"Total Return Investing"

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Taylor Larimore
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"Total Return Investing"

Post by Taylor Larimore »

Bogleheads:

Vanguard recently posted a very important article about "Total Return Investing: A Smart Response to Shrinking Yields." Be sure to read the "Conclusion."

Total Return Investing: A Smart Response to Shrinking Yields

Best wishes.
Taylor
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Re: "Total Return Investing"

Post by Thesaints »

No big news. It adds up to "returns (even total returns) are going to be low" and "adjust for risk (i.e. spend less), rather than adjust for yield".
Not a rosy picture at all.
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Re: "Total Return Investing"

Post by Ozonewanderer »

Thank you, Taylor.

This is pretty much what I have been doing since I retired in 2007 without specifically targeting this approach. I kind of evolved into it, I think at least partly because of the market crash right after I retired.

My portfolio was primarily comprised of bond funds, US Total Market Index and International Index adhering to a moderately aggressive AA based on my age. Very simple stuff. With the tremendous growth in the stock market over this period it has worked well for me.

Going forward, I wonder if we have hit a wall in stock growth with the market being at a record high. However, I would like to believe that I have a sufficient capital base that at least I will not run out of money before I die. Only the kids will lose then! 
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iceport
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Re: "Total Return Investing"

Post by iceport »

Taylor Larimore wrote: Mon Jun 14, 2021 1:52 pm Vanguard recently posted a very important article about "Total Return Investing: A Smart Response to Shrinking Yields." Be sure to read the "Conclusion."
Thanks Taylor! That was an excellent paper — as far as it went. Enough detail to explain their assertions, but brief enough and simple enough for most to follow easily.

My only complaint is that it wasn't finished! Was there a hard deadline to meet? A space or length limit? The authors got tired? :(

Yes, they clearly and effectively explain how the income approach, traditionally viewed as a "safer" strategy than a total return approach, could actually lead to far higher risks than anticipated. However, they completely ignore the elephant in the room: fears that a total return approach might lead to premature portfolio depletion.

Where is the risk assessment or analysis showing how a total return approach, coupled with a prudent withdrawal rate, won't lead to financial ruin? If they are trying to convince folks they don't have to reach so far for yields that they take on too much risk, they really should show why dipping into the principal isn't as risky as they might think. That's the other half of the decision, and Figure 9 just doesn't cut it.
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Re: "Total Return Investing"

Post by Ozonewanderer »

iceport wrote: Mon Jun 14, 2021 4:41 pm Yes, they clearly and effectively explain how the income approach, traditionally viewed as a "safer" strategy than a total return approach, could actually lead to far higher risks than anticipated. However, they completely ignore the elephant in the room: fears that a total return approach might lead to premature portfolio depletion.

Where is the risk assessment or analysis showing how a total return approach, coupled with a prudent withdrawal rate, won't lead to financial ruin? If they are trying to convince folks they don't have to reach so far for yields that they take on too much risk, they really should show why dipping into the principal isn't as risky as they might think. That's the other half of the decision, and Figure 9 just doesn't cut it.
Yes this is the problem with the Total Return strategy. One is taking a huge leap of faith that things will be OK in the long run. In my case, I told myself that if I started to deplete my principal I would just cut back on spending. I did have room to be more frugal.

If I was cutting it close to live with only basics would probably add a healthy annuity to the mix.
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Re: "Total Return Investing"

Post by Thesaints »

Ozonewanderer wrote: Mon Jun 14, 2021 6:18 pm Yes this is the problem with the Total Return strategy. One is taking a huge leap of faith that things will be OK in the long run. In my case, I told myself that if I started to deplete my principal I would just cut back on spending.
Except that selling shares has exactly the same effect as non reinvesting dividends on your portfolio's health.
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Re: "Total Return Investing"

Post by iceport »

Thesaints wrote: Mon Jun 14, 2021 11:11 pm
Ozonewanderer wrote: Mon Jun 14, 2021 6:18 pm Yes this is the problem with the Total Return strategy. One is taking a huge leap of faith that things will be OK in the long run. In my case, I told myself that if I started to deplete my principal I would just cut back on spending.
Except that selling shares has exactly the same effect as non reinvesting dividends on your portfolio's health.
True, but if you've already set your sights on spending those dividends, its the selling of shares *in addition to* the dividends that is the concern, not that shares are spent *instead of* the dividends. The concern is really just that the withdrawal rate might too high.

