Confused about dividend investing, market downturns and early retirement

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I-Know-Nothing
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Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.

Anyway, she talked a lot in the book about the Trinity study and using a 4% SWR. She said that she would have a 95% chance of not depleting her funds if she had a 4% withdrawal rate, but 95% wasn’t enough for her to feel secure. The 5% failure rate would usually occur because of sequence of returns risk - in situations where someone retired and then the market crashed and you had to sell equities during a downturn. If this happens during the first 5 years of retirement, early retirement can fail. In order to counter this, she said she implemented a “cash cushion” and a “yield shield” during her first 5 years of retirement. Basically, she keeps two years of expenses in cash and keeps her equities in index ETFs that throw off a lot of dividends. She said that even if there was a market downturn, she can just live off her dividends and cash until the market recovers, So she wouldn’t be forced to sell in a downturn. She acknowledged that the high-yield ETFs are not as diversified as total stock market indexes, but accepted the lower diversification in exchange for sequence of returns protection during the first 5 years of her retirement.

Initially I thought this whole concept sounded great. However I’ve been researching further, and I don’t get how the yield shield actually protects someone in a market downturn. If you are invested in a higher-yield ETF like VYM, and there is a market downturn, you will still get a dividend. But don’t those dividends reduce the share price? Aren’t you still essentially “selling” during a downturn - whether you take a dividend and don’t reinvest it, or you sell shares of an ETF?
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Re: Confused about dividend investing, market downturns and early retirement

Post by tibbitts »

I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.

Anyway, she talked a lot in the book about the Trinity study and using a 4% SWR. She said that she would have a 95% chance of not depleting her funds if she had a 4% withdrawal rate, but 95% wasn’t enough for her to feel secure. The 5% failure rate would usually occur because of sequence of returns risk - in situations where someone retired and then the market crashed and you had to sell equities during a downturn. If this happens during the first 5 years of retirement, early retirement can fail. In order to counter this, she said she implemented a “cash cushion” and a “yield shield” during her first 5 years of retirement. Basically, she keeps two years of expenses in cash and keeps her equities in index ETFs that throw off a lot of dividends. She said that even if there was a market downturn, she can just live off her dividends and cash until the market recovers, So she wouldn’t be forced to sell in a downturn. She acknowledged that the high-yield ETFs are not as diversified as total stock market indexes, but accepted the lower diversification in exchange for sequence of returns protection during the first 5 years of her retirement.

Initially I thought this whole concept sounded great. However I’ve been researching further, and I don’t get how the yield shield actually protects someone in a market downturn. If you are invested in a higher-yield ETF like VYM, and there is a market downturn, you will still get a dividend. But don’t those dividends reduce the share price? Aren’t you still essentially “selling” during a downturn - whether you take a dividend and don’t reinvest it, or you sell shares of an ETF?
You could have an additional problem as well: turnover in the index. So you (your fund, that is) may literally be selling during a downturn.
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Re: Confused about dividend investing, market downturns and early retirement

Post by 7eight9 »

There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.

...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
https://www.wsj.com/articles/shark-tank ... %20go%20up
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Re: Confused about dividend investing, market downturns and early retirement

Post by jebmke »

Unless on has all (or mostly) stock holdings, there is no need to "sell during a downturn." With a reasonably balanced portfolio of equity and bonds, one would be selling bonds to buy equity (re-balancing) and food in a downturn.
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Re: Confused about dividend investing, market downturns and early retirement

Post by dbr »

In that article you quoted everything after reporting the results of the Trinity study* is a misunderstanding of how investments work.

That doesn't mean that it is not possible to attain some asset level and then live indefinitely from that portfolio at a sufficiently low rate of withdrawal. How low depends on the luck of when one starts the process. Most likely there haven't been any really unlucky years in the last few decades, but we won't know for sure until the results are in and everyone who did retire is dead. Even people retiring around 1999 are only just over 20 years in.

*Except that the Trinity study does not report retirement success at 4% for a 70 year retirement. I don't remember what the longest period included in the analysis is, but for this retiree the better estimate of a safe withdrawal rate is probably closer to 2.5%. Of course it will be fifty years or more before this retiree knows for sure.
Last edited by dbr on Fri May 07, 2021 9:09 am, edited 1 time in total.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Nate79 »

Many problems with this. 4% SWR was not designed for someone doing early retirement. There is no magic that is going to make the 4% SWR suddenly able to do 5% or higher. If there was some magic like this then everyone would be doing it - this is a heavily researched area and don't you think if someone had such a great idea it would be a huge deal? Finally, holding cash in a separate bucket is just a mind trick - it's still part of your asset allocation and therefore didn't change anything.
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Re: Confused about dividend investing, market downturns and early retirement

Post by CyclingDuo »

I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.

