Gyroscopic Investing

I'm reading the PP book and just read this:

You should turn off automatic reinvestments of fund interest and dividends. This feature automatically reinvests dividends and interest paid by your stock and bond funds back into the same fund. Automatic reinvestment of interest and dividends can make it difficult to track fund purchases for tax purposes, and can distort the rebalancing bands that are used to determine when to buy and sell each asset in the portfolio.

This goes against what I always thought was best, which is automatically reinvesting to avoid being taxed early. In my case (investment inside a company in The Netherlands), each profit of a sale or yield is taxed that year, so accumulating ETFs/funds are preferred above distributing ones.

Please help me understand. Thanks!

here in the states whether you reinvest or take a distribution there is no tax difference , it is taxed the same.

so you are saying you are not taxed reinvesting dividends until you draw some out ?

mathjak107 wrote: ↑Thu Dec 12, 2019 5:07 am so you are saying you are not taxed reinvesting dividends until you draw some out ?

Yes indeed

then you need to do what works best ..

it makes sense the way your country does it .

when a dividend is paid it is no different then a fund distribution , it takes what you have invested and gives you a dollar and then has a mandatory dollar subtracted off the share value when it goes ex div ..you really gained nothing , yet we are taxed ...

if i get a 4% div i am taxed on the full 4% no matter whether i reinvest or spend it . if i draw the same 4% off a portfolio of non div payers , i am only taxed on the gain portion not the entire amount like a dividend , yet assuming the same total return my balance would be no different .

so dividends are not really an efficient way to draw income in the states

It works the same for us except when the fund itself reinvests the dividend (accumulating fund). So we also got that weird (unfair) thing that when a fund pays a dividend, and I reinvest it a second later it still gets taxed as profit.

So that is why I always thought that buying accumulating funds are the better choice here. In the book, it is recommended to put the dividends in cash for tax reasons (which is probably a US thing then?), but also because it can distort the rebalancing bands. I don't really get that.

Thanks!