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Reinvesting dividends & interest in the Permanent Portfolio
Posted: Wed Oct 14, 2015 5:42 pm
by economicsjunkie
I've seen different opinions in different discussions on this: What are the pros and cons of reinvesting dividends and bond interest in the permanent portfolio?
Personally I would like to reinvest as much as possible rather than sweep payments into cash. There don't seem to be any transaction fees for dividend reinvestment and I can also buy bonds without any fees.
If I ever need to report stock/bond sales for tax purposes my brokers (CapitalOne Investing and Fidelity) have automated reports at the click of a button as far as I know so no extra time needed there.
Am I missing any obvious or not so obvious disadvantages?
Re: Reinvesting dividends & interest in the Permanent Portfolio
Posted: Wed Oct 14, 2015 6:25 pm
by buddtholomew
economicsjunkie wrote:
I've seen different opinions in different discussions on this: What are the pros and cons of reinvesting dividends and bond interest in the permanent portfolio?
Personally I would like to reinvest as much as possible rather than sweep payments into cash. There don't seem to be any transaction fees for dividend reinvestment and I can also buy bonds without any fees.
If I ever need to report stock/bond sales for tax purposes my brokers (CapitalOne Investing and Fidelity) have automated reports at the click of a button as far as I know so no extra time needed there.
Am I missing any obvious or not so obvious disadvantages?
Nope. At least this won't be an issue for your gold investments
Re: Reinvesting dividends & interest in the Permanent Portfolio
Posted: Wed Oct 14, 2015 6:51 pm
by Pet Hog
I would reinvest any dividends, coupons, or interest into the asset from which it came. Mainly because that approach provides a slightly higher CAGR (see for yourself at peaktotrough.com). The alternatives are letting it remain as cash or investing it in the asset of lowest value at the time. I consider my four asset classes to be completely separate entities, so I don't like the concept of cash siphoning from stocks and bonds into my cash quadrant. Can the assets still be considered uncorrelated? Any why should cash have this specific advantage that no other asset has? Also, consider the (granted, probably highly unlikely) scenario of 15.1% stocks and 34.9% cash -- a situation that would not trigger rebalancing. Next day, you receive a dividend and the percentages change to 15.0 and 35.0%, respectively -- bingo, rebalance! What has changed in the economy? Nothing! So I don't want to ever be forced to rebalance just because I have received a dividend or coupon.
Now, investing the dividend, interest, or coupon into the worst-performing asset is another matter. Even though it could also be considered a mini-rebalance, in this case you are forced to buy low and that is usually not a bad thing and the process might stave off a full rebalance and, therefore, avoid negative tax consequences. But I don't think that's the approach you are considering -- rather, you want to automatically reinvest dividends into stocks and coupons into bonds. I would go for it if I were you.
Re: Reinvesting dividends & interest in the Permanent Portfolio
Posted: Wed Oct 14, 2015 10:23 pm
by MachineGhost
economicsjunkie wrote:
I've seen different opinions in different discussions on this: What are the pros and cons of reinvesting dividends and bond interest in the permanent portfolio?
The cons is you're reinvesting dividends into overvalued stock. It would be better to hold onto it as cash and keep it for when you need to rebalance into stocks, hopefully down far enough that stocks are then undervalued.
OTOH, if you're using a Dividend Growth strategy then you would want to have it reinvested so it buys more shares on the way down. Valuation doesn't matter in this case as the point is to have an eventual income stream that grows above inflation every year.
Re: Reinvesting dividends & interest in the Permanent Portfolio
Posted: Thu Oct 15, 2015 12:49 am
by economicsjunkie
That all makes a lot of sense. Thanks for the input! =)
Re: Reinvesting dividends & interest in the Permanent Portfolio
Posted: Thu Oct 15, 2015 2:41 am
by mathjak107
Pet Hog wrote:
I would reinvest any dividends, coupons, or interest into the asset from which it came. Mainly because that approach provides a slightly higher CAGR (see for yourself at peaktotrough.com). The alternatives are letting it remain as cash or investing it in the asset of lowest value at the time. I consider my four asset classes to be completely separate entities, so I don't like the concept of cash siphoning from stocks and bonds into my cash quadrant. Can the assets still be considered uncorrelated? Any why should cash have this specific advantage that no other asset has? Also, consider the (granted, probably highly unlikely) scenario of 15.1% stocks and 34.9% cash -- a situation that would not trigger rebalancing. Next day, you receive a dividend and the percentages change to 15.0 and 35.0%, respectively -- bingo, rebalance! What has changed in the economy? Nothing! So I don't want to ever be forced to rebalance just because I have received a dividend or coupon.
Now, investing the dividend, interest, or coupon into the worst-performing asset is another matter. Even though it could also be considered a mini-rebalance, in this case you are forced to buy low and that is usually not a bad thing and the process might stave off a full rebalance and, therefore, avoid negative tax consequences. But I don't think that's the approach you are considering -- rather, you want to automatically reinvest dividends into stocks and coupons into bonds. I would go for it if I were you.
i agree , because if you don't you may be reducing the dollars invested and compounding in the asset you are pulling it from at a time rebalancing may not be wanted .
once the dividend or distributrion is paid the price of the asset is reduced by an equal amount so you have less dollars compounding for you then before the payout in that asset .
Re: Reinvesting dividends & interest in the Permanent Portfolio
Posted: Thu Oct 15, 2015 10:06 am
by Xan
I do (at least for now) reinvest dividends and bond interest (apart from the ones I hold directly, of course), but another downside is that reinvesting can complicate your holdings.
If you want to sell some of a stock fund and avoid a wash sale, the automatic purchase as a result of a dividend can mess you up.
Any time you want to sell, you'll have multiple tiny short-term holdings to deal with, complicating taxes.
Re: Reinvesting dividends & interest in the Permanent Portfolio
Posted: Thu Oct 15, 2015 10:58 am
by sophie
I quit reinvesting dividends for exactly the reasons that Xan mentioned. The resulting cash accumulation is small compared to new savings, so I just felt like it wasn't worth the bother.
Once you stop accumulating and start relying on the portfolio for living expenses, you'll want those dividends and interest payments to pile up anyway.
Re: Reinvesting dividends & interest in the Permanent Portfolio
Posted: Thu Oct 15, 2015 12:31 pm
by dualstow
The only holding I reinvest meets all of these criteria:
1 - stock index fund
2 - is well in the black, so no wash-sale risk
3 - is in a retirement account that I no longer contribute to and/or is in such a small account that there won't be a large amount of cash there anytime soon.
It's not big enough to wildly change allocations the stock proportion, due to #3. Not a lot of stock in there, not a lot of cash in there.
Re: Reinvesting dividends & interest in the Permanent Portfolio
Posted: Fri Oct 16, 2015 12:50 pm
by economicsjunkie
Xan wrote:
Any time you want to sell, you'll have multiple tiny short-term holdings to deal with, complicating taxes.
But what if my broker just spits out an automated form with all the tax data available to simply import into my tax software?