Anyway, she talked a lot in the book about the Trinity study and using a 4% SWR. She said that she would have a 95% chance of not depleting her funds if she had a 4% withdrawal rate, but 95% wasn’t enough for her to feel secure. The 5% failure rate would usually occur because of sequence of returns risk - in situations where someone retired and then the market crashed and you had to sell equities during a downturn. If this happens during the first 5 years of retirement, early retirement can fail. In order to counter this, she said she implemented a “cash cushion” and a “yield shield” during her first 5 years of retirement. Basically, she keeps two years of expenses in cash and keeps her equities in index ETFs that throw off a lot of dividends. She said that even if there was a market downturn, she can just live off her dividends and cash until the market recovers, So she wouldn’t be forced to sell in a downturn. She acknowledged that the high-yield ETFs are not as diversified as total stock market indexes, but accepted the lower diversification in exchange for sequence of returns protection during the first 5 years of her retirement.

Initially I thought this whole concept sounded great. However I’ve been researching further, and I don’t get how the yield shield actually protects someone in a market downturn. If you are invested in a higher-yield ETF like VYM, and there is a market downturn, you will still get a dividend. But don’t those dividends reduce the share price? Aren’t you still essentially “selling” during a downturn - whether you take a dividend and don’t reinvest it, or you sell shares of an ETF?
Follow along on their blog.

How their portfolio did in 2020 (their 5th full year of "retirement")...

https://www.millennial-revolution.com/i ... tfolio-do/

Portfolio A is their "yield shield" and it began 2020 and ended 2020:

PORTFOLIO A

So in the end, how did Portfolio A, which is the retirement portfolio we actually live on, do? Note that at the beginning of 2020, we shifted from a 60% equity/40% fixed income allocation to a 70% equity/30% fixed income allocation.

Beginning of 2020 balance: $1,175,000

End of 2020 balance: $1,268,000

ROI: 7.9%
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Re: Confused about dividend investing, market downturns and early retirement

Post by climber2020 »

7eight9 wrote: Fri May 07, 2021 8:56 am Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.
Are you asserting that Berkshire Hathaway stock is equivalent to investing in Pokemon Cards?
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Re: Confused about dividend investing, market downturns and early retirement

Post by hi_there »

Flannelbeard wrote: Fri May 07, 2021 8:52 am Your conclusions are on the nose. Dividend investing is attractive to people who essentially cannot do math. It's mental trickery and little more.
Not the most diplomatic response, but I can't say it's wrong...
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Re: Confused about dividend investing, market downturns and early retirement

Post by CyclingDuo »

7eight9 wrote: Fri May 07, 2021 8:56 am There is no problem with dividends.

Non-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.
Not true. You can create your own "DIY" dividend by selling shares to fund your needs/expenses. Doesn't really matter if that comes from a dividend or a "DIY" dividend by the selling of shares.

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Re: Confused about dividend investing, market downturns and early retirement

Post by Astones »

I-Know-Nothing wrote: Fri May 07, 2021 8:47 am Initially I thought this whole concept sounded great. However I’ve been researching further, and I don’t get how the yield shield actually protects someone in a market downturn. If you are invested in a higher-yield ETF like VYM, and there is a market downturn, you will still get a dividend. But don’t those dividends reduce the share price? Aren’t you still essentially “selling” during a downturn - whether you take a dividend and don’t reinvest it, or you sell shares of an ETF?
Your understanding is correct. Dividends are not a valid alternative to fixed income.
7eight9 wrote: Fri May 07, 2021 8:56 am ...when you buy a stock that doesn't pay a dividend, that is not an investment, that is a speculation ...(b)ecause the only way you can make money is it has to go up. --- Kevin O’Leary
Well, if Kevin O'Leary says so..........
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

dbr wrote: Fri May 07, 2021 9:01 am In that article you quoted everything after reporting the results of the Trinity study* is a misunderstanding of how investments work.

That doesn't mean that it is not possible to attain some asset level and then live indefinitely from that portfolio at a sufficiently low rate of withdrawal. How low depends on the luck of when one starts the process. Most likely there haven't been any really unlucky years in the last few decades, but we won't know for sure until the results are in and everyone who did retire is dead. Even people retiring around 1999 are only just over 20 years in.

