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Old 08-25-2016, 03:46 PM   #41
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Since we are discussing the "never touch the principal" concept, could someone please define what constitutes "the principal"? I've never been clear on this. At what point in time is "the principal" defined?

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Old 08-25-2016, 03:46 PM   #42
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'Principal' to me is cashing out one or more of the securities we hold.

We also have been living purely off dividends, haven't ever touched principal in the five years I've been ER'd. Haven't yet taken my pension and SS yet, either. In fact we only use about 30% of the divs/cap gains we generate, the rest goes right back in thru auto re-invest. We have also kept a mid six figure cash balance (@1%) to be available for various things, ie perhaps an additional home purchase, or rental property.
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Old 08-25-2016, 04:41 PM   #43
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Since we are discussing the "never touch the principal" concept, could someone please define what constitutes "the principal"? I've never been clear on this. At what point in time is "the principal" defined?

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I suspect folks here would not share a single definition. Classically your principal is the original amount invested. So spending net gains does not invade it.

Objectively, your "return" has both dividends and cap gains as components. I get wanting to "live off the dividends" (and I saw the comments about seeking to as a game ). However, as a total return investor, I would not expect my portfolio to "yield" 3-4%+ overall in dividends and interest. Nor would I seek it to.

To the point about dividend growth investing being in a mini-bubble, there is certainly evidence to that effect. Very crowded strategy.

Good Investing!
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Old 08-25-2016, 04:55 PM   #44
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'Principal' to me is cashing out one or more of the securities we hold.

We also have been living purely off dividends, haven't ever touched principal in the five years I've been ER'd. Haven't yet taken my pension and SS yet, either. In fact we only use about 30% of the divs/cap gains we generate, the rest goes right back in thru auto re-invest. We have also kept a mid six figure cash balance (@1%) to be available for various things, ie perhaps an additional home purchase, or rental property.
If you're looking for heirs, I'll volunteer.
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Old 08-25-2016, 05:00 PM   #45
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'Principal' to me is cashing out one or more of the securities we hold.
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I suspect folks here would not share a single definition.

Classically your principal is the original amount invested. So spending net gains does not invade it.
Investopedia defines it thus:

Original Investment
Principal is also used to refer to the original amount of investment, separate from any earnings accrued. Assume you deposit $5,000 into an interest-bearing savings account, for example. At the end of 10 years, your account balance has grown to $6,500. The $5,000 you initially deposited is your principal, while the remaining $1,500 is attributed to earnings.


Of course their example doesn't help clarify the case of owning stocks or mutual funds.

I've often heard people say something along the lines of "I live of the dividends and never touch the principal" which points toward never selling the underlaying shares of stock.

The real question in my mind is how view the capital gains. Maintaining the number of shares won't necessarily work if there are splits. And yes, buy backs complicate this.

If it's just a dollar amount that seems wrong too. - I've actually paid for my DS's entire college education from $3,000 of AAPL stock I bought in the 90's. BUT SINCE I HAVE MORE THAN $3,000 LEFT IN THAT ACCOUNT, "I NEVER TOUCHED THE PRINCIPAL!" Nope.

So my take is that it's a pretty plastic term that can be used to support a wide variety of behaviors. i.e. not particularly useful.
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Old 08-25-2016, 05:05 PM   #46
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For me, the principal is the big blob of money which bought shares of the various bond and stock funds which generate monthly or quarterly income used to cover my expenses while providing a surplus or cushion to cover me for small, unforeseen expenses. If I sell principal, I am selling shares which are used to generate that income.


That being said, I have a slush fund containing shares of a bond mutual fund whose relatively small monthly dividend income is not used to cover my expenses. That's my "Tier 2" emergency fund I tap into once in a while to cover larger, unforeseen expenses the regular monthly surplus can't cover.
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Old 08-25-2016, 05:38 PM   #47
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Although it isn't really principal, I always consider my retirement day savings as the amount I want to preserve.
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Old 08-25-2016, 06:49 PM   #48
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Principal is not just an arbitrary dollar amount or number of shares you own at some starting point in time. Capital gains become part of your principal. That's how wealth is built. You own a small piece of a business. You spend some or all the income the business produces. Your capital gains go back into the business (or another business) to produce more income.

