Gyroscopic Investing

sophie wrote:My PP is up 1.5% since June 1. I expect we'll be giving back some of those gains over the next week or so, but still...nice to see!

If I had 50x my living expenses saved I'd probably put it all in stocks too, because there'd be no problem living off dividends. The PP is for the rest of us who are scraping to get to that magical 25x figure.

If I had 50x it wouldn't be all in stocks. Rich people like that are just financially nonintelligent. Dividends are cut and/or eliminated alarmingly and regularly, taxes take away .5% to 3% of the net gain per year, etc.. Stupid is as stupid does. Maybe they figure they coulda-woulda-shoulda deal with another 50%-80% wipeout, but I'll be on the other side of the trade... after they wakeup to the pain they were ignoring based on faith. Good stewards of capital do not act like such people.

sophie wrote:An S&P 500 stock index fund will yield about 2% in dividends. These are from dividends paid on the stock shares plus capital gains from the minimal amount of buying and selling that is required to maintain an index fund. Alternatively, you can buy your own stocks and select those with higher dividend payouts. Unlikely you'll get much above 3% though, especially if you stick to blue chip stocks.

You can clear 10% a year simple (before the .5%-3% reduction in taxes) if you stick to dividend growth stocks meeting minimum criteria. However, there are long periods of underperformance so I don't know how well that works with a 4% SWR/25x. It may or may not be disastrous.

I guess 100% all in stocks could "work" if you stuck to dividend payors and/or growers only. There's not supposed to be a difference between dividends and buybacks other than the taxes, but I think the ILLUSION of getting "payments" without having to put in a sell order makes it easier to deal with 50%-80% wipeouts (especially since the yield goes up under such scenarios which isn't necessarily the case for buybacks). Still, a lot of things are changing on the ground under that scenario and not being protecting with a PP is just simply foolish.

MachineGhost wrote:You can clear 10% a year simple (before the .5%-3% reduction in taxes) if you stick to dividend growth stocks meeting minimum criteria. However, there are long periods of underperformance so I don't know how well that works with a 4% SWR/25x. It may or may not be disastrous.

I guess 100% all in stocks could "work" if you stuck to dividend payors and/or growers only.

My pre-pp dividend growers are now paying an average of about 5% yield on cost. I'm told I'm supposed to look at yield on holdings, but that changes too rapidly. Lately, a lot of my dividend raisers have stalled. Especially oil. Glad I didn't get too much into banks, as the drop in share price was not worth any dividend.

Overall, I'm satisfied, but it's been a long haul -- twelve years for the oldest holdings -- and I am very glad to have moved on to the pp for the core. Those stocks could certainly get wiped out.

sophie wrote:Good to hear from you frugal! Answers point by point:

I meant 50x living expenses - and best supplemented by a VERY generous cash reserve (e.g. another 5x living expenses).

25x living expenses is enough if you are comfortable with a "safe withdrawal rate" of 4%. Historically that's a fairly safe bet with the PP, but of course not guaranteed.

An S&P 500 stock index fund will yield about 2% in dividends. These are from dividends paid on the stock shares plus capital gains from the minimal amount of buying and selling that is required to maintain an index fund. Alternatively, you can buy your own stocks and select those with higher dividend payouts. Unlikely you'll get much above 3% though, especially if you stick to blue chip stocks.

Hello Sophie!

25 years x 4% per year = 1

after 25 years all the money was withdraw



If PP makes 4, 5 or 6% average we would be out of money

Double is better.

Regards

Looks like it's going to be another pp-friendly day.

Perhaps I should post this in the VP section, but curious to know how Golden Butterfly investors are planning to respond to the recent declines?

As you most likely already know, I maintain a 70/30 allocation in retirement assets with 5/25 rebalancing bands. I am itching to do something, but the driver is mainly greed as I do not want to lose out on a buying opportunity. Not even close to triggering a rebalance.

Nothing to do with the PP. All assets are now 25% give or take 50 basis points. What a luxury!

My plan has been to slowly get to GB type levels over the year, and certainly this is a decent looking opportunity to move more in that direction. I'll probably buy some small cap today, lowering my cash %.

Devil's advocate, MG.

We had another thread some time ago discussing how you might opt to invest in 100% stocks if you had far more money than needed to cover living expenses from a PP. If I were Bill-Gates type of wealthy I'd certainly do that. For my more limited means, I plan to stick to the PP until I've got about 50x annual living expenses stashed away. In the unlikely event I amassed more than that amount of wealth, I'd be happy putting any additional into 100% stocks, since it's money I wouldn't really need. And I'd probably find something interesting to do with it, like fund a scholarship program or set up trusts for my nieces.

frugal wrote:

sophie wrote: Hello Sophie!