*Except that the Trinity study does not report retirement success at 4% for a 70 year retirement. I don't remember what the longest period included in the analysis is, but for this retiree the better estimate of a safe withdrawal rate is probably closer to 2.5%. Of course it will be fifty years or more before this retiree knows for sure.
Right. I’m not sure that a withdrawal rate as low as 2.5% is necessary, but we don’t know for sure. This retiree was aware that the Trinity study wasn’t accurate for a very long retirement period, but she said if she kept re-assessing her portfolio every year, and made adjustments as needed (cutting expenses, going back to work if necessary) she would be safe. She is making some income from blogging and writing right now anyway, so it’s kind of a moot point. I was just wondering whether her ideas regarding yield shields and cash cushions really offered any protection against sequence of return risks.
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Re: Confused about dividend investing, market downturns and early retirement

Post by terran »

Here's a pretty pointed response to the Millennial Revolution "yield shield" idea that debunks the concept. You'll also find some links in the conclusion at the bottom to some other work that blogger has done on legitimate ways to help mitigate sequence-of-returns risk.
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

Flannelbeard wrote: Fri May 07, 2021 8:52 am Your conclusions are on the nose. Dividend investing is attractive to people who essentially cannot do math. It's mental trickery and little more.
Yes, it seems like mental trickery to me, but I’m definitely not an expert. I suppose the somewhat steady income that dividends can provide would be good for someone who doesn’t feel comfortable constantly liquidating equities to meet their income needs. So they can function kind of like an annuity...
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

CyclingDuo wrote: Fri May 07, 2021 9:09 am
Follow along on their blog.

How their portfolio did in 2020 (their 5th full year of "retirement")...

https://www.millennial-revolution.com/i ... tfolio-do/

Portfolio A is their "yield shield" and it began 2020 and ended 2020:

PORTFOLIO A

So in the end, how did Portfolio A, which is the retirement portfolio we actually live on, do? Note that at the beginning of 2020, we shifted from a 60% equity/40% fixed income allocation to a 70% equity/30% fixed income allocation.

Beginning of 2020 balance: $1,175,000

End of 2020 balance: $1,268,000

ROI: 7.9%
Yes, I actually read this post. They are doing great. I don’t know if their yield shield really helped protect them at all though.
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Re: Confused about dividend investing, market downturns and early retirement

Post by CyclingDuo »

I-Know-Nothing wrote: Fri May 07, 2021 9:31 am
CyclingDuo wrote: Fri May 07, 2021 9:09 am
Follow along on their blog.

How their portfolio did in 2020 (their 5th full year of "retirement")...

https://www.millennial-revolution.com/i ... tfolio-do/

Portfolio A is their "yield shield" and it began 2020 and ended 2020:

PORTFOLIO A

So in the end, how did Portfolio A, which is the retirement portfolio we actually live on, do? Note that at the beginning of 2020, we shifted from a 60% equity/40% fixed income allocation to a 70% equity/30% fixed income allocation.

Beginning of 2020 balance: $1,175,000

End of 2020 balance: $1,268,000

ROI: 7.9%
Yes, I actually read this post. They are going great. I don’t know if their yield shield really helped protect them at all though.
They have being doing well - at least in their first 5 years as well as now being 1/3 of the way through their 6th year. They spent much less last year due to his father becoming ill and their return to Canada right before all the Covid travel restrictions hit. That, coupled with good portfolio performance have left them in good shape, plus the income from their business side hustle and growing Portfolio B (which they do not use for their living expenses).

Time will tell, but it is a nice live experiment for all of us to view. I guess I view it from the angle that due to their youth, if the experiment fails they can always derive income from working again to cover life's expenses.

CyclingDuo
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Re: Confused about dividend investing, market downturns and early retirement

Post by dbr »

I-Know-Nothing wrote: Fri May 07, 2021 9:31 am
CyclingDuo wrote: Fri May 07, 2021 9:09 am
Follow along on their blog.

How their portfolio did in 2020 (their 5th full year of "retirement")...

https://www.millennial-revolution.com/i ... tfolio-do/

Portfolio A is their "yield shield" and it began 2020 and ended 2020:

PORTFOLIO A

So in the end, how did Portfolio A, which is the retirement portfolio we actually live on, do? Note that at the beginning of 2020, we shifted from a 60% equity/40% fixed income allocation to a 70% equity/30% fixed income allocation.

Beginning of 2020 balance: $1,175,000

End of 2020 balance: $1,268,000

ROI: 7.9%
Yes, I actually read this post. They are going great. I don’t know if their yield shield really helped protect them at all though.
Of course it has nothing to do with yield.

Considering that the ten year return of the total stock market has been 14% and the ten year return of the total bond index has been over 3% this is easy. Trying the same thing starting in the mid sixties through the seventies might have been a different story. It would have been a cinch starting in the early eighties.

Note that doing well for first ten or fifteen years in good markets does not mean much for the sixty year prospects although it certainly helps. If things had gone badly the plan might have been abandoned. At least very early retirements have more like Plan B's out there.