Spending only dividends was a crude way to approximate a safe withdrawal rate, without thinking of it so explicitly in that way. That's why I think a discussion of sustainable withdrawal rates is critical if you're trying to convince people that a total return approach is better than an income (from dividends) approach. The reason it's better is because spending only dividends is an arbitrarily set limit on the withdrawal rate that is lower than it needs to be. So instead of contorting your portfolio to produce more dividends — and increasing its volatility in the process — it makes more sense to realize that the "dividends only" spending limit is too low, and that selling some shares *in addition to* taking the dividends for spending money won't necessarily lead to ruin.

Without something like the Trinity study, people couldn't gauge what a reasonable limit was, and they probably looked at spending principal as a slippery slope. How much principal spending is OK?

There are reasonable guidelines for identifying sustainable withdrawal rates now. Unfortunately, they mention a "prudent spending rule" just once at the very end, and don't provide any clue as to what that might be.
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Re: "Total Return Investing"

Post by Schlabba »

I wish they focused a little more on the High Dividend Yield index. Too bad they chose MSCI even though Vanguard for the European domiciled ETF's, uses FTSE. The main criticism that the top 10 holdings make up more of the index is not the case for FTSE All-World vs FTSE All-World High Dividend Yield.

Furthermore they mention that high dividend yield indices tend to target "defensive sectors". That should be a good thing if you are looking to retire off your income right?
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Re: "Total Return Investing"

Post by Jonbuck »

Thanks for sharing... .This article is very helpful as I am helping walk my parents through transitioning from the accumulation phase into the retirement "de-cumulation" phase.
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Re: "Total Return Investing"

Post by Ozonewanderer »

iceport wrote: Tue Jun 15, 2021 3:25 am
Thesaints wrote: Mon Jun 14, 2021 11:11 pm
Ozonewanderer wrote: Mon Jun 14, 2021 6:18 pm Yes this is the problem with the Total Return strategy. One is taking a huge leap of faith that things will be OK in the long run. In my case, I told myself that if I started to deplete my principal I would just cut back on spending.
Except that selling shares has exactly the same effect as non reinvesting dividends on your portfolio's health.
True, but if you've already set your sights on spending those dividends, its the selling of shares *in addition to* the dividends that is the concern, not that shares are spent *instead of* the dividends. The concern is really just that the withdrawal rate might too high.

Spending only dividends was a crude way to approximate a safe withdrawal rate, without thinking of it so explicitly in that way. That's why I think a discussion of sustainable withdrawal rates is critical if you're trying to convince people that a total return approach is better than an income (from dividends) approach. The reason it's better is because spending only dividends is an arbitrarily set limit on the withdrawal rate that is lower than it needs to be. So instead of contorting your portfolio to produce more dividends — and increasing its volatility in the process — it makes more sense to realize that the "dividends only" spending limit is too low, and that selling some shares *in addition to* taking the dividends for spending money won't necessarily lead to ruin.

Without something like the Trinity study, people couldn't gauge what a reasonable limit was, and they probably looked at spending principal as a slippery slope. How much principal spending is OK?

There are reasonable guidelines for identifying sustainable withdrawal rates now. Unfortunately, they mention a "prudent spending rule" just once at the very end, and don't provide any clue as to what that might be.
My personal Total Return strategy included "Total Withdrawal." I did not specifically target withdrawing dividends, capital gain or principal.

I used the 4% guideline to set an upper limit to my annual spending budget. Having no pension or social security income for ten years, I lived off of my personal savings. When I needed money, I would take it from whatever account would have the least tax impact. With this approach I was able to keep in a low tax bracket most years and converted money to a Roth IRA. It was very fortunate that both the stocks and bonds did well over this period. Like I said, the Total Return strategy requires a huge leap of faith.
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Re: "Total Return Investing"

Post by iceport »

Ozonewanderer wrote: Tue Jun 15, 2021 4:53 pm
My personal Total Return strategy included "Total Withdrawal." I did not specifically target withdrawing dividends, capital gain or principal.

I used the 4% guideline to set an upper limit to my annual spending budget. Having no pension or social security income for ten years, I lived off of my personal savings. When I needed money, I would take it from whatever account would have the least tax impact. With this approach I was able to keep in a low tax bracket most years and converted money to a Roth IRA. It was very fortunate that both the stocks and bonds did well over this period. Like I said, the Total Return strategy requires a huge leap of faith.
I agree completely!

