Big change in Wellington

[Rockies1978]

Hi Everyone,

I feel a bit silly for not knowing the answer to this question. I have a big holding of Wellington in my Roth IRA. Normally I try to avoid following it on a day to day basis, but I signed on this evening and was shocked to see that it had declined 4.23% on a day when the dow was up 0.75%. Can anyone explain what happened? I looked at the changes for the twenty biggest holdings of the fund and there was no single stock that would explain the decline.

Thanks.

[fourwedge]

It's got to be a capital gains distribution. No worries, happens most years in December.

[DSInvestor]

Hi Everyone,

I feel a bit silly for not knowing the answer to this question. I have a big holding of Wellington in my Roth IRA. Normally I try to avoid following it on a day to day basis, but I signed on this evening and was shocked to see that it had declined 4.23% on a day when the dow was up 0.75%. Can anyone explain what happened? I looked at the changes for the twenty biggest holdings of the fund and there was no single stock that would explain the decline.

Thanks.

Dividend and/or capital gains distribution. Here is a link to the distributions page of Wellington admiral shares:
https://personal.vanguard.com/us/funds/ ... =INT#tab=4

[sscritic]

You are the fourth person in the last 24 hours to ask the same question (by my clock, yours is today and the other three were yesterday), which means

1) you are not alone
2) you are late to the party
3) you aren't reading bogleheads the way you should

Links: in order of first appearance:

http://www.bogleheads.org/forum/viewtop ... 0&t=129142
[This is two threads in one: 129142 and 129143, "Sudden Wellington drop?" and "Market Soars - Vanguard Target Funds Plummet............."]

http://www.bogleheads.org/forum/viewtop ... 1&t=129156

[Taylor Larimore]

I feel a bit silly for not knowing the answer to this question.

Rockies:

No need to feel "silly." The only time to feel "silly" on this forum is not asking a question.

Happy Holiday!
Taylor

[bertilak]

Hi Everyone,

I feel a bit silly for not knowing the answer to this question.

As we probably all did the first time it happened to us. That's many years ago and probably long forgotten by many.

[gerrym51]

why does a capital gains distribution do this. just for info

[nisiprius]

why does a capital gains distribution do this. just for info

Like any other distribution, it takes money out of the fund and puts it into your pocket. So there is less in the fund and the fund is worth less per share. If you choose to reinvest the dividends, you then buy more shares, so you own a few more shares that are worth a little bit less per share.

Imagine you and nine friends create a savings club and you each put $1,000 into a bank account, and keep track of the ten shares. Imagine it pays interest at the rate of 0.1% per month. You operate the club and send out statements. Initially there is $10,000 in the account and you have 10 shares worth $1,000 a share. A month later, there is $10,010 in the account and each share is now worth $1,001. Then $1,002, $1,003, etc. Everyone sees their share value growing.

In December, the account is now up to $10,120 or $1,012 per share.

You now distribute the earnings: you take $120 out of the account and give $12 to everyone. You have $10,000 in the account. You send out statements showing that the value per share is $1,000 per share.

And all your friends ask "Hey, what happened? Why did the value per share suddenly drop from $1,012 to $1,000?"

[sscritic]

Things are included in the NAV. When things that were in the NAV are taken out and distributed, the NAV drops because those things aren't there anymore. Dividends is one such thing. Capital gains, both long and short, are other such things. Wellington lost all three of these things this week.

[Geologist]

why does a capital gains distribution do this. just for info

To give a somewhat broader explanation of why we have distributions: if a mutual fund distributes essentially all of its income (capital gains, dividends, interest, if any) in this way to the shareholders, it doesn't have to pay corporate income tax.

[nisiprius]

Quit looking at price charts. They tell nothing of interest to a long-term investor. They assume that you are just going to throw away the dividends, or that you are not going to be holding the asset long enough to collect dividends, or that you don't care about dividends because they're chump change compared to the day-to-day changes you are betting on... or something.