25 years x 4% per year = 1

after 25 years all the money was withdraw



If PP makes 4, 5 or 6% average we would be out of money

Double is better.

Regards

Frugal, I am not not Sophie but you don't seem to be taking into account that if you set aside 4% the first year for living expenses, the remaining 96% is still invested and can potentially keep growing. Also, look at Tyler's work to understand the difference between "safe" and "sustainable" withdrawal rates. The first one (safe withdrawal rate) is how much you can withdraw each year without running out of money before you leave this planet. The second (sustainable withdrawal rate) is how much you can take out each year and still maintain your original balance.

barrett wrote:

frugal wrote:

sophie wrote: Hello Sophie!

25 years x 4% per year = 1

after 25 years all the money was withdraw



If PP makes 4, 5 or 6% average we would be out of money

Double is better.

Regards

Frugal, I am not not Sophie but you don't seem to be taking into account that if you set aside 4% the first year for living expenses, the remaining 96% is still invested and can potentially keep growing. Also, look at Tyler's work to understand the difference between "safe" and "sustainable" withdrawal rates. The first one (safe withdrawal rate) is how much you can withdraw each year without running out of money before you leave this planet. The second (sustainable withdrawal rate) is how much you can take out each year and still maintain your original balance.

Hello

howdy?

I think I understand.

What if the PP returns per year decrease to 4% average during the next 25 years?


That is the PROBLEM


REgards!

frugal wrote: What if the PP returns per year decrease to 4% average during the next 25 years?

That is the PROBLEM

I am not sure if you are talking about real returns or nominal returns. If you read Craig & MT's book, they emphasize that they are only interested in looking at real returns. Again, I would refer you to Tyler's work on his Portfolio Charts site. Tyler has made it easy to compare the high-inflation 1970s with the current low-growth period because everything he feeds into those beautiful charts is real returns (nominal returns minus inflation each year).

So if we have 4% returns with no inflation, we are all doubling our money every 18 years (rule of 72). If we have 4% returns with 8% inflation, then, yes, that is a problem.

barrett wrote:

frugal wrote: What if the PP returns per year decrease to 4% average during the next 25 years?

That is the PROBLEM

I am not sure if you are talking about real returns or nominal returns. If you read Craig & MT's book, they emphasize that they are only interested in looking at real returns. Again, I would refer you to Tyler's work on his Portfolio Charts site. Tyler has made it easy to compare the high-inflation 1970s with the current low-growth period because everything he feeds into those beautiful charts is real returns (nominal returns minus inflation each year).

So if we have 4% returns with no inflation, we are all doubling our money every 18 years (rule of 72). If we have 4% returns with 8% inflation, then, yes, that is a problem.

How you double if you withdraw it all?

The 4% for living expenses...

Regards

frugal wrote:

barrett wrote:

frugal wrote: What if the PP returns per year decrease to 4% average during the next 25 years?

That is the PROBLEM

I am not sure if you are talking about real returns or nominal returns. If you read Craig & MT's book, they emphasize that they are only interested in looking at real returns. Again, I would refer you to Tyler's work on his Portfolio Charts site. Tyler has made it easy to compare the high-inflation 1970s with the current low-growth period because everything he feeds into those beautiful charts is real returns (nominal returns minus inflation each year).

So if we have 4% returns with no inflation, we are all doubling our money every 18 years (rule of 72). If we have 4% returns with 8% inflation, then, yes, that is a problem.

How you double if you withdraw it all?

The 4% for living expenses...

Regards

Well, if you withdraw ALL of what you have, then obviously you are at zero. Frugal, are you already in the withdrawal phase or are you still accumulating and investing? The doubling I was referring to was with a real 4% return and no withdrawals.

Historically the PP has had a safe withdrawal rate of 5% and a sustainable withdrawal rate of 4%. That means that if you are withdrawing 4% a year, you should be able to more or less not draw down your original balance in real terms. Much of course will depend on sequence of returns and the assumption that the PP will have similar returns going forward as it has has over the last 40 years.

If you are worried about running out of money in retirement, you need a life annuity. Period.

Unfortunately it is no longer possible for US Americans to buy a Swiss annuity, which is one of HB's old recommendations that was great while it was feasible.

But if you are retired already, then a US annuity is the next best thing, as long as you maintain a backup (gold) in case of a disastrous drop in the USD. A single life annuity for a 65-year-old male will pay almost 6.5% with no chance of running out of money before you die, and a female of the same age can get over 6% payout. Joint life annuities don't pay quite as much but they are still the only way to be sure that both of you will have life income.

(BTW, if anyone here is interested in such an annuity, and lives in one of the following states, let me know: AZ, CA, FL, IA, MI, NY, OH, PA, or TX.)