And that's with the benefit of the Trinity Study, and all the reaffirming studies that followed, to use as guide posts. Imagine how it felt without that kind of analysis to fall back on!
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Re: "Total Return Investing"

Post by Ozonewanderer »

iceport wrote: Tue Jun 15, 2021 5:28 pm
Ozonewanderer wrote: Tue Jun 15, 2021 4:53 pm
My personal Total Return strategy included "Total Withdrawal." I did not specifically target withdrawing dividends, capital gain or principal.

I used the 4% guideline to set an upper limit to my annual spending budget. Having no pension or social security income for ten years, I lived off of my personal savings. When I needed money, I would take it from whatever account would have the least tax impact. With this approach I was able to keep in a low tax bracket most years and converted money to a Roth IRA. It was very fortunate that both the stocks and bonds did well over this period. Like I said, the Total Return strategy requires a huge leap of faith.
I agree completely!

And that's with the benefit of the Trinity Study, and all the reaffirming studies that followed, to use as guide posts. Imagine how it felt without that kind of analysis to fall back on!
For that matter, what would I have done without Jack Bogle and the Bogleheard philosophy!
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Re: "Total Return Investing"

Post by tennisplyr »

Thank you Taylor.
Those who move forward with a happy spirit will find that things always work out.
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Re: "Total Return Investing"

Post by muffins14 »

Ozonewanderer wrote: Tue Jun 15, 2021 4:53 pm
iceport wrote: Tue Jun 15, 2021 3:25 am
Thesaints wrote: Mon Jun 14, 2021 11:11 pm
Ozonewanderer wrote: Mon Jun 14, 2021 6:18 pm Yes this is the problem with the Total Return strategy. One is taking a huge leap of faith that things will be OK in the long run. In my case, I told myself that if I started to deplete my principal I would just cut back on spending.
Except that selling shares has exactly the same effect as non reinvesting dividends on your portfolio's health.
True, but if you've already set your sights on spending those dividends, its the selling of shares *in addition to* the dividends that is the concern, not that shares are spent *instead of* the dividends. The concern is really just that the withdrawal rate might too high.

Spending only dividends was a crude way to approximate a safe withdrawal rate, without thinking of it so explicitly in that way. That's why I think a discussion of sustainable withdrawal rates is critical if you're trying to convince people that a total return approach is better than an income (from dividends) approach. The reason it's better is because spending only dividends is an arbitrarily set limit on the withdrawal rate that is lower than it needs to be. So instead of contorting your portfolio to produce more dividends — and increasing its volatility in the process — it makes more sense to realize that the "dividends only" spending limit is too low, and that selling some shares *in addition to* taking the dividends for spending money won't necessarily lead to ruin.

Without something like the Trinity study, people couldn't gauge what a reasonable limit was, and they probably looked at spending principal as a slippery slope. How much principal spending is OK?

There are reasonable guidelines for identifying sustainable withdrawal rates now. Unfortunately, they mention a "prudent spending rule" just once at the very end, and don't provide any clue as to what that might be.
My personal Total Return strategy included "Total Withdrawal." I did not specifically target withdrawing dividends, capital gain or principal.

I used the 4% guideline to set an upper limit to my annual spending budget. Having no pension or social security income for ten years, I lived off of my personal savings. When I needed money, I would take it from whatever account would have the least tax impact. With this approach I was able to keep in a low tax bracket most years and converted money to a Roth IRA. It was very fortunate that both the stocks and bonds did well over this period. Like I said, the Total Return strategy requires a huge leap of faith.
I don’t understand how “total return” is a “huge leap of faith”.

If you only ever spend dividends, your portfolio may need to be very large to support your spending. If you have a portfolio that large, you likely would be not taking that much long-term risk by going the “total return” route and supporting your spending by dividends plus sales of shares.

I would guess that by forcing yourself to spend only dividends you:
a) work longer than you need to, to accumulate a larger portfolio
b) now rely on companies not cutting dividends
c) possibly incur more in taxes
d) are less well diversified
e) have less control over when you take income
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Re: "Total Return Investing"

Post by RAchip »

“Total return” is a misnomer. If you ask anyone who invests in equities how their portfolio is performing, the response by definition includes capital gain and dividends. They both add up to the return you get on equities.

What people are really talking about and what this article specifically says it is addressing is “Spend from capital returns in addition to the portfolio income yield.”