Why would anyone care about price per share? What I care about is the price of my total holding. I bet most of us couldn't even say how many shares of their Vanguard funds they have. I don't buy them by number of shares, I buy them in dollar totals and I care about dollar totals.

I don't really know what price charts are supposed to be good for, actually.

Maybe back when they had to do the calculations with a comptometer and make the charts with a Rapidograph pen and a Leroy set, it was too hard to add in the dividends or something. Now that we have these, what do you call them, electronic brains like UNIVAC that can do thousands of calculations per second, we shouldn't be using them...

[sscritic]

why does a capital gains distribution do this. just for info

To give a somewhat broader explanation of why we have distributions: if a mutual fund distributes essentially all of its income (capital gains, dividends, interest, if any) in this way to the shareholders, it doesn't have to pay corporate income tax.

Also, if it didn't, it wouldn't be a mutual fund (a regulated investment company). Them's the regs (aka, the definition).

[bertilak]

... a Leroy set

Ahh! Childhood memories of playing with the grownup toys! These were vary expensive and I made my father nervous. Rightly so. But I guess he didn't want to discourage any tendency for me to be neat and precise.

[pkcrafter]

To me, this example of distributions is why taking dividends doesn't make sense. As clearly noted, a dividend distribution lowers the NAV. If you don't reinvest the dividend you are tapping total return, and you don't get to decide when to make the distribution. Reinvesting the distribution automatically buys more shares at a slightly lower price. So, there is a trade off between the two withdrawal methods. Taking dividends maintains the number of shares, but lowers the funds potential total growth over time. Reinvesting dividends buys more shares and allows you to and take a distribution amount (sell shares) you choose at a time you choose. In a falling market, taking distributions is the same as selling low. You don't sell shares, but you don't add to shares at the lower price either. Reinvesting dividends in a rising market is also a better choice because you will have more shares that will benefit from expanding price.

Paul

[dbr]

To me, this example of distributions is why taking dividends doesn't make sense. As clearly noted, a dividend distribution lowers the NAV. If you don't reinvest the dividend you are tapping total return, and you don't get to decide when to make the distribution. Reinvesting the distribution automatically buys more shares at a slightly lower price. So, there is a trade off between the two withdrawal methods. Taking dividends maintains the number of shares, but lowers the funds potential total growth over time. Reinvesting dividends buys more shares and allows you to and take a distribution amount (sell shares) you choose at a time you choose. In a falling market, taking distributions is the same as selling low. You don't sell shares, but you don't add to shares at the lower price either. Reinvesting dividends in a rising market is also a better choice because you will have more shares that will benefit from expanding price.

Paul

Paul, the ability to compound the growth of the investment surely does not depend on whether the value of the investment at any point in time resides in more shares at lower price or in fewer shares at higher price! Compounding the investment is the same unless the investor sabotages the process by withdrawing money. Whether the withdrawal is by spending dividends or by selling shares is immaterial.

[countdown]

I see your points, pkcrafter. Particularly the control and timing.
And have come to understand over the past few years (thanks to Bogleheads) that by definition, the NAV is reduced by amount of dividend, which is either reinvested or not.

However, I also note that the NAV of a fund sometimes pops right back up within days of the dividend.
I think Wellesley did just that this month.

So, if you are holding in a qualified retirement account, and reinvesting at the lowered NAV, and within a couple days your NAV rises as well, perhaps equal to or above pre-dividend NAV, isn't that a positive of dividend investing and also true compounding?

Thanks, everyone, for all the contributions and educational posts.

