That all makes sense. I'm assuming you're not paying yourself a fixed amount, so there's no "4% rule" here. Do you pay yourself based on a percentage of your current, total portfolio, or is it based just on the dividends and profits you make during that week? If so, that's a tough gigI keep enough cash in a HISA to survive for more than a year with no additional income from dividends and trading profits and then "pay" myself a weekly wage to a transaction account.
Oh yup. I've pretty much listened to every Buffett interview of YouTube, so it's just a matter of seeing which one you're talking about. So I agree with his sentiment, that a stock is like a equity bond that pays you in earnings (rather than coupons) over time. Particularly for a fundamental investor, this would be core to their understanding.Listen to this video from the 4 minute mark, Buffett describes shares as “equity bonds”, this is a great conversation that brings up some of the points I said helped me understand equities better as I learned about bonds.
Good to hear you've got 1 year buffer in savings. This gives you peace of mind and it's a great position to be in when trading/investing. I can tell you from experience that if you don't have money saved up for emergency living expenses, you tend to force trades to meet current living expenses or you try to make unrealistic gains from the markets. So I also have a revolving buffer of months of living expenses in cash/TD type liquid assets. I say 'revolving' because I sometimes draw on it for emergencies (medical, urgent car/home repairs etc) but then save up again. Also have the option to draw on the home loan but I prefer not to as it would drag out my mortgage to the grave. Instead I'd prefer to pay the whole thing off before or at least in early stages of retirement.I retired early and am following option 1 although I don't use percentages.
I keep enough cash in a HISA to survive for more than a year with no additional income from dividends and trading profits and then "pay" myself a weekly wage to a transaction account.
Even in the GFC companies like the big four banks continued to pay dividends and in a down turn could probably survive more than two years without any drastic action.
I'm going to highlight this point, because it can be tied back so well to "Option 3": all your money in stocks + 1 months expense. If one did choose this option, it makes sense to time it with your natural selling activity. For a short term trader, they would have cash flow every week. For a long term investor, the natural sell cycle might be only 1 stock a year.I can tell you from experience that if you don't have money saved up for emergency living expenses, you tend to force trades to meet current living expenses
I think while we are still working there is no need to be doing any kind of forced selling or liquidating any positions for meeting living expenses. But I totally understand the point becoming valid down the track when you may need to rely on that cashflow for living.I'm going to highlight this point, because it can be tied back so well to "Option 3": all your money in stocks + 1 months expense. If one did choose this option, it makes sense to time it with your natural selling activity. For a short term trader, they would have cash flow every week. For a long term investor, the natural sell cycle might be only 1 stock a year.
It can work based on forced selling: a pension from your super that pays you a monthly amount, is a forced sale for most people. But I feel it makes more sense to time it with your natural cash flow cycle.
Yes, we've got some people in this thread working, and others retired, so the conversation is bouncing back of forthI think while we are still working there is no need to be doing any kind of forced selling or liquidating any positions for meeting living expenses. But I totally understand the point becoming valid down the track when you may need to rely on that cashflow for living.
OK. So you're a pro-risk investor now, but an anti-risk investor during retirement. Gotcha. Yes, unless you have a massive portfolio, all your money sitting in a term deposit isn't going to cut it these days.I have to think outside the box as well going forward. I had it kind of planned out in the olden days to put the bulk of the savings into cash/TD type assets in retirement earning a safe 5% and the rest in more volatile shares etc to earn dividend payments etc. It's not going to work with below 1% interest rates, so will have to re-work the retirement strategy and think long and hard how to structure it since I still have a few years to earn as an employee.
I'm going to highlight this point, because it can be tied back so well to "Option 3": all your money in stocks + 1 months expense. If one did choose this option, it makes sense to time it with your natural selling activity. For a short term trader, they would have cash flow every week. For a long term investor, the natural sell cycle might be only 1 stock a year.
It can work based on forced selling: a pension from your super that pays you a monthly amount, is a forced sale for most people. But I feel it makes more sense to time it with your natural cash flow cycle.
First one is a vehicle. For the sake of this discussion, let's assume you're buying a new, reasonably priced car in cash, and keeping for 10-15 years. Now, it would be crazy to keep 35k in cash for 15 years, ready for the next car. With that timeframe in mind, you invest your "car money" in shares. In that case, you're justified in selling down when your car blows up unexpectedly at 9 years rather than at 15. You've probably double or trebled your car money by then anyway.