Businesses allocate capital. Good businesses allocate capital relatively efficiently. When they have met their capital needs to preserve and grow the business, the remaining cash is either retained for future spending or distributed as income.

As a shareholder, I take on business risk to generate income to eat and have a roof over my head. I can take on a lot of risk in hopes I own the next Google that I can sell parts of at some future date for a big pile of money. Or I can invest and reinvest in a business that's likely to produce the income I need while growing to produce more income in the future.
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Old 08-25-2016, 06:55 PM   #49
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"Investopedia defines it thus:

Original Investment
Principal is also used to refer to the original amount of investment, separate from any earnings accrued. Assume you deposit $5,000 into an interest-bearing savings account, for example. At the end of 10 years, your account balance has grown to $6,500. The $5,000 you initially deposited is your principal, while the remaining $1,500 is attributed to earnings."

And if you buy a $6,500 CD at that point, that's your new principal.
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Old 08-25-2016, 07:09 PM   #50
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As a shareholder, I take on business risk to generate income to eat and have a roof over my head. I can take on a lot of risk in hopes I own the next Google that I can sell parts of at some future date for a big pile of money. Or I can invest and reinvest in a business that's likely to produce the income I need while growing to produce more income in the future.
Yes. The market rewards the first business type (growth stock) at some times, and rewards the second type (typically a value stock) at other times. If a total return investor owns a wide variety of both types and sells each year to support income needs while being careful to not deplete the underlying shares, it could be just as responsible, sustainable, and more stable than constructing a narrower portfolio to optimize dividend returns in order to support spending.
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Old 08-25-2016, 07:31 PM   #51
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I own mutual funds, including broad market funds, that include growth stocks. I just don't plan on selling those to produce income. I might sell and reallocate the capital at some point, but I'm not going to sell without putting the principal back to work somewhere else.

I operate a "business" with a decent ROIC and favorable taxation - rental properties. I have sold equities to buy real estate when it made sense to make that trade. I have sold houses when the rates of return dropped so low that it made more sense to sell the property and pay off other high rate mortgage debt. The frictional losses were made up for by the superior returns in both cases. I do not sell houses or stocks to eat or pay the bills.

I am forced to liquidate an inherited IRA. This galls me no end. Fortunately, I am able to pay more off in mortgage principal and invest more in paper assets every month than the government forces me to take out.
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Old 08-25-2016, 07:48 PM   #52
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"Investopedia defines it thus:

Original Investment
Principal is also used to refer to the original amount of investment, separate from any earnings accrued. Assume you deposit $5,000 into an interest-bearing savings account, for example. At the end of 10 years, your account balance has grown to $6,500. The $5,000 you initially deposited is your principal, while the remaining $1,500 is attributed to earnings."

And if you buy a $6,500 CD at that point, that's your new principal.

The only flaw in this is that you have the definition of "Original" investment principal...


When you have a trust, cap gains is usually allocated to a principal account... there can be a separate beneficiary for the income and for the principal... so the accounting for these items are critical...
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Old 08-25-2016, 08:37 PM   #53
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OK, it's your new "original" principal for the next investment period. If you spend $500 and buy a $6,000 CD your new principal is $6,000. Any reinvestment becomes principal.

Trusts have a specific purpose and the accounting follows that.
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Old 08-25-2016, 09:34 PM   #54
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My view of mutual fund cap gain distributions: Since they are taxable, and I can choose where to invest (that is, I do not have to reinvest), I consider them as increase in my cash - to be allocated according to my needs. Some may be reinvested.

As for me, I am trying to increase my cash to cover 2-3 years net expenses (target is $250K). I am ER starting last year, and am closely focusing on my cash position. I see the market as frothy right now, so time to take some cream off the top. A robust cash position is critical to weather the upcoming downturn.

