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I purposely refrained from calling your earlier "joke" bullshite to be polite. d.

Not drawing down a portion of principal, at least the capital appreciation, is akin to cocooning oneself from life. It's conservatism run amok. I will now refrain from going around in circles yet again.
I will be polite too and not call that BS. Even if it is ;)
 

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Discussion Starter #222 (Edited)
That's a bit harsh AltaRed. Income oriented retirement portfolios are very common and, if done properly (diversified with sensible withdrawal rates) perfectly good options.

This idea of "tapping into principal" is a fuzzy term anyway, since people can mean very different things when they say it. Do they mean preserving the original dollar amount? Preserving the inflation adjusted original amount? Only taking dividends and interest? Only taking dividends that are less than corporate net income? Or maybe something simpler, such as: never entering a sell order on shares.

I acknowledge that people have reasons for wanting what they want. However, I am perfectly fine with liquidating shares as a way to generate cashflow from my capital.
 

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Agreed income oriented retirement portfolios are very common but they are based on a total return concept, such as income funds, which do involve taking capital appreciation into the equation.

To me, 'tapping into principal' is a very transparent and clear concept, i.e. principal means Cost Basis or Book Value, i.e. invested amount. Some go further to suggest it is 'invested amount adjusted for inflation' which can take on more importance obviously with high inflation. With inflation at 2%, it would take 36 years to 'half the original value'. I am agnostic as to which one is chosen, albeit the latter does make more sense to me.

Added: Most retail investors assume it means selling no units/shares which, in my opinion, is a travesty. They are leaving opportunity, i.e. capital appreciation, underutilized.
 

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Thanks. Yes I think as long as the withdrawal rate is kept low, there shouldn't be a problem. Of course it's easy to say now with MAW104 up 15% YTD. It probably feels very different doing the withdrawals in a really bad year, but still should be sustainable.
James,
As I tried to say earlier, this should be fine so long as that low % withdrawal is from a large enough portfolio that it provides your parents with enough to live on.

Percentages are of course misleading. If market value of MAW104 drops by 30% as it did in 2008, then for same income, % withdrawal would have had to be correspondingly higher. MAW104 didn't recover fully from 2007 levels until mid 2012. Longer if inflation is considered.

Personally, I wouldn't like to bet my retirement income on the performance of the markets and especially just one or two low distribution funds. However, I do hope my concerns are unfounded and that things work out well for your parents.
 

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Discussion Starter #225
But you're invested in equities right? Your retirement income IS dependent on the markets. If the markets tank (say a depression) and corporate income is slashed, those dividends you're getting will be slashed too. Dividends generally track the broad equity market as shown here. When stocks are strong, dividends are strong.

The only way you keep getting your dividends uninterrupted is if business conditions / the economy remains relatively strong.

You're talking as if your investments are disconnected from stock market movements. This is true if you're entirely in fixed income, but I thought you had a significant equity allocation.
 

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Discussion Starter #226
Personally, I wouldn't like to bet my retirement income on the performance of the markets and especially just one or two low distribution funds.
You are an income/dividend investor, and I am a diversified total return investor. I would bet that we both have similar vulnerability to stock market weakness.

You: keep getting your dividends if the market weakens, but only to a point. You have elasticity from reserves of the companies you invest in (retained earnings and their capital positions). That elasticity protects your dividends in the early stages of a slowdown.

Me: with 50% in bonds, I have a big cushion. Cash comes out of my bond portion when the stock market is weak. For a sharp but limited duration slowdown, bonds provide the cash. I don't dig into equity and I don't sell depressed equities.

But, in prolonged stock market weakness such as a serious recession or depression, we're both going to feel it, brother. There is no escaping equity market weakness.
 

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Percentages are of course misleading. If market value of MAW104 drops by 30% as it did in 2008, then for same income, % withdrawal would have had to be correspondingly higher. MAW104 didn't recover fully from 2007 levels until mid 2012. Longer if inflation is considered.
Using VPW, one follows it down. Percentages don't change, the amount one spends goes down.

That being said, that is the case using full VPW percentages, e.g. 5% or more. If James' parents are at 3% withdrawal rate, they can decide to perhaps go to as high as the VPW percentage says they can, e.g. 5%, or if they can, track somewhere between 3% and 5%. Indeed, with a 30% drop in MAW104 in your example, they need to only go to a withdrawal percentage of about 4.3% to maintain their constant spend and be well within VPW allowance. The math works beautifully.
 

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You are an income/dividend investor, and I am a diversified total return investor. I would bet that we both have similar vulnerability to stock market weakness.
I do invest mainly in dividend payers, but we also have a few low/no yield stocks that I am slowly weeding out. We also have at least 40% in fixed income. So overall, a fairly balanced portfolio. The overall yield from the portfolio has slowly increased over past 16 years. Just about matched the inflation rate. No reductions, just a brief slowdown in growth during recession. At one time the portfolio total value dropped by 27%, but that was not too much of a concern, because the cash kept flowing in.

