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dual portfolio strategy
Old 10-24-2003, 09:48 AM   #1
 
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dual portfolio strategy

I know this strategy has been discussed on other forums, but I'd really like the thinking of the posters here.

In January, when my personal fiscal year begins, I need to decide whether to take a "total return" approach to my portfolio or go with "yield only."

Let me elaborate. My current taxable portfolio is allocated about 55% equity funds and 45% reits and fixed income funds. ( Deferred accounts are not part of this calculation.)

My needed cash withdrawal, to supplement a fixed pension, is about $ 30,000.

A withdrawal of about 3.40% of the current total portfolio value, with all distributions reinvested, would give me the needed amount.

On the other hand, just the dividends from the reits and a high yield fund would realize about $33,000 and all equity fund assets would remain untouched.

Periodically, if necessary, I could transfer equity assets to the income side.

What do y'all think? Which alternative would you choose?

Thanks to all in advance for your input.

Rich
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Re: dual portfolio strategy
Old 10-24-2003, 12:24 PM   #2
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Re: dual portfolio strategy

Rich,

What kills retirement portfolios is heavy selling when prices are depressed. You are not in that kind of situation.

What you need to consider are the costs in selling and the asset allocations (or balance) of your portfolio. (Taxes are part of these considerations.)

It is generally a good idea to re-balance a portfolio when imbalances start to become large. Re-balancing automatically enforces a sell high, buy low discipline. It can enhance your portfolio's return by about 1%. But beware. Most studies that include re-balancing ignore the associated costs. Even FIRECalc re-balances at zero cost.

There should be some growth assets in a retirement portfolio. They are needed (eventually) to extend your portfolio's duration. But you already have them.

It is a good idea to look at volatile and non-volatile income streams separately. The key is having enough income from steady, reliable sources. Again, you want to avoid having to sell heavily when prices are low. It is OK to sell some assets (and receive a return of capital) slowly, especially when their prices are very high.

Have fun.

John R.
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Re: dual portfolio strategy
Old 10-24-2003, 01:23 PM   #3
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Re: dual portfolio strategy

Rich,

I'm not sure that you want to reinvest distributions in a taxable account. All distributions are going to be taxable (unless from muni bonds), whether or not you reinvest them. If you reinvest stock/fund distributions, you're going to have to sell shares of your funds to generate income. This can trigger more taxes on top of the taxes due on the fund distributions.

One strategy I've seen is to have all the distributions swept into some type of money market account. You pay the taxes on the distributions. Then you take from this what you need for living expenses (including taxes on the living expenses).

If the distributions are more than enough to meet your income needs, you simply reinvest the excess as you see fit. This makes rebalancing sooo much easier. You don't have to sell as many shares of funds (and risk triggering more taxes). If the distributions are not enough to meet your income needs, you'll have to sell some fund shares.

People have told me that having all the distributions swept into a money market is much easier for recordkeeping purposes. Come tax time, you have all the tax generating events (and the $$ amounts) on one record. Don't have to pour over numerous fund statements.

I think the two strategies you outline are actually the same thing. The first just reinvests all the distributions, and then sells shares equal to the amount of distributions you need. The second takes the distributions, spends what is necessary, and reinvests/rebalances with the rest. I think the second method is more tax-efficient.

Thoughts?

- Alec
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Re: dual portfolio strategy
Old 10-24-2003, 04:04 PM   #4
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Re: dual portfolio strategy

I'm leaning toward Alec - my 'hobby' portfolio is a mish mash of 40 Drip stocks - dividend stocks, utilities, telephone, oil, gas, food, drug, etc. Thinking of Vanguard brokerage and sweeping the dividends into money market - take out some for taxes and expenses - I have the paperwork - just haven't done it yet - a lot of work to close 40 accounts - 12 years worth of putzing - should have done more fishing.
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Re: dual portfolio strategy
Old 10-24-2003, 04:13 PM   #5
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Re: dual portfolio strategy

BTY - I treat the dividends as a COLA'd pension steam when running FIREcalc - and asset allocate the rest - mostly taxed deferred index funds roughly 50/50 stocks/bonds.

This was not by analysis but sort of accident because of the self rebalancing of the funds.
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