One thing to notice about studies of past retirement outcomes is that the biggest single factor in success is the luck of when you start. That makes anecdotal experience meaningless for judging the prospects for someone else at a different time. Also you can't know very well ahead of time when is a good time to start.
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Re: Confused about dividend investing, market downturns and early retirement

Post by LadyGeek »

I removed an off-topic post. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
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Re: Confused about dividend investing, market downturns and early retirement

Post by retiredjg »

Having not read the book, I would not make a guess as to whether her plan is a good one or not. Whatever she is doing seems to be working for her and that is all that matters...for her.

Will it work for others? Who knows. But it is certainly possible that book royalties and blog earnings are the trick, rather than investment planning. :happy

I do have a problem with one thing. As mentioned by one poster already, the whole concept of "selling stocks in a downturn" makes perfect sense...until you realize that one would not be selling stocks in a downturn anyway!

Selling bonds or other fixed income assets is what should be done during a downturn. As stocks lose value, the stock to bond ratio shifts so that the bond allocation becomes too high. Selling on the bond side is what would bring the asset allocation closer to target.

This author is certainly not alone in this thinking - we see it all the time here too.

I have to agree with you that harvesting dividends, instead of reinvesting, is essentially the same as selling some shares. But people have different ways of seeing things and different ideas about what is good and what is harmful. And it is certainly possible that there is more than one "right" answer to many investing questions.
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Re: Confused about dividend investing, market downturns and early retirement

Post by LateFire »

You probably need a "separate" bucket of cash for that purpose. For example, if you had three years worth of cash saved up in CDs or short-duration bonds, then you wouldn't have to withdraw anything from your 1M dollar portfolio during any years where your market returns are less than your SWR. When times are good or your returns are higher than your SWR, then you fill these "buckets". If you use this strategy, you may significantly reduce the sequence of return risk. I think Morningstar is starting to recommend something like this. Check out their videos.
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Re: Confused about dividend investing, market downturns and early retirement

Post by dbr »

LateFire wrote: Fri May 07, 2021 10:03 am You probably need a "separate" bucket of cash for that purpose. For example, if you had three years worth of cash saved up in CDs or short-duration bonds, then you wouldn't have to withdraw anything from your 1M dollar portfolio during any years where your market returns are less than your SWR. When times are good or your returns are higher than your SWR, then you fill these "buckets". If you use this strategy, you may significantly reduce the sequence of return risk. I think Morningstar is starting to recommend something like this. Check out their videos.
Assuming spending of $40k a year, you are obviously better off when you really have a $1.12M portfolio than when you have a $1.00M portfolio and you can spend off that $.12M and pretend you didn't spend anything. Where is the $.12M going to come from to start with?

Buckets is a plan that proposes that changing the asset allocation differently from what one would have with a rebalanced constant asset allocation can somehow allow a greater amount of spending in the end. It is really difficult to show that this is generally true to a meaningful degree for a whole retirement, all probabilities considered ex ante. It is probably a better bet that one can improve the situation by adjusting spending as in a model such as variable percentage withdrawal. Of course giving up flexibility to spend what one needs when one needs it is an issue.

The whole idea of an SWR is to understand what you can spend when you have the bad luck that the portfolio is down more than it is up. The whole reason the SWR result exists is the combination of the worst case involving a bad sequence of returns and the worst case involving an entire retirement poor average return.
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

terran wrote: Fri May 07, 2021 9:25 am Here's a pretty pointed response to the Millennial Revolution "yield shield" idea that debunks the concept. You'll also find some links in the conclusion at the bottom to some other work that blogger has done on legitimate ways to help mitigate sequence-of-returns risk.
Thanks, that was a good article. I am going to spend some time reading and understanding the links about mitigating sequence of returns risk, as it seems like they offer a better solution than a yield shield.
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Re: Confused about dividend investing, market downturns and early retirement

Post by dbr »

It is already established that the SWR has a mild maximum at 60/40 which is a result of optimizing for sequence of returns risk. This reflects the fact that the maximum is not at 100/0.

Further approaches have to invoke a changing asset allocation with time. This is not a very strong lever because reducing variability and hence the magnitude of sequence of returns cost also reduces returns. In case a convincing analysis allowing for all probabilities and producing a useful result comes out, then investors could consider implementing some sort of plan based on that.
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Re: Confused about dividend investing, market downturns and early retirement

Post by David Jay »

7eight9 wrote: Fri May 07, 2021 8:56 amNon-dividend paying stock isn't really all that different from Bitcoin or Pokemon Cards. It relies on the Greater Fool theory.
No matter how many times in how many different threads you say exactly the same thing, it is still a false assertion.

A company with real earnings and/or physical assets has intrinsic value.
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Re: Confused about dividend investing, market downturns and early retirement

Post by MishkaWorries »

Flannelbeard wrote: Fri May 07, 2021 8:52 am Your conclusions are on the nose. Dividend investing is attractive to people who essentially cannot do math. It's mental trickery and little more.
You say that like it is a bad thing. Isn't much of the Boglehead philosophy just mental trickery?

