Wednesday, November 11, 2015

Entering Wealth Preservation Mode

In my previous article, I discussed the concept of the dividend snowball as it applies to my dividend portfolio and dividend income. The powerful concept of the dividend snowball means that a portfolio generating $15,000 in annual dividend income could easily double dividend income to $30,000/year in a decade or less. This calculation assumes that no new capital is allocated to that dividend machine, and dividends were reinvested. Just for the sake of reference, I achieved the first $15,000 in annual dividend income in a little over eight years of savings and investing.

Now that I am getting very close to the dividend crossover point, and financial independence, it is time to make sure my financial house is in order. As the amount of money at stake increases, my desire for risk starts decreasing. This is why I have been thinking lately about including layers of protection around my nest egg that will protect it from future downside. Wealth preservation is as important as building wealth in the first place. If you have won the game ( or will have won it by the end of the decade), it is important to stop playing so hard and to make sure the downside is protected from risks.


One thing I haven’t discussed before is the fact that I would be eligible for Social Security a little over three decades from now. If the laws are changed, I may end up eligible for Social Security a little less than four decades from now. Based on my earnings history, it would seem that Social Security could cover as much as half of my expenses in 30 years. If I keep earning money with a W2/1099 income, my social security income would likely increase.

Putting all of the above in perspective, I believe that I may end up with a lot of passive income in the future (if all goes well). This would include dividend income, social security income, and wage/consulting income along the road. This is why I am putting a lot of the capital that I believe will generate this excess dividend income in tax-deferred retirement accounts. I have already discussed before strategies for getting a deduction today, compounding the money tax-free and withdrawing without penalties and paying taxes. I won't discuss this today.

On the other hand, projecting the future is more art than science. While I like to show expectations in a linear form, I do realize that the future is largely unknown and unpredictable. This is why it is important to stress test assumptions and provide additional layers of support, that will help my dividend snowball.

I believe that success in investing is all about being aggressive in the accumulation phase. Once a critical mass is achieved, it would be helpful to also cover any downside. I operate under the assumption that the upside will take care of itself. My job as a capital allocator is to cover my portfolio against risks.

The important factors to protect me against risks include items such as Fixed Income, Housing, and Maintaining Health. It would also be helpful to continue working in some enjoyable capacity, that helps me grow as a person.

For the past five years, I have discussed how I always wanted to have exposure to fixed income. When I discuss fixed income I mean holding directly US Treasury Bonds or US Agency Bonds with varying maturities. I also include Certificates of Deposit (CDs) in my broad definition of fixed income. Having another asset class will provide more security to a long-term portfolio, since it would cover risks that an equity only portfolio cannot cover. This fixed income would provide protection in the event where we see another Great Depression. During the Great Depression, share prices fell by 90%, while dividends declined by 50% - 60% as well. The bond interest increased their purchasing power, due to deflation.

Unfortunately, I have not viewed fixed income as attractively priced over the past five years. Few others have viewed fixed income as attractively valued as well. It is interesting that very few view fixed income instruments as good values today. From a contrarian standpoint, it is possible that the majority is wrong. Either way, I am planning on using new cash to build a long-term CD/bond ladder. Basically, I am aiming to put approximately 3 – 4 years’ worth of expenses in a CD ladder. This translates into something like $54,000 to $96,000 in fixed income. I would do this by purchasing CD’s with 5 – 10 year maturities every single month for a few years. The goal is to have a CD worth about $1,000 maturing every month for about five years, starting out approximately five years from today. Because I believe that I will not use this money, I will likely reinvest the money into another CD at maturity date.

I could achieve this CD ladder by putting an equal amount of funds every month for a period of approximately 5 years. At the end of year 5, I would have my first CD mature, and I would be able to reinvest the amount if I didn't need it.

Alternatively, I could purchase CD's that mature in 5, 6, 7, 8, 9 and 10 years right from the get go. Many brokers offer Certificates of Deposit.  So I have decided to buy 5 year CD's today, but also longer-dated ones to build that ladder faster. I started this exercise a couple of weeks ago, and so far I have a CD maturing every year between 2020 and 2025. The next step is to ensure I have a CD maturing once every six months/twice per year in every year between 2020 and 2025. By the time this ladder is set up in 2018 - 2019 or so, I will have a CD that will mature in each month between 2020 to 2025 ( plus or minus a few months since I am starting late in the year in 2015). A large portion of those CD's will be set up to auto-renew, though a decent portion will also be allocated manually upon expiration. I do not expect this exercise to take more than 10 minutes per month. Those CD's will be set in taxable accounts.