So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.
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Re: "Total Return Investing"

Post by Thesaints »

RAchip wrote: Wed Jun 16, 2021 10:30 am “Total return” is a misnomer. If you ask anyone who invests in equities how their portfolio is performing, the response by definition includes capital gain and dividends. They both add up to the return you get on equities.

What people are really talking about and what this article specifically says it is addressing is “Spend from capital returns in addition to the portfolio income yield.”

So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.
It actually exactly the same. In fact, there is an advantage in deriving the entirety of one's income from selling shares rather than from dividends:

- Dividends amount is not set to satisfy an investor's spending needs. On any given year one may get too little, or too much.
- Dividends payments schedule is also non optimal. They are generally paid quarterly, whereas one can shell shares on any given day.
- Dividend payout is always taxed the same. At QDI rate in the best scenario.
- Income from selling shares can be organized so to minimize taxes: One can even sell shares generating a tax break and selling at long-term capital gain taxation rate (which is equal to the QDI rate) is arguably the worst case scenario.
Last edited by Thesaints on Wed Jun 16, 2021 3:20 pm, edited 1 time in total.
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Re: "Total Return Investing"

Post by muffins14 »

RAchip wrote: Wed Jun 16, 2021 10:30 am “Total return” is a misnomer. If you ask anyone who invests in equities how their portfolio is performing, the response by definition includes capital gain and dividends. They both add up to the return you get on equities.

What people are really talking about and what this article specifically says it is addressing is “Spend from capital returns in addition to the portfolio income yield.”

So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.

There’s really not a difference in value

Would you rather have $100 and 10 shares worth $90 each, or 9 shares worth $111 each? You have to multiple share value by number of shares to get the portfolio amount, and higher dividends with the same total return imply your price per share has gone up less
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Re: "Total Return Investing"

Post by Artsdoctor »

Thesaints wrote: Wed Jun 16, 2021 1:04 pm
RAchip wrote: Wed Jun 16, 2021 10:30 am “Total return” is a misnomer. If you ask anyone who invests in equities how their portfolio is performing, the response by definition includes capital gain and dividends. They both add up to the return you get on equities.

What people are really talking about and what this article specifically says it is addressing is “Spend from capital returns in addition to the portfolio income yield.”

So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.
It actually exactly the same. In fact, there is an advantage in deriving the entirety of one's income from selling shares than from dividends:

- Dividends amount is not set to satisfy an investor's spending needs. On any given year one may get too little, or too much.
- Dividends payments schedule is also non optimal. They are generally paid quarterly, whereas one can shell shares on any given day.
- Dividend payout is always taxed the same. At QDI rate in the best scenario.
- Income from selling shares can be organized so to minimize taxes: One can even sell shares generating a tax break and selling at long-term capital gain taxation rate (which is equal to the QDI rate) is arguably the worst case scenario.
Agreed. I'd only quibble a bit with the idea that "dividend payout is always taxed the same" since some funds, especially international equity funds, can vary QDI ratios from year to year. For me, I'd be very content to have mutual funds (and ETFs) which do not distribute any dividends and to choose my own sales modalities. (Remember, the NAV of the fund will be decreased by the dividend of the equity fund anyway but you don't get a say regarding the date or the QDI ratio.)

A few people will have so much money that they can live off of dividends no matter how small of a percentage that might be. Most people will need more than that and the Vanguard paper walks you through what those options might be. I think that they covered the topic thoroughly.

Most investors will either sell shares in addition to spending dividends (the "total return approach"). The findings of the paper point out that if you reach for yield in other investments, your long-term returns may not be sufficient to last.
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Re: "Total Return Investing"

Post by Thesaints »

I was trying to simplify.
Let's say that the QDI rate is the best possible rate for dividends, while the identical long-term capital gains rate is the worst possible rate for income derived from selling shares (I think we can safely exclude the case of someone willingly selling short-term shares at a gain)
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Re: "Total Return Investing"

Post by Ozonewanderer »

muffins14 wrote: Wed Jun 16, 2021 7:33 am
Ozonewanderer wrote: Tue Jun 15, 2021 4:53 pm Yes this is the problem with the Total Return strategy. One is taking a huge leap of faith that things will be OK in the long run. In my case, I told myself that if I started to deplete my principal I would just cut back on spending.
I don’t understand how “total return” is a “huge leap of faith”.

If you only ever spend dividends, your portfolio may need to be very large to support your spending. If you have a portfolio that large, you likely would be not taking that much long-term risk by going the “total return” route and supporting your spending by dividends plus sales of shares.