Why hold bonds? To prevent panic selling in a downturn.

Why have an asset allocation less than 100%? Because having confidence to begin to invest is more important than the asset allocation.

Why do some retirees keep 2-5 years of living expenses in cash? To sleep well at night.
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Re: Confused about dividend investing, market downturns and early retirement

Post by Mike Scott »

For a long term retirement, you probably want to look at "perpetual" withdrawal rates which are often in the 3-3.5% range depending on the portfolio.
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

Mike Scott wrote: Fri May 07, 2021 12:23 pm For a long term retirement, you probably want to look at "perpetual" withdrawal rates which are often in the 3-3.5% range depending on the portfolio.
Does that incorporate Social Security at all? If one expects to receive substantial Social Security 10-20 years after retirement, wouldn’t a higher withdrawal rate be reasonable?
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Re: Confused about dividend investing, market downturns and early retirement

Post by ChinchillaWhiplash »

Yields are a return on your investment from profits made by the company paying the yield. Selling stocks, funds, bonds for a profit are a return on your investment from valuation of the company you are selling. They are both the same overall if the yield is the same as appreciation for the funds you sell. There is the added depletion of return on dividends in a taxable account. But you also have to pay capital gains taxes on funds you sell in a taxable account. Is one better than the other? A dividend fund will always pay a dividend. An equities fund could lose a lot of it value which will hurt when you have to sell to live off of. Now which one sounds better :oops: Hopefully the non-dividend paying fund will appreciate enough that withdrawals are not a problem, but it could cause rapid depletion of your portfolio if there is a major crash. If you have enough in bonds in a taxable, you could spend this down in times when selling equities would hurt. Lots of different ways to get the same results in the end. The only thing that really matters is total return either through dividends, appreciation of holdings, or a combination of both.
Last edited by ChinchillaWhiplash on Fri May 07, 2021 3:17 pm, edited 1 time in total.
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Re: Confused about dividend investing, market downturns and early retirement

Post by alex_686 »

MishkaWorries wrote: Fri May 07, 2021 12:11 pm You say that like it is a bad thing. Isn't much of the Boglehead philosophy just mental trickery?
Mostly no. It is based off passive investing. Deep field, lots of papers out there with lots of math.
MishkaWorries wrote: Fri May 07, 2021 12:11 pm Why hold bonds? To prevent panic selling in a downturn.

Why have an asset allocation less than 100%? Because having confidence to begin to invest is more important than the asset allocation.
No, to increase risk adjusted return and increase the possibilities of reaching your goals.
MishkaWorries wrote: Fri May 07, 2021 12:11 pm Why do some retirees keep 2-5 years of living expenses in cash? To sleep well at night.
This is Boglheads. Well, not specially Bogleads. This is a very common errors, specially it is "Mental Accounting".
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Re: Confused about dividend investing, market downturns and early retirement

Post by sycamore »

I-Know-Nothing wrote: Fri May 07, 2021 1:01 pm
Mike Scott wrote: Fri May 07, 2021 12:23 pm For a long term retirement, you probably want to look at "perpetual" withdrawal rates which are often in the 3-3.5% range depending on the portfolio.
Does that incorporate Social Security at all? If one expects to receive substantial Social Security 10-20 years after retirement, wouldn’t a higher withdrawal rate be reasonable?
Depends on how you plan things. I prefer to subtract my expected Social Security benefits from my expected expenses. What's left is "residual living expenses" which is what my portfolio withdrawals have to cover. If my withdrawal rate of 2.5% or 3.5% (or whatever I consider "safe") can't cover my RLE, then I'm not ready yet to retire.

It gets complicated if you retire early at 40 but don't claim SS until SS. In that case what some people do is conceptually break their portfolio into two parts: before and after claiming SS. You need the "before SS" portfolio to support a higher withdrawal rate, and the "after SS" portfolio to support a lower rate.
Gundy
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Re: Confused about dividend investing, market downturns and early retirement

Post by Gundy »

Kristy Shen wrote a book and makes money blogging.

She's still working. Not retired.

Perhaps this is the best way to make certain your portfolio lasts.
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Grt2bOutdoors
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Re: Confused about dividend investing, market downturns and early retirement

Post by Grt2bOutdoors »

Mike Scott wrote: Fri May 07, 2021 12:23 pm For a long term retirement, you probably want to look at "perpetual" withdrawal rates which are often in the 3-3.5% range depending on the portfolio.
The FIRE guy is actually withdrawing about that - 3 percent and not the 4 percent they quoted. A typical person retires with the financial assets they own in totality plus any other guaranteed streams of income. The FIRE guy can claim to be living off of Portfolio A but in a true emergency or even when they feel like it, Portfolio B is the ultimate backstop. A $40k withdrawal rate on a total value of $1.5 million is 2.67 percent. That is near foolproof.

