cgaros:

A misunderstanding seems to remain here: although an atrocious fund will have no capital gains distributions and an excellent high-turnover fund will have many, there is no reason to be happy about capital gains distributions from your mutual fund, unless:

1. You are tax-sheltered.

2. They happen in market-beating amounts every year.

3. There is no long-term downtrend in the NAV (i.e. your fund is constantly finding successful investments, selling them at a gain, and using any reinvested distributions or new money to find equally successful investments (i.e. your fund lives in Fairyland with purple unicorns)). 

These conditions would indicate indicates that your fund is superlatively well managed for a very particular need - high income through frequent trading.  Almost no mutual fund managers can achieve this goal, due to the downside of expenses and the fact that a buy-sell-buy-sell strategy statistically underperforms buy-and-hold.

The effect of a reinvested capital gains distribution is nil.  Yesterday, your fund had 10,000 of your dollars to manage for profitable investment.  Today, if the market moves nowhere, you recieve a 200 dollar distribution, the NAV drops to 9,800, and if you reinvest the 200 to bring you back to right where you started - 10,000 under management.  Mutual fund shares are not the same as stock shares, because they are 100% arbitrary.  The mutual fund can and does make more in exchange for cash at any time and for any reason.  When they distribute it indicates they sold shares that quarter, and when you give them cash they buy more stocks/bonds with it.  If both things happen at once, it means that your mutual fund sold something in order to distribute to you, then bought something when you gave them the money back - no evidence of real profitability unless the above conditions are met.  They might be selling the IBM shares they've held for 20 years, waiting 6 months, and buying more IBM at a higher price, which costs you money at every turn.     

You can achieve the same effect as a cash capital gains distribution by selling a portion of your position at any market close.  The effect is to remove some of your assets from the management of the mutual fund company - you had 10,000 under management, you sell 200 worth of shares, you now have 9800 under management and 200 worth of cash. If you are living off the assets and their income, this may be the right choice for you.  But there is no reason you gain any benefit from following the fund's schedule in gains distributions. 

Cgaros,

You are offering the same argument that buy and hold accumulators always offer; a total return perspective.

I am looking primarily at a withdrawal perspective.

We have two funds that pay $.25 per quarter in dividends, and mine pays $1 in CGs and the yours pays none (say an index fund), and I reinvest the $1 in more shares, then both accounts have the same value, but mine has more shares and yours has a higher NAV per share.

  The next quarter, in March, the funds both again pay $.25, mine has more shares so in the  account, so I get $.25 per share of the original shares, + $.25 for each of the new shares my CGs bought.  Of course, both accounts fall the same amount as the distribution again, but  my account received a bigger dividend payout because I had more shares, so my NAV per share again falls further than your index account.  This goes on for some years and as long as all CG and dividends are reinvested, the same dynamic takes place; higher payouts and more shares for my account, lower payout and lower share numbers for your index account.  But both accounts have the same value and the same TR.  My account now has 20% more shares and a lower NAV per share, and your account has a higher NAV per share and less shares.

Now we both decide to retire.  We are the same in our life style and needs in every way.

We determine we need the amount of money equal to the amount generated by my current dividend payment, which is 20% more than your dividend payment.

I begin to take my dividends to live on.  My dividend payout continues to grow, because I continue to reinvest my CGs in more and more shares.  My account value would drop in line with the dividends minus the CGs.  In funds like DODBX where the CGs have exceeded the dividends, my account would grow.  In funds like Wellesley and Wellington where CGs and dividends are closer to the same amount, my account value will stay approximately the same.  For example, over the entire life of Wellesley, taking a 4% initial + real inflation since 1970, left the investor with a nominal increase in account value but a 14% decrease in "real" value.  I'd take that any day.

You now need to take income too.  You take your dividends, but you are still 20% short of the income you need.  You sell some shares to get that 20% more.  Again, our account values are the same, but now you have even less shares than before and I have even more.  The next year you need your dividend payout + 20% of your original dividend payout + the loss of payout you suffered by having to sell shares the year before.  So this year you have to take your reduced dividend and sell even more shares.

You have now stared reverse dollar cost averaging.  While I will continue to accumulate shares, you will continue to decumulate shares. 

At points the market will be up and you will sell less shares.  But at times, the market will be down sharply and you will sell more shares.  Once sold, they ain't comin' back, so you will continually lose shares.  If those bad years happen early on, you may well run out of money before you die.

I, on the other hand, will continue to accumulate shares and grow my payout as long as I am receiving CGs.  I never have to sell a share to eat.  I don't care if the market is up or down.  In fact, a down market means I'm buying more shares at lower prices with my CGs while you are liquidating more shares.

In the end, I become rich, write a book, run away with a super model and buy my own island.  You will walk my dog  :o}

"3. There is no long-term downtrend in the NAV (i.e. your fund is constantly finding successful investments, selling them at a gain, and using any reinvested distributions or new money to find equally successful investments (i.e. your fund lives in Fairyland with purple unicorns)). "

Final point of clarification;  When a fund sells all or part of its holdings in a stock, it only distributes the gain.  The original capital is used to buy the equally successful new stock.  Reinvested CG buy more shares for the reinvestor, they don't buy new stocks.

There doesn't have to be a long term down trend in NAV.  Look at DODBX's NAV and distribution history.

best,

Bill