Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Reinvest Capital Gains?
Old 05-01-2010, 11:16 AM   #1
Dryer sheet aficionado
 
Join Date: Jan 2010
Location: Galt's Gulch
Posts: 35
Reinvest Capital Gains?

I saw on Vanguard that my current setting is to reinvest capital gains in all of my funds. I didn't even know what this meant, but after a bit of research I figured out this was the decision on what to do with profit from a stock that was sold at a higher price than it was bought.

So my question is, do index funds even have an capital gains? They're not buying and selling stocks, unless they're entering and leaving the index the fund is tracking right? So for example a Total Stock Market index should have no capital gains to redistribute?

Also, for active funds that do trade in and out, what do most bogleheads do, do you reinvest capital gains?

Thanks for the help in advance.
__________________

__________________
John Galt is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-01-2010, 12:13 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,615
I am still in the accumulation phase.

In my taxable accounts, I do not automatically re-invest distributions. I take them in cash and use them to help with rebalancing. That is, if something that has gone way up pays a distribution, I will use the money to buy shares in a laggard.

In my tax-advantaged accounts, I do automatically re-invest distributions. Since these are mostly bond funds that pay monthly distributions and there are no tax reporting consequences, I think this is the thing to do.

If I was in the decumulation phase, I would probably just use the distributions to pay my expenses.

Distributions could be dividends or capital gains. Tax efficient mutual funds like index funds usually do not pay much in the way of capital gains, but that was not always true. The losses in the stock market in recent years means these funds have built up some internal losses that they can use to offset gains. You can look up the history of the distributions for your fund at the fund's web site.

Quote:
I saw on Vanguard that my current setting is to reinvest capital gains in all of my funds. I didn't even know what this meant, but after a bit of research I figured out this was the decision on what to do with profit from a stock that was sold at a higher price than it was bought.
Do not confuse a capital gain distribution of which you have no control (the fund just creates it and gives it to you) and a realized capital gain or loss that you create when you sell shares yourself. It is the first (the distribution) that this re-invest question is about.

See also: http://www.bogleheads.org/wiki/Wheth...axable_Account
__________________

__________________
LOL! is offline   Reply With Quote
Old 05-01-2010, 12:32 PM   #3
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,822
Quote:
Originally Posted by LOL! View Post
In my taxable accounts, I do not automatically re-invest distributions. I take them in cash and use them to help with rebalancing.
Same here.

I can use the cash from LTCG to beef up whatever fund needs it, according to my asset allocation, later on when I rebalance. Most of my LTCG are from VWIAX Wellesley, an active fund, though there were none in 2009.

I also get my dividends in cash and withdraw them later on for living expenses, since I am in the decumulation phase.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is offline   Reply With Quote
Old 05-01-2010, 05:18 PM   #4
Thinks s/he gets paid by the post
FIRE'd@51's Avatar
 
Join Date: Aug 2006
Posts: 2,315
Quote:
Originally Posted by John Galt View Post
So my question is, do index funds even have an capital gains? They're not buying and selling stocks, unless they're entering and leaving the index the fund is tracking right? So for example a Total Stock Market index should have no capital gains to redistribute?
This is essentially correct, and the gain is usually the result of a takeover or merger that involves cash. Theoretically, capital gains could be realized if the index fund needed to sell stocks to meet withdrawals which exceeded inflows. Also, a fund which holds index futures collateralized with Treasury bills for liquidity or to reinvest dividends could generate a capital gain as a result of rolling or closing out the futures position, as well as the year-end mark-to-market of the futures. Nevertheless, I believe the last time the Vanguard S&P 500 index fund distributed a capital gain was 1999.
__________________
I'd rather be governed by the first one hundred names in the telephone book than the Harvard faculty - William F. Buckley
FIRE'd@51 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Capital Gains in 2009 bizlady Stock Picking and Market Strategy 17 10-02-2009 09:47 PM
Capital Gains ?? JustMeUC FIRE and Money 5 09-23-2009 08:40 PM
Capital gains distributions virginia Young Dreamers 14 05-23-2006 10:40 PM
Capital gains Jay FIRE and Money 15 03-08-2005 07:32 AM
Mutual fund: better to reinvest cap gains/dividend soupcxan FIRE and Money 4 11-08-2004 01:00 PM

 

 
All times are GMT -6. The time now is 08:36 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.