Growth VS Income

[OldShooter]

Quote:

Originally Posted by Animorph If you want your income to grow with inflation I think you need to have your principal grow with inflation. Then your income should stay roughly the same percentage of your portfolio. That seems sustainable.

At least some influential people agree with you:

Uniform Prudent Management of Institutional Funds Act: " ... investing and spending will be at a rate that will preserve the purchasing power of the principal over the long term."

(https://en.wikipedia.org/wiki/Unifor...onal_Funds_Act)

[RunningBum]

Two examples that might help with the total return concept:

1) Consider two more or less equally profitable and well-run companies. One returns a 4% dividend because it chooses not to invest so much of it's profits back into the business. The other reinvests its profits back into its own business so that it can continue to grow. Why is it that I can spend the income from the first company by taking the dividends, but not the other by selling a fraction of the shares I own, knowing that the value of the shares is growing? And why is it that I can only invest in the first company, since the second one is not giving me the dividend income I need?

2) OK, you understand the first example, but sleep better with the certainty of those dividends, and that's what's really important, right?

Suppose you're invested in a car manufacturer that has been profitable for 100 years and pays consistent dividends making gas burning cars. The future looks to be electric cars but that takes capital to research and retool, and it's not clear they will succeed there. Above all, the shareholders want their dividends, so they stick to profitably making gas burning cars.

But the move to electric cars continues. Sales of your company start to drop as consumers start to move to electric, but they can maintain their dividends by laying off workers, closing their plants and selling them to electric car makers. That works...for awhile. Eventually both profits and assets dwindle and there's nothing left to pay dividends. Now your income model is broke because you aren't getting the income you need, and the company stock is almost worthless so you can't use your capital to buy another dividend paying company.

[pb4uski]

Quote:

Originally Posted by OldShooter ... This is actually a real debate in a nonprofit's investment committee I'm on: If we got a bequest ten years ago that was $100K, is that still the "principal?' By the terms of the bequest we can only spend the "income." Assume the $100K has grown over the ten years.

I would say $100k.... and when the donor restricted the bequest to only spend income I would venture to guess that is what they had in mind and intended... any growth in excess of $100k could be spent.

[OldShooter]

Quote:

Originally Posted by RunningBum T ... But the move to electric cars continues. Sales of your company start to drop as consumers start to move to electric, but they can maintain their dividends by laying off workers, closing their plants and selling them to electric car makers. That works...for awhile. Eventually both profits and assets dwindle and there's nothing left to pay dividends. Now your income model is broke because you aren't getting the income you need, and the company stock is almost worthless so you can't use your capital to buy another dividend paying company.

I'm a total return guy all the way, but this IMO is more an argument for diversification --- leading I think to an argument for a dividend fund as the only practical way for a retail investor to diversify.

[RunningBum]

Quote:

Originally Posted by OldShooter I'm a total return guy all the way, but this IMO is more an argument for diversification --- leading I think to an argument for a dividend fund as the only practical way for a retail investor to diversify.

Sure. I was just pointing out that an investor who doesn't want to touch the principal may be invested in companies that dip into their own principal to pay dividends. My example is contrived but not altogether wrong. Dividend investing is not as safe as it seems.

[Montecfo]

Quote:

Originally Posted by marko I don't really view share as the measure of principal, except only that the number of shares define the principal via their price. To me, dividend dollars are paid are a result of the number of shares, not the share price. The principal's (shares) price goes up and down, but -- generally -- the dividends (income) stay the same as a result of the number of shares regardless of price. [After thinking about it....] Maybe the flaw in my thinking is that I don't view my starting balance (20 years ago) as my "principal" but my most recent balance, as defined as shares X price. Maybe if I viewed my "never touch the principal" from my original starting balance/number of shares, I'd see things more clearly (??) Have I been talking/listening past you-all all this time? Am I having a breakthrough right in front of your eyes or am I getting further out in the weeds?!

I think you were just analyzing your thinking. Seems very healthy to me.

If your investment portfolio were in a single bond then that bond would have a principal equal to what you bought it for, It seems to me.

But you could also decide that what you think of as the principal should be inflation-adjusted every year.

I guess something to ask is what's the purpose behind your thinking regarding principal and the return on principal?

My withdrawal rate is less than my dividends and interest. But I don't view that I'm "living on the dividends and interest" since I'm willing to sell shares as needed based on my withdrawal strategy.

[Finance Dave]

I don't like the original premise of not spending the principal...we plan to spend ours down.

Also, yes...ER does make a big difference. We FIRE'd at about 56/59. The biggest watch out is health care premiums until Medicare age. We are carefully managing MAGI to get the subsidy...which makes it affordable. The other watch-out is access to funds, as most of ours is tied up in either rental properties or TIRAs. Fortunately, our rentals produce great cash flow...and that pays a large portion of our current living expenses.

