Total Return Withdrawal Decision

[audreyh1]

Because total return investors (as I understand it) must make that decision every time they need money while for dividend investors its less common. Id assume total return folks to be expert in the subject.

Or maybe I misunderstand the term.

Sorry if I'm off base.

Many total return investors have a target asset allocation. Withdrawals are often followed by rebalancing. I usually have more than enough cash in my retirement fund to cover my annual withdrawal in Jan because I let all mutual fund distributions go to cash (don’t automatically reinvest). Then I rebalance after the withdrawal.

 

[audreyh1]

Sell the laggards' especially if you are pulling money from brokerage account. Either way, laggards are the logical choice. I was just reading the Mental Accounting article yesterday which has a specific mention of this dilemma.

To help you stay logical, think about this: Laggards are throwing the lowest return on the invested capital so your capital is not efficiently utilized.

This is the opposite of rebalancing to a target AA which many of us use. With an AA there are always going to be laggards, and you trim from the winners to buy more of them.

 

[ERD50]

Because total return investors (as I understand it) must make that decision every time they need money while for dividend investors its less common. Id assume total return folks to be expert in the subject.

Or maybe I misunderstand the term.

Sorry if I'm off base.

No problem, but there is some misunderstanding there. The typical broad-index-equity funds/ETFs that most of use (I dislike the term "total return investor" *) will kick off ~ 1.5% divs. The typical broad-index-bond funds/ETFs that most of use will kick off ~ 2.5% divs, so a 60/40 AA provides ~ 2% divs.

For many, SS/pensions will make up some/all of the rest. So no, we don't need to sell something every time we need money. As mentioned upstream when/if we do, it's a simple look at re-balancing and/or choosing assets with the least tax hit. Pretty easy to do once a year or so.

* edit/add: why I dislike the term "total return investor" : Total return is *not* an investment approach, it is a measure of the return of the investment - any investment. It makes little sense (other than tax consequences) to not look at your total return, it is what matters.

Far better to call out the investors like yourself as having "dividend sector focus". The rest of us who don't delve into sectors are just broad-based-index investors, nothing special to note, that's the standard that most of the portfolio studies are based on, so almost no need to mention it.

-ERD50

 

[pjigar]

This is the opposite of rebalancing to a target AA which many of us use. With an AA there are always going to be laggards, and you trim from the winners to buy more of them.

Yes, I thought about this. The logic makes sense for individual securities but for broad funds the exact opposite makes sense. Sell high, buy low, keep the change.

 

[marko]

* edit/add: why I dislike the term "total return investor" : Total return is *not* an investment approach, it is a measure of the return of the investment - any investment. It makes little sense (other than tax consequences) to not look at your total return, it is what matters.

Far better to call out the investors like yourself as having "dividend sector focus". The rest of us who don't delve into sectors are just broad-based-index investors, nothing special to note, that's the standard that most of the portfolio studies are based on, so almost no need to mention it.

-ERD50

Sell the laggards' especially if you are pulling money from brokerage account. Either way, laggards are the logical choice. I was just reading the Mental Accounting article yesterday which has a specific mention of this dilemma.

To help you stay logical, think about this: Laggards are throwing the lowest return on the invested capital so your capital is not efficiently utilized.

Many total return investors have a target asset allocation. Withdrawals are often followed by rebalancing. I usually have more than enough cash in my retirement fund to cover my annual withdrawal in Jan because I let all mutual fund distributions go to cash (don’t automatically reinvest). Then I rebalance after the withdrawal.

Thanks all!

 

[ERD50]

Sell the laggards' especially if you are pulling money from brokerage account. Either way, laggards are the logical choice. I was just reading the Mental Accounting article yesterday which has a specific mention of this dilemma.

To help you stay logical, think about this: Laggards are throwing the lowest return on the invested capital so your capital is not efficiently utilized.

Yes, I thought about this. The logic makes sense for individual securities but for broad funds the exact opposite makes sense. Sell high, buy low, keep the change.

I don't see how this makes sense for individual securities either. If you sell "the laggards", won't those be the ones beat down in price, and you are selling low? In my research, there seemed to be some support for "reversion to the mean" in investments, so today's laggards are slightly more likely to be tomorrow's leaders. You invest for the future, not the past.

-ERD50

 

[RunningBum]

* edit/add: why I dislike the term "total return investor" : Total return is *not* an investment approach, it is a measure of the return of the investment - any investment. It makes little sense (other than tax consequences) to not look at your total return, it is what matters.

I've read here at e-r.org from some dividend investors that they don't care what the stock price is, they just want their dividends. To them, total return does not matter.

Thus, those who aren't using that approach are total return investors, because their goal is not yield sufficient for an income stream to live off of, but rather total return on their investments.

You may not like the terms, but I don't think others will change them, no matter how many times you complain. Think of the methods being "dividend focused" and "total return focused".

 

[ERD50]

I've read here at e-r.org from some dividend investors that they don't care what the stock price is, they just want their dividends. To them, total return does not matter.

Thus, those who aren't using that approach are total return investors, because their goal is not yield sufficient for an income stream to live off of, but rather total return on their investments.