I agree you can think of these cap gains as part of your principal, as they decrease the NAV by the same amount - every December. But dividends also behave this way somewhat, with a usual (small) dip when a stock goes ex-dividend every quarter.
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Old 08-25-2016, 09:43 PM   #55
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For the purpose of this discussion, I'd define principal as the amount of assets one has/had at FIRE.
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Old 08-25-2016, 10:05 PM   #56
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...If it's just a dollar amount that seems wrong too. - I've actually paid for my DS's entire college education from $3,000 of AAPL stock I bought in the 90's. BUT SINCE I HAVE MORE THAN $3,000 LEFT IN THAT ACCOUNT, "I NEVER TOUCHED THE PRINCIPAL!" Nope.

So my take is that it's a pretty plastic term that can be used to support a wide variety of behaviors. i.e. not particularly useful.
No, I think what you described is exactly right... principal is what you put in... to the extent that the value exceeds what you put in then your principal is still intact... any value over principal (original investment) is either income reinvested or unrealized appreciation.

While it is a little easier to see in a bank account or fixed income investment, the principle is the same. (pun intended)

And it become really hard to track as you trade from one stock or fund to another.
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Old 08-25-2016, 10:29 PM   #57
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I find this discussion a bit silly. In my mind, money is money. Entirely fungible. $5 spent from dividends buys the same cup of coffee that $5 from capital gains buys. The only real difference is what it costs you to get the $5 (how it is taxed/sales charges). If it comes from your pre-tax retirement accounts, it is ENTIRELY a distinction without a difference. If you receive a distribution of CG, interest, or Div in a post tax account, the tax obligation is already set and what is left is just money in your account. The "Benjamin'" have no idea where they came from.

The discourse in this thread, in my mind, really translates into a discussion of several variable withdrawal rules (I'll spend only dividends or dividends + 1/2 cap gains....) and a hidden asset allocation decision ( If you have chosen to target dividend paying stocks). These should be eminently evaluable in back testing models and the approach is common enough that I an certain someone has already examined it well.
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Old 08-26-2016, 12:31 AM   #58
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What I always have trouble understanding is that people save for retirement but then fear using principal.... that is what you saved the money for... to spend it in your retirement! IMO if you can live on just income then you probably worked too long and will have wealthy heirs.

+1

This falls into the "How long will I live" category. If I knew the date of mine and DW death, I'd know exactly how much we'd need to save and not worry about over saving.


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Old 08-26-2016, 06:51 AM   #59
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I find this discussion a bit silly. In my mind, money is money. Entirely fungible. $5 spent from dividends buys the same cup of coffee that $5 from capital gains buys. The only real difference is what it costs you to get the $5 (how it is taxed/sales charges). If it comes from your pre-tax retirement accounts, it is ENTIRELY a distinction without a difference. If you receive a distribution of CG, interest, or Div in a post tax account, the tax obligation is already set and what is left is just money in your account. The "Benjamin'" have no idea where they came from.

The discourse in this thread, in my mind, really translates into a discussion of several variable withdrawal rules (I'll spend only dividends or dividends + 1/2 cap gains....) and a hidden asset allocation decision ( If you have chosen to target dividend paying stocks). These should be eminently evaluable in back testing models and the approach is common enough that I an certain someone has already examined it well.
I tend to agree with you. You or I could be "living off the dividends" while capital value has declined below the original investment, reducing principal. What is important, I think is that you have a withdrawal rate and that rate is "safe" in the context of history and your plans.

What is also meaningful is the amount if cushion you have between your SWR and what you are actually drawing.

That's not to say that you or I might not receive psychological benefits from "living off the dividends".

Good Investing!
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Old 08-26-2016, 06:54 AM   #60
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I tend to agree with you. You or I could be "living off the dividends" while capital value has declined below the original investment, reducing principal. What is important, I think is that you have a withdrawal rate and that rate is "safe" in the context of history and your plans.

What is also meaningful is the amount if cushion you have between your SWR and what you are actually drawing.

That's not to say that you or I might not receive psychological benefits from "living off the dividends".

Good Investing!
Yea but living of the dividends only means safest SWR that there is.

Spending Capital gains means spending principal that generates dividends. It is fine to spend principal but certainly not as safe as living of off dividends only.
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