What type of investments make up a good income stream? Any do, as long as they supply your needed income and don't expose you to risk you're uncomfortable with.

For example...

We met with a FIDO advisor for the first time in 2007...about two years before we FIREd. He said we should have more money in equities (we were at about 15% equities, 20% bonds, 25% in rental properties, and the rest was in various forms of cash such as CD ladders, money market mutual funds, etc). He said inflation would eat up our buying power over time.

I asked him "How much more would we have to save such that we would not need to worry about inflation eating up our nest egg while maintaining our current AA?" He mentioned about $140,000 more....so we just saved that much more lol (actually much of it was growth simply by *orking one more year, and some was contributions).

So in our case, lots of 'cash-like' investments are sufficient.

Early in life I was very risk tolerant...as I knew we had lots of time to wait out the ups and downs. Now that we're FIREd...I'm very risk averse and likely will never go over about 35% equities even if we have a large drop and I "buy the dip". I sleep much better at night this way. YMMV.

[marko]

Quote:

Originally Posted by RunningBum Sure. I was just pointing out that an investor who doesn't want to touch the principal may be invested in companies that dip into their own principal to pay dividends. My example is contrived but not altogether wrong. Dividend investing is not as safe as it seems.

To me, 'not touching the principal' isn't about staying with the same investments for life. I do move investments around as opportunities and/or failures develop. I do sell things and buy others every few years, even as a buy-and-hold investor.

My definition of not touching the principal is that you rely solely upon dividends, interest and MF cap gains for income rather than selling shares for spending.

But I am curious if most here view "principal" as your starting point 20+ years ago or your current balance? By my definition above, it is the current balance, but I may have had it wrong all these years.

[marko]

Quote:

Originally Posted by Montecfo I guess something to ask is what's the purpose behind your thinking regarding principal and the return on principal?

Appreciate the insight.
My thinking is driven by two things:
1) Not running out of money by having sold every last share to make ends meet. Highly unlikely but...

2) Ingrained in me since childhood. It was just a given. Grandparents/parents would tsk tsk about so-and-so who had to change their lifestyle because the family fortune dried up. "That's what happens when you dip into the principal! His father must be rolling in his grave!!". It's also what happens when you live above your means, but that's another story.

[RunningBum]

Quote:

Originally Posted by marko To me, 'not touching the principal' isn't about staying with the same investments for life. I do move investments around as opportunities and/or failures develop. I do sell things and buy others, even as a buy-and-hold investor. My definition of not touching the principal is that you rely solely upon dividends, interest and MF cap gains for income rather than selling shares for spending. But I am curious if most here view "principal" as your starting point 20+ years ago or your current balance? By my definition above, it is the current balance, but I may have had it wrong all these years.

I wasn't trying to imply that you stick to those same investments, but I have heard people here say they don't care what the stock price does as long as the stock continues to pay the dividend. That works, until it doesn't.

So you can sell one investment to buy another, but my impression of people preserving the principal is like yours, that they wouldn't sell an investment for spending money. I'm not sure what you mean by "current balance" but you bought 100 shares of a stock, your principal is that same 100 shares, split adjusted (200 shares if there was a 2:1 split). I guess that's the same thing as current balance?

[OldShooter]

Quote:

Originally Posted by marko .. But I am curious if most here view "principal" as your starting point 20+ years ago or your current balance? By my definition above, it is the current balance, but I may have had it wrong all these years.

Well, per my post #21 above, the fiduciary standard in "Uniform Prudent Management of Institutional Funds Act" says that "principal" value of an endowment is the current value of the buying power of the original amount. So it is neither the starting point nor the current balance unless the current balance just happens to have hit the inflation-adjusted value of the starting point.

I have seen investment policy statements that include a portfolio goal of keeping up with inflation. That has always seemed kind of crazy to me, as an investment manager's results are not really coupled to inflation. But maybe it comes from this Uniform Prudent Management of Institutional Funds Act language.

This is quite an interesting discussion because I have never really though in terms of principal and income in our personal portfolio, though that is the centerpiece discussion for endowments.

[marko]

Quote:

Originally Posted by RunningBum I wasn't trying to imply that you stick to those same investments, but I have heard people here say they don't care what the stock price does as long as the stock continues to pay the dividend. That works, until it doesn't. So you can sell one investment to buy another, but my impression of people preserving the principal is like yours, that they wouldn't sell an investment for spending money. I'm not sure what you mean by "current balance" but you bought 100 shares of a stock, your principal is that same 100 shares, split adjusted (200 shares if there was a 2:1 split). I guess that's the same thing as current balance?

