Passive sell vs HYP income

[Dod101]

Ive just noticed the subtlety here, you only sell once per year??

Do you choose a fixed date, try and time the market, or something else?

I ask as over the last couple of months VWRL has fluctuated massivley, losing 10% between early Jan and early March, then recovering in a 3 week period. Additionally the cash you withdraw will (probably, on average) gain more spending 6 months more in equities.

As I'm with ii I get a free trade each month, so that is the route I intend to follow.

Paul

And that of course is one of the flaws in the argument of those converting capital to income by selling. When do you sell? Furthermore many of them will have some dividends accumulating in the course of any year. What do they do with them? If they leave them to accumulate, they are out of the market (and are thus partly living off their dividends anyway) If on the other hand they reinvest the dividends, they could be buying one month and selling the next.

The problem with those theoreticians is that they are just that. If you are dependent on investments and nothing else to live off then you have to be very practical and throw the theory book out of the window and discover what actually works.

Dod

And the same problems exist when the Directors of the company are the ones deciding how much "income" you get, and when.

You are still faced with the potential situation of getting too much, or too little, or at the wrong time, and then having to decide what to do about it. For many that are in the accumulating phase of investing you need to consider dividends paid as cash and being, as you describe, "out of the market". No doubt it could be annoying when any surplus income arises when the markets are at all time highs, and some may feel angst about market timing issues associated with that reinvestment.

What you seem to be missing when you criticise "theoreticians" is that some are actually practicing such. It isn't just theory. Furthermore those who rely solely on the decisions of companies and their directors are just as exposed as those that choose to take control themselves. Arguably more so.

It isn't for everyone. There isn't a fanatical crusade to convert "non-believers" to do something they don't do, or are uncomfortable doing. But many seem content to criticise others, and push falsehoods, yet find it uncomfortable when these are challenged.

I am not in the least uncomfortable when challenged and am not trying to prove anything.

Fine.

So why use sentences such as "And that of course is one of the flaws in the argument of those converting capital to income by selling."?

Simply say, as others do and believe should be done, that it is "better" or preferable to do it the way you choose to, for you. For others it might be different. and even for those who don't invest, who might be described as "theoreticians" don't be so dismissive of well researched, and long taught, finance theory.

Exactly what it is, 'finance theory'. I live in the hard practical world and can be dismissive of theory if I want, thank you.

Dod

[Lootman]

Ok, I accept I may have jumped the gun in this thread. Let's see if someone does try to make the case that the dividend route is financially superior to selling accumulation shares.

One thing that occurs to me is that selling shares incurs a cost, while receiving dividends is essentially cost free. Not only is there brokerage to pay, there is also the spread between buying and selling shares. If you pay £10 to sell a block of shares, then if you want £1,000 that is a 1% deduction. If you want to do it in bigger chunks, then eventually you run into the PTM levy which is a minor increase. If your broker charges a percentage fee, then the cost will be higher as the amount increases.

The selling route also runs the inherent risk in market fluctuation. You may sell more of the Goose that lays your Golden Dividends than you wanted to.

Yes, selling incurs costs but then dividends create a tax event, compared to instead allowing capital values to roll-up. Dividends above a certain level are taxed at a higher rate than realised capital gains.

Also selling allows one to utilise one's annual CGT-free allowance, which would otherwise go to waste if you have a strict "never sell" policy.

If everything is within an ISA and taxes don't matter, then it is a fairer comparison. But if like me you have a fair amount of taxable holdings, then it makes more sense in tax terms to favour selling a certain amount annually, at least up to the amount of the annual CGT-free allowance, and perhaps also up to the point where the 10% CGT rate ends.

[DrFfybes]

Personally after have had some years of fun trying to get a quart out of a pint pot I just settled for one global index tracker fund -for bonds and equities- and just sold some units once a year to top up the living expenses cash fund
xxd09

Ive just noticed the subtlety here, you only sell once per year??

Do you choose a fixed date, try and time the market, or something else?

Paul

And that of course is one of the flaws in the argument of those converting capital to income by selling. When do you sell? Furthermore many of them will have some dividends accumulating in the course of any year. What do they do with them? If they leave them to accumulate, they are out of the market (and are thus partly living off their dividends anyway) If on the other hand they reinvest the dividends, they could be buying one month and selling the next.
Dod

The answer is "sell when it suits". For me, if it is divi month I won't need to sell anything, the Fund Manager decides for me. If the market is down, I might not sell and use my cash reserve for a month then double dip a month after if needed. This is why xxd09's apparent 'once per year' surprised me, but perhaps it works for him for tax purposes. One of my pots is being taken at 4%, another at 5%, doing the latter on divis only restricts the choices, and from my limited looking at HY funds, the capital return is often compromised long term. IIRC for total return (which is what I'm interested in) VWRL has trounced CTY over the last decade, and I'm pretty sue ATST has as well, despite (or perhaps because of) its lower yield. Don't get me wrong, I like Dividend income, but not at the expense of TR.