[bertilak]

To me, this example of distributions is why taking dividends doesn't make sense. As clearly noted, a dividend distribution lowers the NAV. If you don't reinvest the dividend you are tapping total return, and you don't get to decide when to make the distribution. Reinvesting the distribution automatically buys more shares at a slightly lower price. So, there is a trade off between the two withdrawal methods. Taking dividends maintains the number of shares, but lowers the funds potential total growth over time. Reinvesting dividends buys more shares and allows you to and take a distribution amount (sell shares) you choose at a time you choose. In a falling market, taking distributions is the same as selling low. You don't sell shares, but you don't add to shares at the lower price either. Reinvesting dividends in a rising market is also a better choice because you will have more shares that will benefit from expanding price.

Paul

Paul, the ability to compound the growth of the investment surely does not depend on whether the value of the investment at any point in time resides in more shares at lower price or in fewer shares at higher price! Compounding the investment is the same unless the investor sabotages the process by withdrawing money. Whether the withdrawal is by spending dividends or by selling shares is immaterial.

dbr, I was about to post something similar, but realized I didn't quite follow what Paul was saying. When he says "the fund's potential for growth" is he talking about the investor's holdings of the fund or the fund itself? Certainly the fund itself doesn't care who reinvests or who keeps the cash, so what you say is true. Perhaps Paul meant the investor's holdings decrease and there is therefore less to compound over time. I think his main poiint is that by reinvesting and selling off only when needed the investor has tighter control. This can also make tax time a bit easier.

[YDNAL]

Reinvesting dividends buys more shares and allows you to and take a distribution amount (sell shares) you choose at a time you choose.

Paul,

The game to save/invest is to use the money when you need it. Taking the dividend may mean exactly that, so it would make FULL sense.

To me, this example of distributions is why taking dividends doesn't make sense.

[dbr]

To me, this example of distributions is why taking dividends doesn't make sense. As clearly noted, a dividend distribution lowers the NAV. If you don't reinvest the dividend you are tapping total return, and you don't get to decide when to make the distribution. Reinvesting the distribution automatically buys more shares at a slightly lower price. So, there is a trade off between the two withdrawal methods. Taking dividends maintains the number of shares, but lowers the funds potential total growth over time. Reinvesting dividends buys more shares and allows you to and take a distribution amount (sell shares) you choose at a time you choose. In a falling market, taking distributions is the same as selling low. You don't sell shares, but you don't add to shares at the lower price either. Reinvesting dividends in a rising market is also a better choice because you will have more shares that will benefit from expanding price.

Paul

Paul, the ability to compound the growth of the investment surely does not depend on whether the value of the investment at any point in time resides in more shares at lower price or in fewer shares at higher price! Compounding the investment is the same unless the investor sabotages the process by withdrawing money. Whether the withdrawal is by spending dividends or by selling shares is immaterial.

dbr, I was about to post something similar, but realized I didn't quite follow what Paul was saying. When he says "the fund's potential for growth" is he talking about the investor's holdings of the fund or the fund itself? Certainly the fund itself doesn't care who reinvests or who keeps the cash, so what you say is true. Perhaps Paul meant the investor's holdings decrease and there is therefore less to compound over time. I think his main poiint is that by reinvesting and selling off only when needed the investor has tighter control. This can also make tax time a bit easier.

Well, after I posted I thought more and decided I actually have no idea what Paul's post actually says. However, it looks like you could interpret it in a way that essentially would support the old and very wrong idea that dividends are free money. Since Paul certainly does not think that, I am now not sure what the post really says.

[YDNAL]

Well, after I posted I thought more and decided I actually have no idea what Paul's post actually says. However, it looks like you could interpret it in a way that essentially would support the old and very wrong idea that dividends are free money.

I don't want to speak for Paul, but I read (paraphrase) "don't take unneeded Dividends, reinvest, and withdraw when it floats your boat."

To me, this example of distributions is why taking dividends doesn't make sense.....

Reinvesting dividends buys more shares and allows you to and take a distribution amount (sell shares) you choose at a time you choose.

Paul,

The game to save/invest is to use the money when you need it. Taking the dividend may mean exactly that, so it would make FULL sense.