Agree. I also like the idea of the higher interest paid by P2P companies but scared of the capital loss as you mentioned. It's not always smooth sailing as what people have experience with well known P2P lenders like the Lending Club in the US. I may put a small % into these accepting that if the whole scheme folds, I will not be losing the bulk of my savings. So it'll have to be a small % of my investment funds not money in 'mojo' buffer account which is for emergency living expenses.Personally, I'd tread any single P2P company like a single stock. Limit the amount you put into it to 5% (or whatever your normal limit is)
That's very impressive. And you don't have additional income from a job? I have read your amazing backstory with a certain honey company, so I suspect you're self-sufficient, but I'm not 100% sure.I am a longterm investor, and the bulk of my earnings come from dividends, which come in roughly every 6 months.
Every time I get a dividend, I allocate 50% of it to my living expense account, 30% to reinvest in new investments, and 20% into my tax reserve account.
That sounds like an amazing set up. And your dividends are likely to be far more stable than capital growth. Plus you've got that 30% reinvest buffer if your companies did cut their dividends.I keep roughly 2 years of expenses in my living expense account, some of this I store in my everyday account, some in a mortgage offset account, and the rest in 3year rate setter loans that pay principle and interest into my everyday account weekly.
Any capital gains I make are reinvested, I never spend capital.
Sounds like you could go on a holiday for a year, and still have everything automatically paid in the background. You can't ask for better than that!I also own a couple of investment properties, these simply build equity by using rent to pay off their loans, assisted by the cash I store in offset.
The investment property also covers the cost of my primary residence.
Agreed. Both that his figures are optimistic, and that investing rather than car payments are definitely the way to go.Check out this “free cars for life plan”.
I know his estimated return is a bit far fetched, but it is definitely a better way to manage your car payments.
That's very impressive. And you don't have additional income from a job? I have read your amazing backstory with a certain honey company, so I suspect you're self-sufficient, but I'm not 100% sure.
Do you target high yield stocks deliberately, as would a dividend investor, as in never buy a company that pays <5% (or insert figure here) dividend yield? And what is your average dividend yield across your portfolio?
The current market dividend yield is 4.1%, so something like 5%+ is very achievable, if you targeted dividend stocks. The advantage with that over the "4% rule", is you only need capital of 20 times your desired earnings, rather than 25 times, which is a significant difference.
That sounds like an amazing set up. And your dividends are likely to be far more stable than capital growth. Plus you've got that 30% reinvest buffer if your companies did cut their dividends.
Sounds like you could go on a holiday for a year, and still have everything automatically paid in the background. You can't ask for better than that!
I've drawn the line at direct real estate for me, personally. I think of the bad tenants, the property damage they might leave behind, and the lazy property agent who doesn't bother chasing things up, type stories I've heard. I do like REITs though. I own some of those. And they're "virtual" and hassle free, just like shares
So to put that into perspective, what is your current portfolio yield, as in last financial year's dividends / current value of those shares?For example based on my entry price into fmg (after options premiums), I have earned a dividend yield of 40% or so this year
Not bad at all!So yeah, So for a self taught kid I haven’t set myself up to badly, so far so good.
So to put that into perspective, what is your current portfolio yield, as in last financial year's dividends / current value of those shares?
Not bad at all!
Once "retired", we'll take 5% of the total portfolio out each year for expenses. That's 5% of the fluctuating, total balance. This means if the market crashes 50%, you still take out only 5%, but of course, in dollar terms that's only half as much as you're taking out if the market hadn't crashed. So it has an inbuilt safety into it where you're taking out fewer dollars in a bad market, and more in a good market. In a sense, it's a version of reverse dollar cost averaging.
You're welcome! I believe the 5% balance drawdown works out to be somewhat equivalent to the 4% rule, which works on a fixed sum that increases with inflation. If so, that's only 20x earnings you'll need rather than the 25x for the 4% rule. And if you do grow your portfolio over time, your 5% gives you automatic pay raises. As the 4% is based on your balance on the day you retire, goodness knows how that works if you outpace your drawdown needs.I like your thinking Zaxon, taking out a % as opposed to a $ amount does make sense especially during leaner years for the reasons you mentioned.
thank you for that insight.
It could, but it doesn't have to. The market averages a return of 10%. This is capital gains + dividends. If your percentage drawdown + inflation is less than 10% then averaged out over time, your portfolio will grow. That's why a figure like a 5% drawdown works. But if your drawdown was 15%, sure, you'll eat through your money in no time.But if you are drawing down a fixed percentage of your capital, doesn’t that mean that the total amount you get each year decreases as your capital decreases?
I do like the 4% though mate. It does give you that extra buffer of protection when it comes to prolonging the life of your nest egg. It also means you are unlikely to outlive your savings if the market returns are rotten.You're welcome! I believe the 5% balance drawdown works out to be somewhat equivalent to the 4% rule, which works on a fixed sum that increases with inflation. If so, that's only 20x earnings you'll need rather than the 25x for the 4% rule. And if you do grow your portfolio over time, your 5% gives you automatic pay raises. As the 4% is based on your balance on the day you retire, goodness knows how that works if you outpace your drawdown needs.
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