when reading through some stuff on tax implications for selling off mutual funds I came across this juicy nugget on the Forbes site.
4. Reinvesting is a bad idea. You put $100,000 in a fund, it makes a $5,000 distribution, and you use that to buy more fund shares. That sounds nice, except that it messes up your cost basis. You now have two lots of shares with two purchase prices and two holding periods. Keep this up for a decade and you could wind up with 10 or 40 or even 120 purchases. Now what happens when you want to take some money out? That means selling shares. Which shares are you selling? Bought at what prices?
The only way to cope with this mess is to use the fund company’s “average cost” calculation when you sell shares. That’s suboptimal. It would be better to identify the high-cost shares as the ones you’re selling.
A better idea is to check “No” when asked about whether to reinvest. Send distributions (both income and capital gain distributions) into your money market account. When that account gets fat, use it to make a lump-sum purchase of the same or a different fund. When you want to need to raise cash, you can pick a high-cost position to minimize your tax burden.
whaaaa....? Reinvesting my dividends has always been a core tenant of my 'lazy-man's' strategy for garnering wealth. I get that later on (decades later) it may be slightly sub-optimal for tax purposes, but since my gains are all LT capitol gains I seriously suspect that shuttling it into a MMA and waiting "until it gets fat" would be too big of a cash drag to make up for any tax-loss harvesting I would otherwise get by dutifully tracking each dividend and share purchased over a decade+.
Or am I wrong?