[countdown]

For those not as knowledgeable about the relationship between dividends, distributions, and mutual funds (like me),
there is a very good thread that Lady Geek directed readers to in another post, which is contained in the Wiki 'Dividend' section.
The thread is called 'What's so great about dividends?'.

http://www.bogleheads.org/forum/viewtopic.php?t=46454

[rj49]

To me, this example of distributions is why taking dividends doesn't make sense. As clearly noted, a dividend distribution lowers the NAV. If you don't reinvest the dividend you are tapping total return, and you don't get to decide when to make the distribution. Reinvesting the distribution automatically buys more shares at a slightly lower price. So, there is a trade off between the two withdrawal methods. Taking dividends maintains the number of shares, but lowers the funds potential total growth over time. Reinvesting dividends buys more shares and allows you to and take a distribution amount (sell shares) you choose at a time you choose. In a falling market, taking distributions is the same as selling low. You don't sell shares, but you don't add to shares at the lower price either. Reinvesting dividends in a rising market is also a better choice because you will have more shares that will benefit from expanding price.

Paul

Psychologically, higher capital gains in active funds also cause pain for taxable accounts because they are highest when the fund is doing well, even when you tell yourself it's the result of the wise Wellington/Wellesley managers making shrewd market moves. High capital gains are even more painful when they're paid out after the start of a bear market from accumulated gains, as happened to many of us in 2000 and 2007. It's a disadvantage of actively managed funds, especially for taxable accounts, that most investors overlook, until they get a tax shock in December.

[LadyGeek]

For those not as knowledgeable about the relationship between dividends, distributions, and mutual funds (like me),
there is a very good thread that Lady Geek directed readers to in another post, which is contained in the Wiki 'Dividend' section.
The thread is called 'What's so great about dividends?'.

http://www.bogleheads.org/forum/viewtopic.php?t=46454

Thanks. That's a deep-dive on deciding whether or not you should base investing decisions on dividends.

To answer the OP's question ("What happened?") and for others wondering the same thing about their fund, see: [Why did my fund suddenly drop in value?] (the thread sscritic points to)

In particular this post and the 2 following posts. New investors are encouraged to ask questions in that thread.

[Rockies1978]

Thanks to everyone for their feedback. I figured it had to be something like this, but I was confused when I saw the drop but didn't see the capital gains in my contribution summary (I have dividends set for reinvestment). I guess there's a one day lag between the two and I happened to log on in the gap period.

Sorry for duplicating a post.

[LadyGeek]

You didn't know that when you posted, so don't worry about it. If you have any other questions about your portfolio, just ask.

[countdown]

Lady Geek, sorry to stray so far afield when you are so patiently trying to stay on point, consolidate and shephard them all in. Wasn't thinking
Thanks for all your excellent work.

[pkcrafter]

dbr wrote:

Paul, the ability to compound the growth of the investment surely does not depend on whether the value of the investment at any point in time resides in more shares at lower price or in fewer shares at higher price! Compounding the investment is the same unless the investor sabotages the process by withdrawing money. Whether the withdrawal is by spending dividends or by selling shares is immaterial.

Sorry, I guess I wasn't very clear. I point is I don't believe it's immaterial. When taking dividends, the investor does not have discretion on how much or when to withdraw.

countdown wrote:

However, I also note that the NAV of a fund sometimes pops right back up within days of the dividend.
I think Wellesley did just that this month.

So, if you are holding in a qualified retirement account, and reinvesting at the lowered NAV, and within a couple days your NAV rises as well, perhaps equal to or above pre-dividend NAV, isn't that a positive of dividend investing and also true compounding?

It seems to be almost always the case that the NAV rebounds very quickly. Much of it is probably due to reinvested dividends. Yes, I think it a slight positive.

Bertilak wrote:

dbr, I was about to post something similar, but realized I didn't quite follow what Paul was saying. When he says "the fund's potential for growth" is he talking about the investor's holdings of the fund or the fund itself? Certainly the fund itself doesn't care who reinvests or who keeps the cash, so what you say is true. Perhaps Paul meant the investor's holdings decrease and there is therefore less to compound over time. I think his main poiint is that by reinvesting and selling off only when needed the investor has tighter control. This can also make tax time a bit easier.

