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"Unfortunately, I tend to be a "buy and hold" investor so I am unlikely to sell for some time, and mutual funds must lump short-term capital gains with non-preferred dividends for tax purposes, so in practice FIFO vs. average cost basis won't make any difference for me unless I really do sell some shares after owning them for less than a year."

Mark,

I beg to differ. I think precisely because you are dripping money in and holding for a long time, FIFO is going to be a terrible tax strategy, and presuming you also gradually sell shares during your "draw down" years, average cost basis will also be inferior to specific share designation.

If we assume, given world enough and time, the stock market goes up, whatever the fits and stops, the first shares you buy will be at a cheaper share price than the shares you bought just one year before you start selling shares (one year, because that's when yu get long term capital gains rate). If you buy your first shares at $1 a shares and, over your accumulation years, the market goes up 5-fold above dividends, your last shares will cost $5 a share (glossing the last year). If you sell shares at $5.25, if you sell the $5 shares first, you'll pay less than 4 cents a share in capital gains taxes (15% rate); if you sell the $1 shares, you'll pay nearly 64 cents a share in capital gains taxes.

Now, it's true, over time, if you do sell all your shares, you'll eventually have to sell the cheapest shares and pay your taxes, which will end up with average cost basis, but by delaying as long as possible you get compounding and, if you are lucky enough to die before you go broke, you'll pay a lot less total taxes.

FIFO basically has you sell the cheapest shares first, maximizing your taxes.

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