I would guess that by forcing yourself to spend only dividends you:
a) work longer than you need to, to accumulate a larger portfolio
b) now rely on companies not cutting dividends
c) possibly incur more in taxes
d) are less well diversified
e) have less control over when you take income
I’m not sure that I am making myself clear. If one only spends dividends, I do not consider that a "Total Return" strategy. To me that's a dividend strategy.
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Re: "Total Return Investing"

Post by Thesaints »

Ozonewanderer wrote: Wed Jun 16, 2021 3:41 pm I’m not sure that I am making myself clear. If one only spends dividends, I do not consider that a "Total Return" strategy. To me that's a dividend strategy.
Yes. But there is no difference with any other strategy; you are spending a certain % of your capital, regardless of the way you withdraw the cash.
In fact, to implement a dividend strategy one preferentially loads up on that subsector of the market which pays higher dividend. In a total return strategy, one simply replicates the market.
Finally, In a dividend minimization strategy, one again loads up on a subsector of the market (non-dividend paying stocks), but at least they get a clear tax advantage.
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Re: "Total Return Investing"

Post by Makefile »

Thesaints wrote: Wed Jun 16, 2021 3:46 pm
Ozonewanderer wrote: Wed Jun 16, 2021 3:41 pm I’m not sure that I am making myself clear. If one only spends dividends, I do not consider that a "Total Return" strategy. To me that's a dividend strategy.
Yes. But there is no difference with any other strategy; you are spending a certain % of your capital, regardless of the way you withdraw the cash.
In fact, to implement a dividend strategy one preferentially loads up on that subsector of the market which pays higher dividend. In a total return strategy, one simply replicates the market.
Finally, In a dividend minimization strategy, one again loads up on a subsector of the market (non-dividend paying stocks), but at least they get a clear tax advantage.
Yes. I thought it is well known that trying to make a "principal" vs. "earnings" distinction on a stock portfolio is totally artificial?
Take a look at the "The Power of Retained Earnings" section of the 2019 Berkshire Hathaway annual report - https://www.berkshirehathaway.com/2019ar/2019ar.pdf
Some of the profit from the businesses owned through stock is paid out through a dividend, some is reinvested in the business. The increase in stock price is a real part of your return on investment.
Also, this "don't touch anything but dividends" ignores share buybacks as a form of return, right?
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Re: "Total Return Investing"

Post by Da5id »

Ozonewanderer wrote: Wed Jun 16, 2021 3:41 pm I’m not sure that I am making myself clear. If one only spends dividends, I do not consider that a "Total Return" strategy. To me that's a dividend strategy.
My dividends basically cover my spending at this point, but that is low withdrawal rate rather than portfolio design. I think a "dividend strategy" is one where that is the intent or design. Not my intent or design, just kinda happened.
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Re: "Total Return Investing"

Post by Ozonewanderer »

Thesaints wrote: Wed Jun 16, 2021 3:46 pm
Ozonewanderer wrote: Wed Jun 16, 2021 3:41 pm I’m not sure that I am making myself clear. If one only spends dividends, I do not consider that a "Total Return" strategy. To me that's a dividend strategy.
Yes. But there is no difference with any other strategy; you are spending a certain % of your capital, regardless of the way you withdraw the cash.
In fact, to implement a dividend strategy one preferentially loads up on that subsector of the market which pays higher dividend. In a total return strategy, one simply replicates the market.
Finally, In a dividend minimization strategy, one again loads up on a subsector of the market (non-dividend paying stocks), but at least they get a clear tax advantage.
That is an interesting perspective, and perhaps more accurate. So in your mind, in a dividend strategy one designs a portfolio to produce a certain amount of income stream and strives to spend no more than that income stream. But one can actually withdraw funds from any investment.

In my approach to my total return strategy, I designed my portfolio to follow a Boglehead type asset allocation with stock and bond mutual funds for general growth and stability. For withdrawals, I would simply dip into this entire asset base and take from wherever it made the most sense, mostly from a tax perspective, to meet my needs.
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Re: "Total Return Investing"

Post by Thesaints »

Ozonewanderer wrote: Wed Jun 16, 2021 4:02 pm That is an interesting perspective, and perhaps more accurate. So in your mind, in a dividend strategy one designs a portfolio to produce a certain amount of income stream and strives to spend no more than that income stream.
That's what they say, it seems to me.
But one can actually withdraw funds from any investment.
Not sure what you mean here
In my approach to my total return strategy, I designed my portfolio to follow a Boglehead type asset allocation with stock and bond mutual funds for general growth and stability. For withdrawals, I would simply dip into this entire asset base and take from wherever it made the most sense, mostly from a tax perspective, to meet my needs.
Well, you get some dividends anyway, right ?
- If those dividends are more than you need to spend, you probably don't have the optimal portfolio for your situation.
- If those dividends are exactly what you need, then you are lucky.
- If those dividends are less than what you need, you have to sell some shares selected generally in a way to minimize taxes.

