Mixing Vanguard Life Strategy funds?

sebtomato

bowlhead99 wrote: »

Smart thing to do if you want to generate an income without triggering the obligation to pay income tax on the income - just buy right after ex-div and sell right before the next one and you benefit from the income coming into the fund without it being sent out to you. A little wacky if you are doing it in a tax wrapper where you won't pay income tax on the income anyway

If you sell right before the ex-div, you wouldn't get an income, would you?

schiff

bowlhead99 wrote: »

Smart thing to do if you want to generate an income without triggering the obligation to pay income tax on the income - just buy right after ex-div and sell right before the next one and you benefit from the income coming into the fund without it being sent out to you. A little wacky if you are doing it in a tax wrapper where you won't pay income tax on the income anyway

The interest took care of itself. I was more interested in getting units that were going to pay out dividends for several years, whilst giving up the equivalent of the cost price of the units. As I was regularly paying in lump sums it also had a cumulative effect.

bowlhead99

sebtomato wrote: »

bowlhead99 wrote: »

Smart thing to do if you want to generate an income without triggering the obligation to pay income tax on the income - just buy right after ex-div and sell right before the next one and you benefit from the income coming into the fund without it being sent out to you. A little wacky if you are doing it in a tax wrapper where you won't pay income tax on the income anyway

If you sell right before the ex-div, you wouldn't get an income, would you?

You buy the fund when it is ex div for 100.

Over the course of the year, 3 of income comes into the fund so the fund is worth 103.

On the next ex-div day they are going create a liability in their records to pay the 3 over to you as a dividend and drop the price of the fund back to 100.

But a day or two before they do so, you sell the fund at 103.

Then when the fund is back at 100 on the ex div day, you buy it back.

In that way, you have 'got' the 3 of income without it actually being characterised as income for tax purposes, because nobody paid you a dividend.

sebtomato

bowlhead99 wrote: »

You buy the fund when it is ex div for 100.

Over the course of the year, 3 of income comes into the fund so the fund is worth 103.

On the next ex-div day they are going create a liability in their records to pay the 3 over to you as a dividend and drop the price of the fund back to 100.

But a day or two before they do so, you sell the fund at 103.

Then when the fund is back at 100 on the ex div day, you buy it back.

In that way, you have 'got' the 3 of income without it actually being characterised as income for tax purposes, because nobody paid you a dividend.

That's buying and selling instead of being paid an income, in the traditional sense of the word.
In your example, having to time the buying and selling of entire stakes in a fund just to get 3% tax-free, when the fund price variation is likely to go up and down (aside from ex div) also probably means not achieving a consistent return of 3% anyway.

bowlhead99

sebtomato wrote: »

That's buying and selling instead of being paid an income, in the traditional sense of the word.

I know it is not being 'paid' an income in the traditional sense of the word. It is choosing to 'take' the income by disposing of the fund which has received the income and is holding the income on your behalf, before it gives the income to you and puts you on the hook for income tax.

I'm not saying I recommend it as a strategy.

I only commented because Schiff described his old strategy of avoiding the interest/dividends by timing his purchases and buying at a lower price after he forwent the dividend. As we know that the overall economics are the same whether you buy just pre-div or ex-div with the only difference being tax treatment (yet he was doing it in a tax-free environment), I assumed that his "seemed a no-brainer" with a smiley was some self-deprecating humour.

In other words he was looking back at his youthful exuberance when he was thinking that he'd found a great wheeze - when really there was no significant economic benefit and he was just avoiding a minor delay (time out of market on income reinvestment, because of needing to wait for a div to be received before it could be reinvested) while creating his own delay (time out of market due to holding off on investing the lump sum until the fund had become ex-div).

So I smiled and commented that the avoidance of an ex div date can actually be useful if you are trying to change the tax character by earning an income without ever getting paid the income. Some people can have their own reasons for doing things that seem like they don't make make sense at face value.

In your example, having to time the buying and selling of entire stakes in a fund just to get 3% tax-free, when the fund price variation is likely to go up and down (aside from ex div) also probably means not achieving a consistent return of 3% anyway.

It does mean you'll be out of the market for a day or two, but statistically a daily movement is only about a 250th of the annual movement and while it might in practice be a percent or two, the effect of missed days can be to your favour or benefit and will smooth out somewhat over time.

Like I say, I don't advocate it as a strategy.

schiff

I lost touch with my youthful zeal so long ago now it's hard to remember what it felt like. However, an example:

Price come-div 103.3p
Price ex-div 101.7p a day or two after

£2000 invested when come-div I get 1936 units (in round figures)
£2000 invested when ex-div I get 1966 units (-do-)
I sacrifice a quarterly dividend on those units; one dividend.

Next dividend payout is on 1966 units rather than 1936
The payout after that ditto
And the payment after that ditto
And that went on for years. It was my only S&S ISA , I was a bit of a novice and hadn't picked up yet on diversification.
Each few thousand I invested I used the same technique.

When I only had a few hundred to play with I did something similar with Government Stock - buying ex-dividend, selling come dividend 6 months later. Any profit was CG and covered, not income. Until the Revenue put a stop to it.

bowlhead99

schiff wrote: »

Price come-div 103.3p
Price ex-div 101.7p a day or two after

£2000 invested when come-div I get 1936 units (in round figures)
£2000 invested when ex-div I get 1966 units (-do-)
I sacrifice a quarterly dividend on those units; one dividend.

Next dividend payout is on 1966 units rather than 1936
The payout after that ditto
And the payment after that ditto
And that went on for years.

Yes, I see what you were doing. If you had invested cumdiv to buy the 1936 units, they would have sent you 1.6p x 1936 units as a dividend a short while later. Knowing you were going to receive £31 means you could have invested that £31 quarterly dividend to get 30 units which would leave you with the same 1966 units, after 'sacrificing' it to boost your number of units.

The only downside of investing cumdiv is that while waiting for the £31 to arrive and be reinvested, the £31 is out of the market for a little while, if you don't separately fund it from your bank account. But the very act of waiting for the ex-div price means that your whole £2000 is out of the market for a little while as you wait for the ex-div date to come around before you can invest at the 'low' price. So, likely no overall longterm benefit from you investing late and 'sacrificing' the quarterly dividend by not receiving it, instead of investing early and reinvesting the dividend when you receive it.

As an aside, if it's a 'no brainer' to sacrifice one quarterly dividend to receive payments on more units in future going on for years, it's perhaps also a 'no brainer' to sacrifice a second quarterly dividend by reinvesting it so that you can receive payments on more units in future going on for years... and the same for a third quarterly dividend, etc etc. Where does one stop

schiff

bowlhead99 wrote: »

.

As an aside, if it's a 'no brainer' to sacrifice one quarterly dividend to receive payments on more units in future going on for years, it's perhaps also a 'no brainer' to sacrifice a second quarterly dividend by reinvesting it so that you can receive payments on more units in future going on for years... and the same for a third quarterly dividend, etc etc. Where does one stop

Indeed, but I tended to think in thousands rather than trivial sums