What I mean by current balance is the balance today. IOW, 20 years ago I had a (principal) balance of $1000. Today, even though I've withdrawn $2000 in dividends, interest and cap gains over the years, my current balance is now $3500.

In my twisted world, the $3500 is my principal. But I'm starting to see that the original $1000 (and maybe adjusted for inflation) is what everyone else calls "principal".

[marko]

Quote:

Originally Posted by OldShooter Well, per my post #21 above, the fiduciary standard in "Uniform Prudent Management of Institutional Funds Act" says that "principal" value of an endowment is the current value of the buying power of the original amount. So it is neither the starting point nor the current balance unless the current balance just happens to have hit the inflation-adjusted value of the starting point. .

Bolds mine. OMG! I've had it wrong for 69 years!!

[OldShooter]

Quote:

Originally Posted by marko Bolds mine. OMG! I've had it wrong for 69 years!!

Yeah, but does it really matter? I don't even think in terms of principal and interest. At this point all our assets are in MFs in IRAs and Roths and dividends are automatically reinvested. I couldn't even tell you amounts or pay dates. TIPS interest doesn't reinvest so it ends up getting withdrawn first as we draw the cash we need for expenses, QCDs and RMDs. Once deposited it's simply fungible cash, though. No different than the cash from selling MF shares from time to time.

[pb4uski]

I think the fact that it doesn't matter demonstrates how artificial the notion of never spend principal is.

[target2019]

Quote:

Originally Posted by marko Appreciate the insight. My thinking is driven by two things: 1) Not running out of money by having sold every last share to make ends meet. Highly unlikely but... 2) Ingrained in me since childhood. It was just a given. Grandparents/parents would tsk tsk about so-and-so who had to change their lifestyle because the family fortune dried up. "That's what happens when you dip into the principal! His father must be rolling in his grave!!". It's also what happens when you live above your means, but that's another story.

marko,
These investing principles are your own, handed down from parents and grandparents. They are valid for you, and you continue to prosper.

[marko]

Quote:

Originally Posted by OldShooter Yeah, but does it really matter? I don't even think in terms of principal and interest. At this point all our assets are in MFs in IRAs and Roths and dividends are automatically reinvested. I couldn't even tell you amounts or pay dates. TIPS interest doesn't reinvest so it ends up getting withdrawn first as we draw the cash we need for expenses, QCDs and RMDs. Once deposited it's simply fungible cash, though. No different than the cash from selling MF shares from time to time.

Quote:

Originally Posted by pb4uski I think the fact that it doesn't matter demonstrates how artificial the notion of never spend principal is.

No it doesn't matter. After this thread, I'd end up at the same place regardless I think.

But a lot of things really don't matter in the end (a friend of mine won't eat meat to combat global warming) but we keep up our own beliefs, causes and habits for a wide range of reasons. We all do a lot of things through upbringing, history, superstition, fact or hearsay.

Most of it doesn't matter (and in 50 years, none of it does!) but within this discussion I've broadened my understanding of a few things.

I did learn that for 10 years on this forum my original starting point/position (what is "the principal") was flawed, which led me to listen/talk past what was being said.

Thanks to all for your time!

[RobLJ]

The principal discussion got me off on a tangent. Quicken shows portfolio return (if you close/switch accounts you have to select the Option to "show closed lots" which made quite a difference on the return amount).
Basically, my original principal (investment) is about 35/36% of the total portfolio, and I bet a lot on here would have an even smaller original %. I'm not sure how to adjust for inflation, however, since the portfolio was started about 30 years ago and like most here, I steadily invested out of paychecks.

Just a thought that I wouldn't investigate if I didn't have Quicken.

Quote:

Originally Posted by marko What I mean by current balance is the balance today. IOW, 20 years ago I had a (principal) balance of $1000. Today, even though I've withdrawn $2000 in dividends, interest and cap gains over the years, my current balance is now $3500. In my twisted world, the $3500 is my principal. But I'm starting to see that the original $1000 (and maybe adjusted for inflation) is what everyone else calls "principal".

[Finance Dave]

Quote:

Originally Posted by marko What I mean by current balance is the balance today. IOW, 20 years ago I had a (principal) balance of $1000. Today, even though I've withdrawn $2000 in dividends, interest and cap gains over the years, my current balance is now $3500. In my twisted world, the $3500 is my principal. But I'm starting to see that the original $1000 (and maybe adjusted for inflation) is what everyone else calls "principal".

Not me. To me, the principal is a moving target and changes every day. The interest or gains earned on a given day becomes part of the principal for the next day.

[FIREarly]

Didn't read all the posts but if you have 10+ years of investing left and are looking for a "high risk high reward " stock... TSLA!!!!