Paul

[Dod101]

Ok, I accept I may have jumped the gun in this thread. Let's see if someone does try to make the case that the dividend route is financially superior to selling accumulation shares.

One thing that occurs to me is that selling shares incurs a cost, while receiving dividends is essentially cost free. Not only is there brokerage to pay, there is also the spread between buying and selling shares. If you pay £10 to sell a block of shares, then if you want £1,000 that is a 1% deduction. If you want to do it in bigger chunks, then eventually you run into the PTM levy which is a minor increase. If your broker charges a percentage fee, then the cost will be higher as the amount increases.

The selling route also runs the inherent risk in market fluctuation. You may sell more of the Goose that lays your Golden Dividends than you wanted to.

Yes, selling incurs costs but then dividends create a tax event, compared to instead allowing capital values to roll-up. Dividends above a certain level are taxed at a higher rate than realised capital gains.

Also selling allows one to utilise one's annual CGT-free allowance, which would otherwise go to waste if you have a strict "never sell" policy.

If everything is within an ISA and taxes don't matter, then it is a fairer comparison. But if like me you have a fair amount of taxable holdings, then it makes more sense in tax terms to favour selling a certain amount annually, at least up to the amount of the annual CGT-free allowance, and perhaps also up to the point where the 10% CGT rate ends.

I now have only a very few shares unsheltered although they still generate well over the rather mean tax free allowance, but on the whole, except if as I am now doing I am putting shares into an ISA, I can ignore tax.

Dod

[Dod101]

Personally after have had some years of fun trying to get a quart out of a pint pot I just settled for one global index tracker fund -for bonds and equities- and just sold some units once a year to top up the living expenses cash fund
xxd09

Ive just noticed the subtlety here, you only sell once per year??

Do you choose a fixed date, try and time the market, or something else?

Paul

And that of course is one of the flaws in the argument of those converting capital to income by selling. When do you sell? Furthermore many of them will have some dividends accumulating in the course of any year. What do they do with them? If they leave them to accumulate, they are out of the market (and are thus partly living off their dividends anyway) If on the other hand they reinvest the dividends, they could be buying one month and selling the next.
Dod

The answer is "sell when it suits". For me, if it is divi month I won't need to sell anything, the Fund Manager decides for me. If the market is down, I might not sell and use my cash reserve for a month then double dip a month after if needed. This is why xxd09's apparent 'once per year' surprised me, but perhaps it works for him for tax purposes. One of my pots is being taken at 4%, another at 5%, doing the latter on divis only restricts the choices, and from my limited looking at HY funds, the capital return is often compromised long term. IIRC for total return (which is what I'm interested in) VWRL has trounced CTY over the last decade, and I'm pretty sue ATST has as well, despite (or perhaps because of) its lower yield. Don't get me wrong, I like Dividend income, but not at the expense of TR.

Paul

I agree with you and feel that growth as well as income is essential. I am not and never have been a HYPer but will not get into another argument. Interested in your mentioning Alliance because every time I mention it I keep being put down, but it has had quite a good outcome since the change of their investment management arrangements a few years ago. They have of course just made a step change to their dividend and when asked I told them that I was totally indifferent to it, partly for the reason you cite.

Dod

[genou]

Just to chuck another pebble in the pond. Unless you intend to die with your capital untouched, at some point you are going to have to sell down your holdings. At which point both the "dividends versus TR" and "when do you sell" discussions become moot. You sell when you need the money.

I appreciate that TLF has a demographic of its own, but most retirees will intend to consume capital. And I suspect for many that consumption will start not long after retirement.

[Dod101]

Just to chuck another pebble in the pond. Unless you intend to die with your capital untouched, at some point you are going to have to sell down your holdings. At which point both the "dividends versus TR" and "when do you sell" discussions become moot. You sell when you need the money.

I appreciate that TLF has a demographic of its own, but most retirees will intend to consume capital. And I suspect for many that consumption will start not long after retirement.

I am a retiree and have seldom 'consumed any capital in the last 30 years or so of retirement. I think maybe a couple of times. Mind I have a good supply of cash equivalents. I see no reason for me to sell down my holdings. My Attorney may for home care fees.

