Addendum to Previous Post

I was thinking about the post last night and realized I had not mentioned anything about dealing with dividends during the holding period. Since, with large cap value stocks, in a medium to long holding plan, dividends are perhaps the most important factor in profitability, this is sort of a major failing.

In a long term holding plan, dividend handling is very simple; just instruct your broker/mutual fund company to automatically re-invest the dividends. With the three portfolios discussed yesterday, though, we're looking at a medium term period (I define anything under a year as short, a year to 2-5 years as medium, and longer than that as long term.)

At this point in my investing career, I tend to think the best option is to have the dividend income placed into the cash/money management fund attached to the account, and then add it to your investment total when you rebalance the account each year-end. You could set it up to reinvest at each payout, but I'm not sure the shorter holding period for these fractions would be worth the effort or overcome any transaction costs.

One other note, on setting up the account and rebalancing. In long term accounts like this that rebalance annually at the New Year, I do all calculations and purchases on the last trading day of the old year, and all sales on the first trading day of the New Year. This will insure that your trades are always eligible for long term cap gain treatment. Needless to say, you must be eligible for margin, altho you'll only be in a margined position for a few days, minimizing any costs.