Growth VS Income

[Montecfo]

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]

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]

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]

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]

.. 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]

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]

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]

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]

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]

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.

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.

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]

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!!!!

 

[OldShooter]

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!!!!

I assume you are joking. If not, William Bernstein has some wisdom for the OP:

“Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”

“Do you think that by choosing a portfolio of only a few stocks that you hope will score big, you are maximizing your chances of becoming wealthy? Indeed you are, but you are also maximizing the chances of a retirement of cat food cuisine”
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