Dod

[genou]

Just to chuck another pebble in the pond. Unless you intend to die with your capital untouched, at some point you are going to have to sell down your holdings. At which point both the "dividends versus TR" and "when do you sell" discussions become moot. You sell when you need the money.

I appreciate that TLF has a demographic of its own, but most retirees will intend to consume capital. And I suspect for many that consumption will start not long after retirement.

I am a retiree and have seldom 'consumed any capital in the last 30 years or so of retirement. I think maybe a couple of times. Mind I have a good supply of cash equivalents. I see no reason for me to sell down my holdings. My Attorney may for home care fees.

Dod

Go here https://ifs.org.uk/tools_and_resources/ ... you_fit_in and

https://www.varbes.com/your-money/net-w ... culator-uk

and see what answers you get. Not that you need to tell us, just to give you a flavour of what is required to spend thirty years of no capital spend in retirement. I take it that your retirement is comfortable. Let's assume you retired at 50 and are now 80. So ~30 active years to fund 30 retired, with no capital spend. You are seriously an outlier - congratulations.

[Dod101]

Just to chuck another pebble in the pond. Unless you intend to die with your capital untouched, at some point you are going to have to sell down your holdings. At which point both the "dividends versus TR" and "when do you sell" discussions become moot. You sell when you need the money.

I appreciate that TLF has a demographic of its own, but most retirees will intend to consume capital. And I suspect for many that consumption will start not long after retirement.

I am a retiree and have seldom 'consumed any capital in the last 30 years or so of retirement. I think maybe a couple of times. Mind I have a good supply of cash equivalents. I see no reason for me to sell down my holdings. My Attorney may for home care fees.

Dod

Go here https://ifs.org.uk/tools_and_resources/ ... you_fit_in and

https://www.varbes.com/your-money/net-w ... culator-uk

and see what answers you get. Not that you need to tell us, just to give you a flavour of what is required to spend thirty years of no capital spend in retirement. I take it that your retirement is comfortable. Let's assume you retired at 50 and are now 80. So ~30 active years to fund 30 retired, with no capital spend. You are seriously an outlier - congratulations.

B***** *ell. You may be right! If you knew my story......... I have always been a conservative investor and I suspect that any success has been by time in the market not investing genius. My retirement is very comfortable I may say and I have never particularly scrimped or saved in retirement. There is more to life though than monetary comfort. Thanks though for that.

Dod

[Hariseldon58]

Living off natural yield is superficially very attractive, I started off down this route but changed my mind, there were two major reasons.

One of the disadvantages of living off natural yield is that your investments are largely concentrated in a subset of the investable universe, you need shares/funds that offer a reasonable level of dividends, you ignore many good opportunities eg Berkshire Hathaway.

Secondly you do not have a separate structured decumulation strategy, its inherently tied to your investment policy.

I have no desire to argue one approach is better or worse but these were the reasons I changed my policy.

[Dod101]

Living off natural yield is superficially very attractive, I started off down this route but changed my mind, there were two major reasons.

One of the disadvantages of living off natural yield is that your investments are largely concentrated in a subset of the investable universe, you need shares/funds that offer a reasonable level of dividends, you ignore many good opportunities eg Berkshire Hathaway.

Secondly you do not have a separate structured decumulation strategy, its inherently tied to your investment policy.

I have no desire to argue one approach is better or worse but these were the reasons I changed my policy.

Thanks for these balanced comments. I was not arguing one or other approach had a better financial outcome either but others drew that in as though it was the over arching reason for my approach.

For the last several years (10 years at least) I have become much more interested in total return, having pretty much secured the income that I need.
I have some growth shares which I tend just to leave although when for instance Scottish Mortgage had its recent spectacular run, I was harvesting gains to reinvest and i do that where possible. Capital gains nowadays are likely to be shared between my heirs and IHT so are not really a priority although I like to retain the real value of my estate of course.

Dod

[Hariseldon58]

Just to chuck another pebble in the pond. Unless you intend to die with your capital untouched, at some point you are going to have to sell down your holdings. At which point both the "dividends versus TR" and "when do you sell" discussions become moot. You sell when you need the money.

I appreciate that TLF has a demographic of its own, but most retirees will intend to consume capital. And I suspect for many that consumption will start not long after retirement.

I am a retiree and have seldom 'consumed any capital in the last 30 years or so of retirement. I think maybe a couple of times. Mind I have a good supply of cash equivalents. I see no reason for me to sell down my holdings. My Attorney may for home care fees.

