the same because in either case you had 10,000 shares invested.

Or you could only hold back the $4250, and invest that extra $750 which would almost certain grow in the real life case where the fund probably increases in value and keeps earning dividends. If the fund doubles in 10 years including adjustment for dividends, you'd be $750 (less the tax on that) ahead by investing after the dividend.

On the other hand, if the fund increases in value 0.3% between now and the dividend, you'll cover that amount if you are invested in the fund during that time.

Someone can check my numbers. I hope I'm not off by a factor of 10 somewhere.
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Old 10-12-2017, 07:51 PM   #25
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Thank you Runningbum for showing the math and taking the time to do that. I now see why it would be benificial to hold off as long as the fund does not increase in value .3% from now until dividend payout. Definitely a strong argument to wait.
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