What’s interesting is a number of these FIRE bloggers really are NOT retired.
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dbr
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Re: Confused about dividend investing, market downturns and early retirement

Post by dbr »

I-Know-Nothing wrote: Fri May 07, 2021 1:01 pm
Mike Scott wrote: Fri May 07, 2021 12:23 pm For a long term retirement, you probably want to look at "perpetual" withdrawal rates which are often in the 3-3.5% range depending on the portfolio.
Does that incorporate Social Security at all? If one expects to receive substantial Social Security 10-20 years after retirement, wouldn’t a higher withdrawal rate be reasonable?
The math there is that SS is subtracted from the wanted spend and the rest is taken in withdrawals. That means for constant spending the withdrawal rate changes, meaning decreases, when SS starts. This is common along with all kinds of other changes that can happen in life. That is why these SWR estimates are characterizations of how portfolios behave in special cases but are not plans for how to engineer a retirement. Models based on SWR methods but allowing for these variations are much more complicated but come closed to representing real life, up to a point.

The 4% finding or equivalents for other lengths of time are useful for generally locating where one stands or will stand in trying to withdraw money from a portfolio to live on.
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I-Know-Nothing
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

Gundy wrote: Fri May 07, 2021 2:47 pm Kristy Shen wrote a book and makes money blogging.

She's still working. Not retired.

Perhaps this is the best way to make certain your portfolio lasts.
She is keeping any money earned after “retirement” in a separate portfolio in order to see if she could have lived on only the money she saved for retirement in her first portfolio. So far she could have. Most people who retire so early wind up doing something to earn additional income after retirement. This is helpful during years when the market is down. The hope is that the side income is not necessary - it’s just an additional safety measure. One could also cut discretionary expenses significantly during market downturns if they would prefer not to work.
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ipdiddly
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.
That's funny! Does she explain how two people can live on $40K/year AND travel around the world? I suppose if you backpack and tent all the way? Good luck with that! I've spent $30K on a luxury cruise. But I prefer that to backpacking and tenting.
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ipdiddly
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Re: Confused about dividend investing, market downturns and early retirement

Post by ipdiddly »

As to dividend investing, I refer you to viewtopic.php?f=10&t=346777 (the initial post reproduced below).

I used PortfolioVisualizer to compare the performance of a dividend stock portfolio (SCHD) vs a typical stock-bond portfolio (VTI-BND at 70:30).
The time period was Nov. 2011 (SCHD creation) to Mar. 2021.
The initial investment is $500,000.
All dividends are reinvested. (This was required by PV given the pre-set withdrawal rate below.)
The portfolio owner withdraws $2000 monthly ($24,000/yr).
VTI-BND is rebalanced annually.

Results below:
Portfolio- - Initial Balance - - - Final Balance - - - CAGR - - - - Best Year - - - Worst Year - - - Max. Drawdown
VTI-BND - - - $500,000 - - - - - -$1,023,610 - - - - - 7.91% - - - - 24.12% - - - - - (-3.68%) - - - - - (-14.40%)
SCHD - - - - - $500,000 - - - - - -$1,415,466 - - - - 11.68% - - - - 32.89% - - - - - (-5.56%) - - - - - (-21.54%)

Income (dividends/interest) generated by each portfolio in 2020:
VTI-BND - - $16,795
SCHD - - - - $38,775
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I-Know-Nothing
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

ipdiddly wrote: Fri May 07, 2021 4:52 pm
I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.
That's funny! Does she explain how two people can live on $40K/year AND travel around the world? I suppose if you backpack and tent all the way? Good luck with that! I've spent $30K on a luxury cruise. But I prefer that to backpacking and tenting.
Yes, she explains it. No backpacking or tents. They divide their time between more expensive parts of the world and much cheaper parts like Southeast Asia and Portugal. The stays in cheaper countries allow them to defray the costs of the stays in more expensive countries. They stay in a lot of Airbnbs for longer periods of time, and try to live like locals. They use credit card points for airfare when possible.
terran
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Re: Confused about dividend investing, market downturns and early retirement

Post by terran »

ipdiddly wrote: Fri May 07, 2021 4:52 pm
I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.
That's funny! Does she explain how two people can live on $40K/year AND travel around the world? I suppose if you backpack and tent all the way? Good luck with that! I've spent $30K on a luxury cruise. But I prefer that to backpacking and tenting.
Yes, she does for 2019 which is probably more applicable to your question and for 2020 when they spent much of the year in Toronto thanks to COVID. If you dig a little further you'll find more detailed breakdowns by location.
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I-Know-Nothing
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

ipdiddly wrote: Fri May 07, 2021 4:59 pm As to dividend investing, I refer you to viewtopic.php?f=10&t=346777 (the initial post reproduced below).