Dod

Go here https://ifs.org.uk/tools_and_resources/ ... you_fit_in and

https://www.varbes.com/your-money/net-w ... culator-uk



and see what answers you get. Not that you need to tell us, just to give you a flavour of what is required to spend thirty years of no capital spend in retirement. I take it that your retirement is comfortable. Let's assume you retired at 50 and are now 80. So ~30 active years to fund 30 retired, with no capital spend. You are seriously an outlier - congratulations.

I am not so sure that not consuming capital over a 30 year retirement is an outlier but probably should be expected…

When you retire on drawdown there are three main parameters, your investment strategy, your decumulation policy and luck regarding your starting year.

Looking at tables with the expected 30 year outcome for a Bergen style retirement the Safe Withrawal Rate is the lowest amount where success is at very high probability, the failures are concentrated in just a few starting years and most outcomes leads to significant capital appreciation.

In Dod’s case he has articulated an investment and decumulation policy, he has clearly been successful in managing it but the third factor is just luck, how well the starting year works out.

It requires flexibility to manage difficult years.

My experience of early retiring at 49 is a work in progress, but after 15 years of a comfortable lifestyle my inflation adjusted capital is up 80%. So far so good but I have already experienced 40+% drops, the odds are favourable to retain the existing capital but who knows !

[hiriskpaul]

Ok, I accept I may have jumped the gun in this thread. Let's see if someone does try to make the case that the dividend route is financially superior to selling accumulation shares.

One thing that occurs to me is that selling shares incurs a cost, while receiving dividends is essentially cost free. Not only is there brokerage to pay, there is also the spread between buying and selling shares. If you pay £10 to sell a block of shares, then if you want £1,000 that is a 1% deduction. If you want to do it in bigger chunks, then eventually you run into the PTM levy which is a minor increase. If your broker charges a percentage fee, then the cost will be higher as the amount increases.

Yes, I agree that selling investments does come at a cost and said so previously. I hold some securities that at times have spreads in excess of 2% and cannot be traded online, so requiring higher telephone dealer commissions. Trading frictions can definitely be painful. However, the OP is comparing taking dividends with selling index funds and the trading costs on index funds is usually very small. The spread can even be zero, depending on the cashflows in and out of the fund on the day.

The selling route also runs the inherent risk in market fluctuation. You may sell more of the Goose that lays your Golden Dividends than you wanted to.

True, the selling route does run the risk of market fluctuation, but so does taking dividends.

For example, consider a share that does not pay dividends, such as Berkshire Hathaway or an accumulating fund of some sort. Start off with £100k of shares, market drops 50%, so now only £50k. £2k of shares is sold for income, leaving £48k of shares. The market subsequently reverts and the shares double in price, so the remaining shares are now worth £96k. By selling £2k worth of shares at the bottom, the investor is £4k worse off than if they had not sold. That's volatility risk and it can be detrimental to long term returns.

What about the dividend case? Start off with £100k of shares, market drops 50%, so now only £50k. The shares pay out £2k of dividends and consequently the value of the shares drops to £48k. As before, the market subsequently reverts and the shares double in price, so the shares are now worth £96k. So, taking £2k of dividends when the market was down leaves the investor £4k worse off than would have been the case if the investor had reinvested. ie all else being equal, the investor experiences exactly the same volatility risk with dividend paying shares as with non-dividend paying shares. Volatility risk cannot be avoided by loading up on dividend paying shares.

[hiriskpaul]

Just to chuck another pebble in the pond. Unless you intend to die with your capital untouched, at some point you are going to have to sell down your holdings. At which point both the "dividends versus TR" and "when do you sell" discussions become moot. You sell when you need the money.

I appreciate that TLF has a demographic of its own, but most retirees will intend to consume capital. And I suspect for many that consumption will start not long after retirement.

I am a retiree and have seldom 'consumed any capital in the last 30 years or so of retirement. I think maybe a couple of times. Mind I have a good supply of cash equivalents. I see no reason for me to sell down my holdings. My Attorney may for home care fees.

Dod

Go here https://ifs.org.uk/tools_and_resources/ ... you_fit_in and

https://www.varbes.com/your-money/net-w ... culator-uk



and see what answers you get. Not that you need to tell us, just to give you a flavour of what is required to spend thirty years of no capital spend in retirement. I take it that your retirement is comfortable. Let's assume you retired at 50 and are now 80. So ~30 active years to fund 30 retired, with no capital spend. You are seriously an outlier - congratulations.

I am not so sure that not consuming capital over a 30 year retirement is an outlier but probably should be expected…

When you retire on drawdown there are three main parameters, your investment strategy, your decumulation policy and luck regarding your starting year.

Looking at tables with the expected 30 year outcome for a Bergen style retirement the Safe Withrawal Rate is the lowest amount where success is at very high probability, the failures are concentrated in just a few starting years and most outcomes leads to significant capital appreciation.