Note: when I say "dividends" I mean "taxable dividends"
Note 2: In any case, you could arguably pay less taxes if you did not get dividends at all, but you obtained all of your spending money by selling shares.
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Re: "Total Return Investing"

Post by iceport »

Artsdoctor wrote: Wed Jun 16, 2021 3:22 pm
A few people will have so much money that they can live off of dividends no matter how small of a percentage that might be. Most people will need more than that and the Vanguard paper walks you through what those options might be. I think that they covered the topic thoroughly.
I beg to differ, Artsdoctor. :|

I think the paper was surprisingly clear and informative on the subject of unexpected risks associated with stubbornly insisting on only cashing out the dividends, when those dividends alone aren't enough. So they cover why that's not a great idea, and do so thoroughly.

However, there's barely even a mention of what the other options might be, given a primary concern folks have in the withdrawal stage is withdrawing too much from a limited portfolio and going broke.

I found the phrase, "when accompanied by a prudent spending rule," just once. But there wasn't even a hint of what, exactly, that "prudent spending rule" might be. Nor do they explain why they feel so sure a "prudent spending rule" will work out so well, without too great a risk of running out of money, even while spending all the dividends and then starting to dip into the principal.

The PDF I downloaded was 15 pages. Did I miss something? :shock:

In fairness, depending on how much detail is covered, the subject of a prudent spending rule is a big one, and it could fill a separate paper. That's fine. How about maybe a reference to a paper on that, or at the very minimum a more substantial acknowledgement of the issue than a single phrase mentioned in passing?
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Re: "Total Return Investing"

Post by Artsdoctor »

I think that the goal of the paper was to address the difficulty in living off of dividends alone but to also be aware of the risks of reaching for other income streams. They methodically go through some of the more common income streams that retirees may use and the pitfalls associated with those alternatives.

The purpose of the paper was not to address different withdrawal techniques in detail but they used some standard projections of portfolio success with various withdrawal methods. They also addressed what volatility would mean to a typical retiree and compared various withdrawal strategies.

One of the references sited was a paper by David Pakula which would probably give more information on withdrawal techniques. But over many years, Vanguard has been publishing several papers on their variable withdrawal recommendations using a total return method and the +5%/-1.5% guard rails.

What I took away from the paper was a warning regarding using investment-grade fixed income substitutes in a quest for increasing yield.
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iceport
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Re: "Total Return Investing"

Post by iceport »

I'm in violent agreement with everything you say, Artsdoctor, except the quoted passage below.
Artsdoctor wrote: Wed Jun 16, 2021 5:53 pm ...they used some standard projections of portfolio success with various withdrawal methods.
I must have missed that. On what page is that found?

There was Figure A-2, but I'm hoping the don't expect folks to translate those numbers directly into withdrawal rates. That would be a mistake. (Sequence of returns risk and all...)

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VanGar+Goyle
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Re: "Total Return Investing" ( be true to your div )

Post by VanGar+Goyle »

So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.
This can be taken to an extreme scarecrow example: $30 to $60 to $0, or perhaps PCG PG&E $40 to $70 to $13.
Yes, it might be horrible if our unrealized capital disappeared. But if you harvested some of the gains in good times,
then when they disappear, at least you got something out of it.
If you only collect dividends and then disaster, you only get a little.
If you sell high, you are not 'investing' at a lower yield, but could invest in a different stock with better yield.
If it is all about that dividend, then buy better dividends. Perhaps think of it like DCdA Dollar Cost dividend Average Investing, or rebalancing.
Well, you pay a little bit, we're a little bit tough. | You pay very much,very much tough. | You pay a too much, we're too much a tough. | How much you pay? ... Well, then we're plenty tough. - Marx
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Artsdoctor
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Re: "Total Return Investing"

Post by Artsdoctor »

^ Iceport,

No, you didn't miss anything. I'm a footnote kind of guy so I pulled the Pakula article which was cited in the white paper because I wanted to see what the original article was referring to on several occasions. The two articles fit together nicely but you're absolutely right: you'd need the Pakula paper to support a couple of the premises I was referring to.