I used PortfolioVisualizer to compare the performance of a dividend stock portfolio (SCHD) vs a typical stock-bond portfolio (VTI-BND at 70:30).
The time period was Nov. 2011 (SCHD creation) to Mar. 2021.
The initial investment is $500,000.
All dividends are reinvested. (This was required by PV given the pre-set withdrawal rate below.)
The portfolio owner withdraws $2000 monthly ($24,000/yr).
VTI-BND is rebalanced annually.

Results below:
Portfolio- - Initial Balance - - - Final Balance - - - CAGR - - - - Best Year - - - Worst Year - - - Max. Drawdown
VTI-BND - - - $500,000 - - - - - -$1,023,610 - - - - - 7.91% - - - - 24.12% - - - - - (-3.68%) - - - - - (-14.40%)
SCHD - - - - - $500,000 - - - - - -$1,415,466 - - - - 11.68% - - - - 32.89% - - - - - (-5.56%) - - - - - (-21.54%)

Income (dividends/interest) generated by each portfolio in 2020:
VTI-BND - - $16,795
SCHD - - - - $38,775
Shouldn’t SCHD be compared to a 100% VTI portfolio?
sailaway
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Re: Confused about dividend investing, market downturns and early retirement

Post by sailaway »

terran wrote: Fri May 07, 2021 5:07 pm
ipdiddly wrote: Fri May 07, 2021 4:52 pm
I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.
That's funny! Does she explain how two people can live on $40K/year AND travel around the world? I suppose if you backpack and tent all the way? Good luck with that! I've spent $30K on a luxury cruise. But I prefer that to backpacking and tenting.
Yes, she does for 2019 which is probably more applicable to your question and for 2020 when they spent much of the year in Toronto thanks to COVID. If you dig a little further you'll find more detailed breakdowns by location.
Ah yes, that real world where you have to read the fine print to find medical costs, gifts aren't really part of the budget, and we will exclude travel involved in book promotion, as if we would have otherwise ceased to exist during that time and... If contact lenses are an aside, rather than expense, I always end up wondering what else doesn't factor in. Obviously, this couple isn't asking for a case study and is doing fine, but they also don't seem to be setting realistic expectations. Why not just say that you aren't retired and count all the business expenses against the business income? Why exclude things like the ability to see from your base expenses?

I don't think their budget is ridiculous, but the way they present it is.
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I-Know-Nothing
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Re: Confused about dividend investing, market downturns and early retirement

Post by I-Know-Nothing »

sailaway wrote: Fri May 07, 2021 5:35 pm
terran wrote: Fri May 07, 2021 5:07 pm
ipdiddly wrote: Fri May 07, 2021 4:52 pm
I-Know-Nothing wrote: Fri May 07, 2021 8:47 am I recently read “Quit Like a Millionaire” by Kristy Shen. I am interested in early retirement, so this appealed to me. She retired in her early 30s and is traveling around the world with her husband, living off about $40k a year. I thought the book was really good.
That's funny! Does she explain how two people can live on $40K/year AND travel around the world? I suppose if you backpack and tent all the way? Good luck with that! I've spent $30K on a luxury cruise. But I prefer that to backpacking and tenting.
Yes, she does for 2019 which is probably more applicable to your question and for 2020 when they spent much of the year in Toronto thanks to COVID. If you dig a little further you'll find more detailed breakdowns by location.
Ah yes, that real world where you have to read the fine print to find medical costs, gifts aren't really part of the budget, and we will exclude travel involved in book promotion, as if we would have otherwise ceased to exist during that time and... If contact lenses are an aside, rather than expense, I always end up wondering what else doesn't factor in. Obviously, this couple isn't asking for a case study and is doing fine, but they also don't seem to be setting realistic expectations. Why not just say that you aren't retired and count all the business expenses against the business income? Why exclude things like the ability to see from your base expenses?

I don't think their budget is ridiculous, but the way they present it is.
[ quote fixed by admin LadyGeek]

Where did you see that medical expenses aren’t included? I don’t think it would be appropriate to take business travel expenses out of non-business portfolio.
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Schlabba
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Re: Confused about dividend investing, market downturns and early retirement

Post by Schlabba »

[quoted post and reply removed by admin LadyGeek]

To the OP, I like that idea of a ‘yield shield’. Dividends are relatively stable during recessions compared to share prices (https://www.simplysafedividends.com/int ... ar-markets) so in that way if an actual recession hits you might not even have to sell (much) bonds and you can ignore the share price to a large extend.