In Dod’s case he has articulated an investment and decumulation policy, he has clearly been successful in managing it but the third factor is just luck, how well the starting year works out.

It requires flexibility to manage difficult years.

My experience of early retiring at 49 is a work in progress, but after 15 years of a comfortable lifestyle my inflation adjusted capital is up 80%. So far so good but I have already experienced 40+% drops, the odds are favourable to retain the existing capital but who knows !

To say that someone is not consuming capital by only spending dividends is just financial mumbo jumbo. Had those dividends been reinvested instead of spent there would be more capital!

Completely agree about safe withdrawal rates by the way. In the majority of historical starting points taking say 4% results in substantial capital at the end. The outliers are the cases when money runs out, not when there is a surplus. This is the big dilemma in retirement investing - the higher the SWR, the bigger the risk of running out of money and you are not going to know what the maximum SWR could have been until it is too late.

[hiriskpaul]

To illustrate the SWR success, look at the 100+ year backtest table here: https://earlyretirementnow.com/2016/12/ ... t-1-intro/

In 89% of cases the money did not run out when drawing down a 100% equities portfolio at a 4% SWR for 60 years. That is, only 11% of starting points resulted in failure.

[Itsallaguess]

I think a huge driver for long-term investment success is simply finding a 'good enough' approach that closely suits an individuals investment personality in such a matched way that they are able to continue and stick with it through thick and thin, using simple and repeatable processes, and allow time in the market to do the heavy lifting over many, many years, with the minimum of fuss...

Someone trying to adopt a long-term investment strategy that's fundamentally at odds with their investment-personality is less likely to succeed in that quest, in my view.

As such, much of the discussions around 'alternative technical outcomes' with these types of threads will always have to assume that any adoption of an alternative approach can be taken on by an individual investor in a way that still delivers on the same 'ease and length of adoption' of the previous strategy.

That's never a given, and in my view, such issues are rarely given the weight of consideration that they deserve in these types of discussions...

Cheers,

Itsallaguess

[Dod101]

IAAG has I think hit the nail on the head.

As for a SWR, well, taking the natural yield, that is the dividends as they arise, has been very safe for me. There is no need to look any further and indulge in all the academic theories that some like to follow.

Dod

[DrFfybes]

As for a SWR, well, taking the natural yield, that is the dividends as they arise, has been very safe for me. There is no need to look any further and indulge in all the academic theories that some like to follow.

Dod

Well, that's that then. The secret to retierement investing solved in 2 short sentences. Discussion over

Ah, you caveated it with "for me", you mean it might not work for everyone?

FWIW Dod's was the approach I took with mum's stuff, worked very well for her for a 12 year period, although the cash reserves went pretty quick once she needed more care then went in a care home (a sudden spike in expenditure for her final year or so). Had she lasted longer the flat sale would have covered the fnex 3 years, but then a deculmulation strategy would have had to kick in. Had I gone 'TR and sell down' in 2009 there would have been a lot more left at the end.

Paul

[Dod101]

As for a SWR, well, taking the natural yield, that is the dividends as they arise, has been very safe for me. There is no need to look any further and indulge in all the academic theories that some like to follow.

Dod

Well, that's that then. The secret to retierement investing solved in 2 short sentences. Discussion over

Ah, you caveated it with "for me", you mean it might not work for everyone?

FWIW Dod's was the approach I took with mum's stuff, worked very well for her for a 12 year period, although the cash reserves went pretty quick once she needed more care then went in a care home (a sudden spike in expenditure for her final year or so). Had she lasted longer the flat sale would have covered the fnex 3 years, but then a deculmulation strategy would have had to kick in. Had I gone 'TR and sell down' in 2009 there would have been a lot more left at the end.

Paul

I can't speak for others. I only know that that is broadly the way I have lived for the past 28 years or so. Nominally anyway, my capital has grown by at least 150% in that time and I have occasionally extracted capital from my SIPP for housing costs, once to assist with the purchase and renovations to my current house16 years ago and possibly other times as well.

Dod

[hiriskpaul]

IAAG has I think hit the nail on the head.

As for a SWR, well, taking the natural yield, that is the dividends as they arise, has been very safe for me. There is no need to look any further and indulge in all the academic theories that some like to follow.

Dod

What "Academic theories" are you on about? I just cannot see in the context of this discussion what you are referring to.

I don't get your opposition to academic theories any way. If you had to have surgery would you really prefer a surgeon who got by on non-academic theory? Just hacked bits off he didn't like the look of, but it's all fine because by luck or otherwise he has ended up with a low fatality rate?