Artsdoctor

https://personal.vanguard.com/pdf/ISGSW ... Online.pdf
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iceport
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Re: "Total Return Investing"

Post by iceport »

Thank you, Artsdoctor, for that explanation!

I just skimmed the paper you linked to, but that's exactly the kind of discussion of sustainable withdrawal rates (SWR) I was hoping to see in the total return (TR) paper. It's similarly brief, but clear and informative. The SWR paper actually stands on its own better than the TR paper, because becoming familiar with — and then comfortable with — the SWR concept is critical, IMHO, to convincing some folks to venture past the more intuitive income approach and adopt a TR approach.

I've saved the SWR paper now, for use in conjunction with the TR paper.

I really was only being so critical of the TR paper, ironically, because it was so well done... all except for running out of steam on addressing the entire second half of the dilemma. Combine the two papers and Vanguard makes a compelling case!

Thanks again.

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RAchip
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Re: "Total Return Investing"

Post by RAchip »

muffins14 wrote: Wed Jun 16, 2021 2:30 pm
RAchip wrote: Wed Jun 16, 2021 10:30 am “Total return” is a misnomer. If you ask anyone who invests in equities how their portfolio is performing, the response by definition includes capital gain and dividends. They both add up to the return you get on equities.

What people are really talking about and what this article specifically says it is addressing is “Spend from capital returns in addition to the portfolio income yield.”

So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.

There’s really not a difference in value

Would you rather have $100 and 10 shares worth $90 each, or 9 shares worth $111 each? You have to multiple share value by number of shares to get the portfolio amount, and higher dividends with the same total return imply your price per share has gone up less

This is the same misguided argument I see all the time here. The flaw is: the “value” you are referring to is asset value (even though you dont understand that is what you are doing). But asset value is largely irrelevant to valuing going concern companies. You can have 2 companies in the same industry, one with a high asset value and one with an asset value of zero and the one with the zero asset value will be worth more if the net present value of its anticipated future free cash flow is higher. Going concern companies are not valued based on how much cash or other assets they have.
RAchip
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Re: "Total Return Investing" ( be true to your div )

Post by RAchip »

VanGar+Goyle wrote: Wed Jun 16, 2021 10:16 pm
So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.
This can be taken to an extreme scarecrow example: $30 to $60 to $0, or perhaps PCG PG&E $40 to $70 to $13.
Yes, it might be horrible if our unrealized capital disappeared. But if you harvested some of the gains in good times,
then when they disappear, at least you got something out of it.
If you only collect dividends and then disaster, you only get a little.
If you sell high, you are not 'investing' at a lower yield, but could invest in a different stock with better yield.
If it is all about that dividend, then buy better dividends. Perhaps think of it like DCdA Dollar Cost dividend Average Investing, or rebalancing.

You proved my point! If you sell to “make” dividends, you have less shares and so have a lower loss if the company’s stock price drops. But, if the stock goes up - the goal of investing - you have less shares and therefore lower gains and less dividends going forward. So selling to make your own dividends is different from cashing dividend checks.
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Re: "Total Return Investing" ( be true to your div )

Post by Da5id »

RAchip wrote: Thu Jun 17, 2021 7:46 pm
VanGar+Goyle wrote: Wed Jun 16, 2021 10:16 pm
So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.
This can be taken to an extreme scarecrow example: $30 to $60 to $0, or perhaps PCG PG&E $40 to $70 to $13.
Yes, it might be horrible if our unrealized capital disappeared. But if you harvested some of the gains in good times,
then when they disappear, at least you got something out of it.
If you only collect dividends and then disaster, you only get a little.
If you sell high, you are not 'investing' at a lower yield, but could invest in a different stock with better yield.
If it is all about that dividend, then buy better dividends. Perhaps think of it like DCdA Dollar Cost dividend Average Investing, or rebalancing.