You're correct, I was talking about the investors holdings. If we assume the investor must withdraw something for living expenses, I believe it's better to reinvest and withdraw or not withdraw depending on market conditions. In a deep drop, nothing should be withdrawn from equities.

YDNAL, I agree, that if distributions coincide with needed withdrawals in both amount and time, then it won't make much difference. In the example I mentioned above about a market drop, it will make a difference since an investor not only should not be withdrawing from equity, she should be adding to equity. Reinvesting dividends is purchasing more stock.

dbr wrote:

Well, after I posted I thought more and decided I actually have no idea what Paul's post actually says. However, it looks like you could interpret it in a way that essentially would support the old and very wrong idea that dividends are free money. Since Paul certainly does not think that, I am now not sure what the post really says.

I'm sorry if it sounded like that. You're right, I don't believe dividends are free money, and you're also right the post was not clear enough.

Paul

[sscritic]

It seems to be almost always the case that the NAV rebounds very quickly. Much of it is probably due to reinvested dividends. Yes, I think it a slight positive.

Easy case: The fund managers know that 100% of the holders want to reinvest dividends. As the end of the year approaches, the managers can take the dividends coming in and either
1) set aside cash earning 0% to pay the dividends they know they won't have to pay.
2) invest the money in the stocks the fund is supposed to hold.

When it is time for the distribution, the managers will either
1) go out and buy the stocks they could have been buying all along
2) make a book adjustment to the number of shares held by each owner.

My bet is on number 2: not a single stock will be purchased after the dividend is paid; the stock will all be "pre-purchased."

Now if the managers know that only 90% of the owners will reinvest dividends, they will mix the two strategies in the first step. They will set aside 10% of the accumulating cash to pay dividends and they will buy stock with the other 90% as it comes in. Note that as an owner of a fund that is supposed to be invested in stock, I want my fund to be invested in stock, not in cash.

There are some minor issues. The fund manager will always want some cash around to pay for redemptions. Also, some dividends from the underlaying stock will be coming in in the days just before the distribution, but those dividends will go into the next accounting period for distribution the next quarter (and a regulated investment company is not required to pay out 100% of the dividends received less expenses, but, guess from memory, 95%).

[YDNAL]

YDNAL, I agree, that if distributions coincide with needed withdrawals in both amount and time, then it won't make much difference. In the example I mentioned above about a market drop, it will make a difference since an investor not only should not be withdrawing from equity, she should be adding to equity. Reinvesting dividends is purchasing more stock. (my emphasis)

Paul,

I believe that you are departmentalizing money and/or have the wrong understanding here.

1. The underlying premise is *withdrawing*.
2. When we withdraw, it makes NO DIFFERENCE if we consume Dividends - regardless the direction of the market.
3. This (#2), even if you have multiple years of consumption sitting in Cash to *mentally* avoid "not withdrawing from Equity" - just consume the Dividend and use Cash to rebalance back to your AA. Same with Bonds.

[Peter Foley]

Paul
I turned off dividend and capital gains reinvesting on my taxable account about 2 years ago - shortly before I retired. Two reasons: I want to retain the average cost basis that I had and I would like it to be entirely long term capital gains. I suspect that at some point I will sell some shares of taxible for cash. In the meantime, the dividends and capital gains let me delay that sale while I am doing Roth conversions.

I'm hoping to structure a year in which I will be able to sell some taxable while in the 15% bracket.

[abuss368]

Please do not ever feel "silly" for asking a question on the forum. That is what the forum is for. To better educate yourself on investing advice inspired by Jack Bogle!

Your Wellington fund paid a distribution on 12/24/2013 that included dividends, short term capital gains, and long term capital gains.