It may depend on just which markets, but most blue chip Canadian stocks almost never cut their dividends and in fact many have a history of always increasing them. I know you are aware of all this, but the great thing about dividend income, is that it usually keeps coming in regardless of what the market does to the stock price. No need to cut your spending until markets recover. I am sure Total Return approach can work, but perhaps a longer horizon is needed than most retirees have.

Funnily, an hour or so ago, I had a glass of wine before dinner and watched BNN. David Driscoll was on at 6pm. He seemed to be on same page as me and funnily enough so were some of his past picks! I don't watch BNN much, but he seems like one of their better guests.
 

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Discussion Starter #229
We haven't had a prolonged slowdown since you started. There's a reason dividend investing is very popular today; it's perceived to be immune to slowdowns and stock market volatility. I'm saying that dividends are vulnerable to slowdowns, just look back at the 1970s. Or look at that S&P 500 dividend chart I posted.

Look at the historical behaviour in dividends, not just the last 20 years.

but the great thing about dividend income, is that it usually keeps coming in regardless of what the market does to the stock price
That's only true in mild corrections and short lived bear markets. In long bear markets, your dividends will be reduced -- they are connected to stock prices, not independent.
 

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Look at the historical behaviour in dividends, not just the last 20 years.
The available data is mostly US based. But even so, almost everything I have ever read or heard says that dividend payers outperformed non-payers. Not to say dividends were not affected, but they still helped get through the bad times. The S&P500 bluechips have a stellar record of increasing their dividends. These 90 or so, have done it for 25-64 years https://www.dividend.com/dividend-stocks/25-year-dividend-increasing-stocks/

Some light reading for your sabattical. https://www.dividend.com/dividend-investing-101/performance-of-dividend-paying-stocks-over-long-term/

When it comes to effective portfolio-building, history is the best teacher. By looking back through time, we can clearly see that dividend-paying stocks are the bedrock of any well-diversified portfolio. What’s more, they’re proven to outperform during periods of increased volatility and uncertainty.
Anyway, that's enough for now. As they say - different strokes for different folks.
 

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That's a fair argument. To go with this, you'd have to have the conviction to keep rebalancing even if one asset chronically does poorly for decades.

I would argue that stocks face a similar possibility. For example, Japanese stocks (down for 20 to 30 years) or even US stocks for 13 years after 2000. That's a very long period too... how many people gave up on their stock allocation (capitulation) after 13 years of poor US returns?

How many people in 60/40 allocations actually kept repeatedly buying more US stocks throughout this horrible 13 years: http://schrts.co/THzNiZar

I think this is a problem with any volatile asset, whether it's stocks or gold. It's not easy for anyone.
Here is blog post from Ben Carlson of A Wealth of Common Sense on the difficulty of market timing in bear markets and crashes.
https://awealthofcommonsense.com/2019/11/what-would-you-have-done-in-2009/

One tactic for managing your portfolio in crashes is to never rebalance into risk assets. So in bull markets, as equities continue to grow over time, you rebalance from stocks to fixed income to sustain your target asset allocation and portfolio volatility & risk.

But in market crashes, you don't rebalance from fixed income to equities. Just wait for stocks to eventually recover and continue giving the good returns they historically have. This eliminates the stress of buying at distressed prices, and avoids the risk that stocks may never recover. You would miss out on the "rebalancing bonus" and it would take longer for your portfolio to recover to its pre-crash levels. but it would take away the possible regret of buying stocks and watching them fall further, like often happens as crashes are a process that takes time, rather than a quick event.
 

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But in market crashes, you don't rebalance from fixed income to equities.
That makes a lot of sense.

One of the problems with rebalancing, is that percentages or ratios are used.
If you have a 60/40 Eq/FI portfolio and equities crash, you could soon end up with 50/50. Yet, you may very well still have exactly the same amount in FI.
It may be better to forget about those arbitrary percentages and ratios. They vary as markets change without any investor input.
Better to choose a fixed income dollar amount that you would be happy with if the markets totally crashed. As time goes by, re-visit this number to account for inflation and lifestyle.
That is more or less what we do. We have much lower % in FI than some "financial experts" might suggest. However, the amount in $$ is something we are comfortable with.
 

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Discussion Starter #233
I agree that one can skip rebalancing but beware that this will result in larger maximum drawdowns -- larger declines from peak to trough.

I am still dedicating myself to annual rebalancing because I like the concept, and I want to minimize drawdowns.
 

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Discussion Starter #234
Quick example from portfolio visualizer. Using 60/40 with US since 1972.

With annual rebalancing, 9.59% CAGR, worst year -15.07%, max drawdown -28.54% (ouch that hurts right?)
With no rebalancing, 9.56% CAGR, worst year -24.94%, max drawdown -37.47%

So it's the same performance but look what happens on the risk side of the picture. This has become a significantly more painful investment without rebalancing!
 