You proved my point! If you sell to “make” dividends, you have less shares and so have a lower loss if the company’s stock price drops. But, if the stock goes up - the goal of investing - you have less shares and therefore lower gains and less dividends going forward. So selling to make your own dividends is different from cashing dividend checks.
Total return is all a stock investor should rationally care about. Where that return comes from doesn't matter in the least. How a company returns capital, dividends vs buybacks, doesn't influence returns.
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Re: "Total Return Investing"

Post by Thesaints »

RAchip wrote: Thu Jun 17, 2021 7:38 pm This is the same misguided argument I see all the time here. The flaw is: the “value” you are referring to is asset value (even though you dont understand that is what you are doing). But asset value is largely irrelevant to valuing going concern companies. You can have 2 companies in the same industry, one with a high asset value and one with an asset value of zero and the one with the zero asset value will be worth more if the net present value of its anticipated future free cash flow is higher. Going concern companies are not valued based on how much cash or other assets they have.
That depend on the sector. Banks, for example, trade at much lower multiples of assets than "software houses"
https://siblisresearch.com/data/price-to-book-sector/
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Re: "Total Return Investing"

Post by CuriousTacos »

RAchip wrote: Wed Jun 16, 2021 10:30 am “Total return” is a misnomer. If you ask anyone who invests in equities how their portfolio is performing, the response by definition includes capital gain and dividends. They both add up to the return you get on equities.

What people are really talking about and what this article specifically says it is addressing is “Spend from capital returns in addition to the portfolio income yield.”

So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.
What exactly are you saying that people (in the decumulation phase) should do right now? Invest in the total market, but only withdraw its very meager dividends even if the value appreciates a lot over many years? Or invest primarily in "high quality" dividend companies? Or something else?

As I'm sure you know, companies have been shifting away from dividends and towards buybacks since the 80s, with buybacks overtaking dividends in the late 90s. What would you do if this trend continues to the extreme, such that nearly all shareholder yield was in the form of buybacks (even for today's "dividend" companies)? I'm not saying that this is likely, but it is possible and deserves consideration for an IPS if you only plan on withdrawing dividends.
muffins14
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Re: "Total Return Investing"

Post by muffins14 »

RAchip wrote: Thu Jun 17, 2021 7:38 pm
muffins14 wrote: Wed Jun 16, 2021 2:30 pm
RAchip wrote: Wed Jun 16, 2021 10:30 am “Total return” is a misnomer. If you ask anyone who invests in equities how their portfolio is performing, the response by definition includes capital gain and dividends. They both add up to the return you get on equities.

What people are really talking about and what this article specifically says it is addressing is “Spend from capital returns in addition to the portfolio income yield.”

So, “total return” is just a phrase people use to convince themselves that it is fine to spend your principal. The problem is that unrealized capital gains on your principal are not permanent. Stocks go up and down in price. If you cash in part of your capital gains, the remainder can disappear if stock prices fall. I dont agree with people who say selling shares is the same as getting paid a dividend. There is a big difference: you still have your shares if you dont sell them and you get capital gains and dividends on those shares you dont sell.

There’s really not a difference in value

Would you rather have $100 and 10 shares worth $90 each, or 9 shares worth $111 each? You have to multiple share value by number of shares to get the portfolio amount, and higher dividends with the same total return imply your price per share has gone up less

This is the same misguided argument I see all the time here. The flaw is: the “value” you are referring to is asset value (even though you dont understand that is what you are doing). But asset value is largely irrelevant to valuing going concern companies. You can have 2 companies in the same industry, one with a high asset value and one with an asset value of zero and the one with the zero asset value will be worth more if the net present value of its anticipated future free cash flow is higher. Going concern companies are not valued based on how much cash or other assets they have.

In my example, value is price per share. I thought it was a simple example of how dividends and price both contribute to how much money you have at some future time, and how "selling shares" is not a bad thing if your shares are worth more.
VanGar+Goyle
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Re: "Total Return Investing"

Post by VanGar+Goyle »

But, if the stock goes up - the goal of investing
I am confused by this goal of investing. Sounds like you want to invest in the most rising stock like Berkshire Hathaway, Google, or BTC,
which do not pay out dividends, and yet only live off the dividends. If you never sell, at least your beneficiaries will get a step up in cost basis,
if one of them were to sell some stock and not starve. ;)

Paying dividends can reduce the price of a company stock.
Having earnings and the ability to pay dividends can increase the stock price.
Retaining income indicates confidence in internal ROA, and
stock buybacks can cause stock price to go up, but may not be the best way for a company to invest cash.
Well, you pay a little bit, we're a little bit tough. | You pay very much,very much tough. | You pay a too much, we're too much a tough. | How much you pay? ... Well, then we're plenty tough. - Marx
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