How I Ignore Market Volitality

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at
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How I Ignore Market Volitality

Post by at » Fri Aug 05, 2011 3:29 am

The recent market turbulence is unnerving for many, especially for those near or into the withdrawal phase. However, I rest in peace (pun unintended) with the market and sleep soundly every night.

How do I do it? I buy dividends ETF and plan to retire drawing only the dividends and leaving the principal intact. Even though the markets might leap or plunge, the expected dividends I'm going to receive are roughly the same whether the markets are high or low. In actual fact, for a person in the accumulation phase of the cycle, I hope the markets will downright tank so that I can buy more dividends ETF.

I see my investments as buying dividends instead of buying capital. At 75% stocks with my house fully paid off, I'm happy with my progress and look forward to a dividends-based retirement.

Hector
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Re: How I Ignore Market Volitality

Post by Hector » Fri Aug 05, 2011 11:33 am

at wrote:The recent market turbulence is unnerving for many, especially for those near or into the withdrawal phase. However, I rest in peace (pun unintended) with the market and sleep soundly every night.

How do I do it? I buy dividends ETF and plan to retire drawing only the dividends and leaving the principal intact. Even though the markets might leap or plunge, the expected dividends I'm going to receive are roughly the same whether the markets are high or low. In actual fact, for a person in the accumulation phase of the cycle, I hope the markets will downright tank so that I can buy more dividends ETF.

I see my investments as buying dividends instead of buying capital. At 75% stocks with my house fully paid off, I'm happy with my progress and look forward to a dividends-based retirement.
good for you as far as you are okay with the risk of dividend being reduced or stopped at any time.

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Post by avalpert » Fri Aug 05, 2011 11:37 am

So you delude yourself into thinking that the value of your portfolio doesn't impact your drawdown rate and that dividends are risk-free.

Neat psychological trick if financially unsound - you would be in a much better situation if you could do this by investing in TIPS and living off the interest at least that will greatly reduce some of the income risk.

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Post by GammaPoint » Fri Aug 05, 2011 12:00 pm

I think that in most cases this will work for a retirement plan. Not necessarily because it's correct, but because it allows you (if you don't think about it too much) to take on more equity risk than you might otherwise be comfortable holding. Is there any reason to expect that if the market drops considerably that most dividends won't stop or be strongly reduced? Maybe you plan on saving enough such that this won't be a problem for you (which again, is similar to a TIPS-based strategy except the dividend stock strategy has much more upside potential -- although maybe not if you're just using dividends anyway).

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Post by at » Fri Aug 05, 2011 10:09 pm

Thanks for all your reply.

Yes, dividends are volatile, but no, I personally do not think this is an unsound strategy. While dividends do get reduced, they do not get stopped out of a sudden if the portfolio is well diversified. Furthermore, the historical data shows that when dividends get reduced, the reduction is gentle - much smaller than the reduction in stock prices.

http://www.multpl.com/s-p-500-dividend/

You can see from the hyperlink above that while the S&P500 dividend yield has been volatile, the greatest drawn down in dividend since 1950 is only around 25% and that's in real terms. I'm not sure about you guys, but personally, I feel that a reduction in retirement income of 25% is still bearable if you leave enough buffer in your savings. Perhaps some part-timing will cover up that shortfall.

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Post by madbrain » Fri Aug 05, 2011 10:16 pm

at wrote: You can see from the hyperlink above that while the S&P500 dividend yield has been volatile, the greatest drawn down in dividend since 1950 is only around 25% and that's in real terms. I'm not sure about you guys, but personally, I feel that a reduction in retirement income of 25% is still bearable if you leave enough buffer in your savings. Perhaps some part-timing will cover up that shortfall.
IMO, any retirement that requires going back to work, even part-time, is not retirement. It means the investment strategy has failed. One should be able to weather a temporary reduction of income by 25% by drawing into savings. But if it lasts for an extended period of time, it is a problem.
I don't think the dividend strategy is a bad one, but it's certainly no silver bullet. It may be OK for retirement accounts, but is not good for taxable accounts.

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Post by zinnia » Sat Aug 06, 2011 7:44 am

IMO this crisis is different...we're in deep trouble...I've never been a market timer, but I opted out of the market 2 weeks ago...cash is king...I'll pay the long term capital gains tax

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