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Quick example from portfolio visualizer. Using 60/40 with US since 1972.

With annual rebalancing, 9.59% CAGR, worst year -15.07%, max drawdown -28.54% (ouch that hurts right?)
With no rebalancing, 9.56% CAGR, worst year -24.94%, max drawdown -37.47%

So it's the same performance but look what happens on the risk side of the picture. This has become a significantly more painful investment without rebalancing!
If you don't rebalance at all, your asset allocation will drift overtime, likely making it more stock heavy, so there is a reverse SoR risk in that a large bear market in the latter years will cause much bigger drawdowns. That should not be a problem if one rebalances one way from stocks to bonds. Actually at the depth of bear markets, the investor has less risk in equities.
 

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So it's the same performance but look what happens on the risk side of the picture. This has become a significantly more painful investment without rebalancing!
It depends on how you perceive risk. Some investors have no fixed income at all. I just want a sufficient amount of FI to act as a cushion. And, as I said earlier, I would look at this cushion from time to time and see it meets current needs.

Of course fluctuations in portfolio value will be higher. I can't see that as being a problem if you have limited the downside to meet your needs.

Forget about those percentages! :)
 

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That makes a lot of sense.
It may be better to forget about those arbitrary percentages and ratios. They vary as markets change without any investor input.
Better to choose a fixed income dollar amount that you would be happy with if the markets totally crashed. As time goes by, re-visit this number to account for inflation and lifestyle.
Yes that makes sense too. I have seen people advocate for it. It's something I have been pondering but not done yet. Especially being retired I can look ahead and forecast my spending to estimate the fixed income dollars I may need.

I currently have a 60/40 portfolio, and I settled on the 40% FI based roughly on 4% withdrawal rate through a 10 year bear market = 40% fixed income needed. Not a particularly sophisticated analysis, but given the unpredictability of the market there's no point in getting too precise. I used to have a university prof that talked about "implied accuracy through casual precision".

Some investors talk about having a 2 year "cash wedge" to get them through a bear market without having to sell equities at depressed prices. I think those investors have not been investing long enough and have not studied investing history. Two years of cash would not get even close to through a looooonnnng bear market. A dollar in the S&P500 at the start of 2000 did not stay above it's starting value until 2013. The Dow peaked some time in the late 1960s, drifted sideways for years, crashed big-time in 73 & 74 and it did not get back up to its 1960s highs until the early 1980s. A dollar invested in the S&P500 at the start of 1973 was worth less than 63 cents by the end of 1974, and did not stay above its initial value until 1978. Data from the Stingy Investor Asset Mixer. This is why I and some other investors maintain conservative portfolios.


Also some posts have commented on not rebalancing. If that is in response to my post #231 above, my suggestion was to keep rebalancing into fixed income during bull markets, but not rebalance into equities during bear markets.
 

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I am one of those that also hold a defined amount of fixed income and cash equivalents. Along with annuity income and investment income, it is easily enough to carry me 2 years at current rates of spend, and if I chose to cut back on a number of luxury expenses, could go at least 5 years and beyond.

That all said, not all equities go into the tank to the same degree, and not all global markets go into the tank for lengthy periods to the same degree. In a prolonged bear, there will be opportunities to pick off an equity or two that may actually be up, rather than down 30%. It is not a case of never selling an equity when it is down. It is a case of picking and choosing. Some consumer staple stocks can hold their own and so can selected residential REITs for example. Even a stock like BCE...if it was in the $55 range, I'd not have an aversion to selling it if I needed too. The fact it may have been $65 at one time is not terribly relevant.

It is a matter of being rational about choices one can make, rather than getting caught up in academic 'rules'.
 

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Discussion Starter #239
Also some posts have commented on not rebalancing. If that is in response to my post #231 above, my suggestion was to keep rebalancing into fixed income during bull markets, but not rebalance into equities during bear markets.
I still don't quite understand this part. Is it to make sure you still have lots of fixed income, so you don't risk depleting it during a long bear market?

A strategy like annual rebalancing at a fixed date is the only method I'm aware of to reliably "buy low" without market timing pitfalls.
 

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I think it is situational, i.e. it depends on how much fixed income one holds and why, and whether one is in accumulation or withdrawal. During withdrawal, it would most likely be risky to take more of one's safety net and allocate it to equities...not knowing now long that bear market will last. One would be preferentially drawing down fixed income any way to fund living expenses.

During accumulation, a standard re-balancing methodology makes sense, but I don't necessarily agree with fixed date annual re-balancing either. Do it when one's allocation gets out of whack by, for example , +/- 10%. It may never happen if one is adding new money to the under performing class, or it might happen in addition to new money because of large moves in the market.
 
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