I don't disagree with any of that. But I still think it evens out over the long haul.
Can a non-herd-follower take advantage of the shorter term irrationality? Maybe, maybe not. I recall, and made notes to this effect, that the market was getting crazy during the tech boom of the 90's. But I would have got out around 1997. Eventually, I'd be right. But I just looked, and the div adjusted value never dropped low enough for me to get back in at/below my hypothetical exit point. I think it's a pretty tricky thing for me to do, and maybe trickier for the pros, so what choice do I have?
-ERD50
I am not saying that dividend stocks and/or income investing necessarily provide a higher withdrawal especially. Although prior to the last few years run up in dividend stocks, there was some evidence that they provided a better risk adjust return, because of the lower volatility. (Virtually all individual stocks in my portfolio have a Beta <1 and some of the MLP less than .5)
In the long run I don't think there is much financial difference between income investing and total return investing for retirement.
The difference is a psychological one and I'd argue that is quite important both in the 5 years before retirement and and first 5 or so year after.
It is similar to the pay of the mortgage debate. You have shown that you are marginally better off keeping a mortgage in retirement than paying it off. But plenty off people want to have the comfort of not having a mortgage. The difference financially is small one and sleeping better at night is better than worrying about the mortgage payment. Even if you and I may think money fungible why sweat it.
Imagine two 60 year old investor Total Return Tom and Income Irv pulled the plug this year and retired
.
After carefully reviewing the literature, evaluating the CAPE ratio and reading the ER board, Tom decide that he was going to withdraw 3.5% of his 75/25 portfolio (with most of the fixed income in a Pen Fed CD ladder) each year. Irv constructs a 75/25 portfolio that yields 3.5% (At the beginning of the 2013 the M* Dividend Builder portfolio was 3.54%)
At the end of 2013 both Tom and Irv portfolio are worth $1,250,000. Irv realized that he received $2,700 worth of dividend increases last year. So his 2014 spending will be $37,700. He sleeps well at night knowing that he isn't touching the principal and his dividend and interest income is more than keeping up with inflation.
Tom struggles with how much to take next year. Inflation is only running about 1.4% this year so adjusting for inflation his 2014 withdrawal should be $35,500. Tom realizes that if he retired at the end of 2013 a 3.5% withdrawal would $43,750. On the other hand Tom was a tad nervous with a 3.5% at Dec 2012 stock market levels at Dec 2013 he is really worried, that he is overspending.
So ERD how much would you recommend Tom spend in 2014?
To me the big benefit of dividend and income investing and tying my spending to income rather than portfolio value, is most years it eliminates the question.