It does mean that you are spending more of your equity part of your portfolio during the downturn, but that is the tradeoff you choose.

There are multiple ways to fund your retirement, and putting money in VYM and the international version + bonds is a totally reasonable approach that will work. It will not have a higher total return but it is a different withdrawal method.
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Re: Confused about dividend investing, market downturns and early retirement

Post by vineviz »

Schlabba wrote: Sat May 08, 2021 1:17 am
To the OP, I like that idea of a ‘yield shield’. Dividends are relatively stable during recessions compared to share prices (https://www.simplysafedividends.com/int ... ar-markets) so in that way if an actual recession hits you might not even have to sell (much) bonds and you can ignore the share price to a large extend.
The “yield shield” is comforting in the way that closing your eyes is comforting when you’re being attacked by a bobcat.

It’s an illusion. A misdirect.

With a low enough withdrawal rate, you can ignore the share price of your stocks REGARDLESS of what your dividend yield is. And if your withdrawal rate is too high, no amount of dividends will shield you from your eventual bankruptcy.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Confused about dividend investing, market downturns and early retirement

Post by Ferdinand2014 »

Dividends historically from the U.S. market have been less volatile with smaller drawdowns compared to the overall market returns. Dividends reinvested have certainly been a significant portion of the total returns of the S&P 500 over its history. However, a high yield dividend fund will be less diversified and more focused on higher debt, lower growth value companies or companies that offer a higher yield simply because of high payout to earnings ratio because of low earnings. It is better to look at capital gains and dividends combined as your total return.
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Schlabba
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Re: Confused about dividend investing, market downturns and early retirement

Post by Schlabba »

vineviz wrote: Sat May 08, 2021 5:04 am It’s an illusion. A misdirect.
Different withdrawal strategies different results.
vineviz wrote: Sat May 08, 2021 5:04 am With a low enough withdrawal rate, you can ignore the share price of your stocks REGARDLESS of what your dividend yield is. And if your withdrawal rate is too high, no amount of dividends will shield you from your eventual bankruptcy.
We all agree that withdrawing too much is not sustainable and withdrawing too little is low risk.
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Re: Confused about dividend investing, market downturns and early retirement

Post by firebirdparts »

I-Know-Nothing wrote: Fri May 07, 2021 8:47 am . But don’t those dividends reduce the share price? Aren’t you still essentially “selling” during a downturn - whether you take a dividend and don’t reinvest it, or you sell shares of an ETF?
Not at all. Traders set share prices. This above is simply delusion. Popular, but just delusion. If the dividend is suddenly arbitraged in one day then you have to accept that it is also slowly arbitraged in the other 89 days. Anybody who doesn’t see this is just dense.

The dividend is just money. It comes out of the bank. If the company kept it, you could argue that they would do something brilliant with it, but I don’t think you can count on that, after working 40 years. The company wins some and loses some.
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Re: Confused about dividend investing, market downturns and early retirement

Post by LadyGeek »

I removed an off-topic comment and reply. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
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vineviz
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Re: Confused about dividend investing, market downturns and early retirement

Post by vineviz »

Schlabba wrote: Sat May 08, 2021 5:41 am
vineviz wrote: Sat May 08, 2021 5:04 am It’s an illusion. A misdirect.
Different withdrawal strategies different results.
Everyone should choose a withdrawal strategy that they're comfortable with.

I think it's important to understand, though, that the dividend yield of the portfolio does NOT give you a "different result".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
JustinR
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Re: Confused about dividend investing, market downturns and early retirement

Post by JustinR »

I-Know-Nothing wrote: Fri May 07, 2021 8:47 amInitially I thought this whole concept sounded great. However I’ve been researching further, and I don’t get how the yield shield actually protects someone in a market downturn. If you are invested in a higher-yield ETF like VYM, and there is a market downturn, you will still get a dividend. But don’t those dividends reduce the share price? Aren’t you still essentially “selling” during a downturn - whether you take a dividend and don’t reinvest it, or you sell shares of an ETF?
Yes, it's called mental accounting. By people who don't understand how dividends work.

A lot of uneducated investors think dividends are free money being deposited into their bank accounts, including the author you mentioned.
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Re: Confused about dividend investing, market downturns and early retirement

Post by coachd50 »

firebirdparts wrote: Sat May 08, 2021 6:27 am
I-Know-Nothing wrote: Fri May 07, 2021 8:47 am . But don’t those dividends reduce the share price? Aren’t you still essentially “selling” during a downturn - whether you take a dividend and don’t reinvest it, or you sell shares of an ETF?
Not at all. Traders set share prices.
But don't the traders factor in that a company just reduced its assets by ________ (amount of the dividend)? After the ex-dividend date, a buyer is not entitled to the dividend that will be paid. That is accounted for in the prices by traders.
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