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Old 04-23-2009, 09:50 AM   #61
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Ah. So there are two types of investors: some are self-admitting market timers, and the remaining ones are hiding behind their "rebalance" personal strategies.

Actually, why are market timers called "dirty"? Is it because they most often fail in their Quixotic quest and lose their shirts?

However, the market timer, if successful, does a lot of good. He not only adds to his fortune, but also acts as a market stabilizing force. By selling high and buying low, he provides liquidity and reduces the market wild swings. His actions counter the madness of the crowd who flocks into the market en-masse in good years, and liquidates stocks in downturns. A very noble act indeed!

The successful ones are revered as heroic and wise contrarians, while the failing ones are called "dirty".

So, don't fail, damn it!
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Old 04-26-2009, 03:14 PM   #62
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Originally Posted by rjsciurus View Post
Hello,
Delurking because this caught my attention. I'm trying to decide if I'm reading too much into this, or if there's some issue I've neglected. My understanding was that MFs adjust their NAV when they give dividend or CG distributions. If you reinvest, your total value doesn't see it-- changes in NAV are counteracted by increased shares. If you don't, you *may* see the NAV lurch slightly. The tax paid on distributions is reflected by the drop in NAV (thus basis).

In the end, it's quite simple if I track every purchase/redemption (including reinvestments) with something like Quicken. I can easily use FIFO tax basis for sales of x shares of the fund by simply having Quicken report my basis for all purchases from the oldest up to x shares. The distribution-based taxes paid yearly in the past are irrelevant. That's useful if you believe FIFO is to your advantage and wish to harvest tax liability now-- taxes will go up, or low current tax bracket. It's a permanent decision for that fund made at the first sale, of course.

Would you agree with this, Audrey?
Yes, I think you are right. If you track individual lots and track any share lots bought via reinvested separately then the drop in the current NAV of the should take into account the distributions. That can be a whole lotta tracking though. The "basis raising" applies if the total $ amount originally invested is compared (for tax purposes) against the current total $ in the fund that includes reinvested dividends which bought more shares. That is what can be confusing.

Some folks never reinvest distributions so they can do the individual lot tracking more easily. Since I let the mutual fund company calculate my average share costs basis for me I don't worry about it. Average basis is usually better than FIFO for tax purposes, but with the roller coaster market for the past decade it probably is a wash nowadays.

I notice that my bond funds almost never show a capital gain but rather a capital loss in spite of my fund balances continually increasing over the years because almost all "gains" were due to reinvested dividends and I have already paid taxes on them. Rebalancing lately for me has meant realizing some capital gains losses helping my tax situation which takes a little of the sting out.

Audrey
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Old 04-26-2009, 03:23 PM   #63
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I'm not so sure that that was a good lesson to learn. That is, your strategy resulted in a bad outcome last year (just as mine did -- I rebalanced on Jan 3, 09), but with slightly different timing of the ups and downs, your strategy might have been ideal.

Next year a downturn of 8% might be followed by a 30% uptick, and then your older strategy would have been better.
I recognize that it means there is a chase to miss an opportunity rebalance on a smaller drop in the market. That would be a deliberate choice. I like the idea of excuses to fiddle with the portfolio less often, and a wider band encourages this. I think in general, rebalancing less often has been shown to be more beneficial, especially for taxable accounts.

As far as I know there haven't been any studies that have shown a benefit to using an "out-of-balance" trigger for rebalancing, it's just an idea that intuitively appeals to some of us. I would probably be better off not even using such a thing but just go strictly by the 18 month to 2 year schedule that seems to be optimal for rebalancing in taxable accounts. Another big advantage of not using any out-of-balance trigger is that you can completely ignore what your portfolio is doing until the calendar says it's time to rebalance.

Audrey
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