You may not like the terms, but I don't think others will change them, no matter how many times you complain. Think of the methods being "dividend focused" and "total return focused".

I understand that they don't care what the stock price is. But "total return" still matters, they are just choosing to ignore it. Take a hypothetical, where a div-paying portfolio had stocks that paid a consistent dividend right to their dying day, then went belly up (I think some stocks have actually done this, or something pretty close). There would be no value left in the portfolio, and no companies around to pay a dividend.

Maybe they won't change, but I think of a paraphrase of that old saw about a statement going unchallenged, if repeated enough, becomes accepted. As long as it's repeated, I'll probably challenge it.

I feel that we should use accurate and descriptive terms to aid in communication. I think that "sector-focused" investors and "broad-index" investors are good terms to use.

-ERD50

 

[Exchme]

I think it's a fair question. While I am a dyed in the wool Total Return investor, I hate selling anything as it feels like what I sell always goes up right after I sell it. So emotionally, I'm sympathetic to the dividend investor who rarely has to make a sell decision.

Besides taxes and rebalancing, I have another factor I haven't seen mentioned. I have some odd tilts left over from trying to match what a former FA was doing. Those haven't worked out any better than a total market fund like VTI, so I want to slowly get rid of them. That will simplify things for when I'm gone or no longer able to handle the complexity of trying to rebalance them.

 

[pjigar]

I don't see how this makes sense for individual securities either. If you sell "the laggards", won't those be the ones beat down in price, and you are selling low? In my research, there seemed to be some support for "reversion to the mean" in investments, so today's laggards are slightly more likely to be tomorrow's leaders. You invest for the future, not the past.

-ERD50

Valid arguments but it may makes sense for a brokerage account from the tax perspective. The laggards neve reverted to mean during my own short (3 years) stint of investing in the individual securities. YMMV.

 

[BobMW]

I only have 3 funds so not a big decision. I’ll withdraw from whatever is overweight in my AA to get back to my target. Right now, I am overweight domestic stock, so if I needed money, I would sell some of my total US stock fund. Life is simple when you have a 3 fund portfolio.

Curious- what 3 funds? 18 months from retirement now but looking to simplify my own portfolio. Thanks

 

[indiajust]

Keep enough cash that there are no true financial emergencies anymore. 20k is in the wash.

Use a Robo Account, which is necessarily auto rebalanced optimally. If I need cash I pull from there.

Roughly annual-ish rebalance intervals for taxable account. Sell losers that I have fallen out with or no longer understand. Do the same for oversize positions, over risk positions, over value positions. Roughly balance cap gains and cap losses for zero taxes.

Rank order what is left and trim losers/winners together. Then decide on tax budget for cap gains and clip enough to hit the tax target.

Now reallocate any cash excess above the bucket size into stronger conviction stocks.

 

[corn18]

Curious- what 3 funds? 18 months from retirement now but looking to simplify my own portfolio. Thanks

Fidelity Total US Stock
Fidelity Total International
Stable Value Fund in my 401k holds all my fixed income. Currently yielding 2.2%.

I also hold 3 years cash but I won't use it unless the market is down. I have been using it this year though because I retired and got a humungous separation package that has me in the highest tax bracket. Don't want to incur any capital gains this year, so spending the cash. Starting next year, I can do 0% LTCG tax gain harvesting and/or 12% Roth conversions.

 

[NW-Bound]

I suspect this has been covered a few times before but I can't seem to find it easily.

I'm a dyed-in-the-wool "live off the dividends" person, but I'm wondering for you "total return" types how you decide which stocks/funds to sell when you need cash.

Beyond regular re-balancing, if you unexpectedly needed $10K-$20K suddenly, you need to sell some stocks/funds:
Would you sell the laggards that aren't going anywhere?
The great performers because you expect to re-gain the balance via growth?The ones that will help tax-wise?

Is there some common criteria or is it YMMV?

Definitely YMMV, as few people do the same things.

As for me, I hold so much cash of 20% of liquid assets, such that I never have to consider selling something for cash. Selling or buying something is entirely driven by my view of its prospect looking forward, which is another way to say I am a total-return investor.

The above said, even though I hold many positions, spread over more than a dozen accounts, a quick Quicken report sums up the dividends I received over the last 12 months, and I see that the total dividend yield of my stocks is around 1.5%, which is better than that of the S&P at 1.37%.

Hmm.... I think this is because I still use the P/E criteria to buy growth stocks that are not overvalued. Most of these also pay a bit of dividends, and because I shun the sky-high valuation stocks, my overall yield is a tad higher.

If I need to spend a large sum of 6 figures, a bigger decision for me is regarding taxes. Do I take it from after-tax accounts, or before-tax?

I think about this hypothetical question, and the most logical choice would be to take it from my Roth account, selling some stocks there if I have to, and to buy back the same in my IRA rollover accounts. My IRA rollover accounts at this point have the largest balance, and also the most cash. I then refill the Roth slowly with future conversions. This will average out the tax burden, and may help keep me in a lower bracket.