The other important area I need to focus more is my health. I spend too much time in front of a computer. This is bad for the body. I will be working more on exercising. By exercising I mean incorporating exercise into my daily life. This includes always taking the stairs, taking breaks to do brisk walking etc. It also means eating healthy. I have one body that I need to keep working well for several decades into the future. Just like with compounding capital, the habits I form today will bear fruit decades from now. If I eat junk food, I will suffer health problems down the road. However, if I exercise regularly and eat nutritious food, I stand a better chance of maintaining a healthy lifestyle in old age. I break this problem as a capital allocation problem – if I can maintain my health, I will probably spend less on healthcare 30 – 40 years down the road.

Do you have an allocation to fixed income? What percentage of your portfolio is in fixed income?

Thank you for reading.

Relevant Articles:

Margin of Safety in Financial Independence
Stress Testing Your Dividend Portfolio
Does Fixed Income Allocation Make Sense for Dividend investors today?
How to stay motivated on your road to financial independence
My Dividend Goals for 2015 and after

46 comments:

  1. Any reason you chose a CD ladder over a US Treasury ladder? I'm assuming you could get a better yield through Treasuries and just allocate say $1k per month each month for the next 5 years to the Treasuries and achieve the same result but likely get a bit more income in the meantime. Either way I think that's a great source of diversification and plan to do a similar thing when we start nearing FI. Hold probably 3-6 months of expenses in cash and have the rest of our cash set up in CD or Bond ladders.

    ReplyDelete
    Replies
    1. Hi PIP,

      The yields are higher on CD’s than treasury bonds. For a 5 year CD - 2.20 - 2.30%. For a 5 year T-Bond - 1.80%.

      I hold about 1 - 2 months in cash.

      DGI

      Delete
    2. Ah...surprised to see the CDs that much higher than T-bonds.

      Delete
    3. The reason is liquidity. If you hold a CD until its mature date, no worries. But if you need to sell the CD to recoup principal - you will have to do so on the secondary market. This essentially means you will have to take less than what you paid. Treasuries and other bonds have a much more robust market to resell. Hence the rate is lower...

      Delete
    4. The idea is to hold CD's to maturity. That's why they are all laddered. Otherwise, the money would be just sitting in cash.

      You can cash out CD's whenever you choose to. For 5 year CD's, check this comparison:

      https://www.depositaccounts.com/tools/ewp-calculator.aspx

      An early penalty at Ally will cost 5 months interest. This is less than a 1% cost. If you sold a treasury bond, you may lose more than that + you have a broker commission to pay.

      Delete
  2. Our debt investments are largely held in tax-deferred accounts, and consist of TIPS, corporate bonds, and short-term Treasury notes. I understand your objectives with a CD ladder given the milestones up ahead that you've discussed. Depending on the state where you live, and its tax laws, you may also find it interesting to build a ladder of short-maturity municipal bonds whose yields, after taxes, could be more attractive than what you're getting with similar-maturity CDs. The risks are different, of course (maybe I wouldn't want even GO bonds issued in Illinois), but worth considering.

    ReplyDelete
    Replies
    1. Hi Even Keel,
      It is usually smarter to hold fixed income in tax-deferred accounts. I have decided to hold those fixed income in taxable accounts, since I have more flexibility on using the money, no matter what I decide to do by the end of the decade. If I bought TIPs however, I would likely put those in tax-deferred accounts.
      I would have gone for munis, but unfortunately I don’t want to have any possibility of a default.
      DGI

      Delete
    2. The default risk on short-maturity GO munis should be the same or less than the risk of fraud on a CD issuance, so long as you perform a little due diligence and avoid states or municipalities afflicted by extremely clear danger signs, such as enormous unfunded pension obligations and the like. Anyone purchasing debt instruments from places like Detroit, Vallejo, Puerto Rico, or Illinois can't feign surprise, unless he or she was willfully blind or blindly greedy.

      Delete
    3. Hi John,
      The issue with Muni’s is that you do not know who the next Detroit, Puerto Rico, Illinois will be 10 years from now, just as you didn’t know a decade ago which municipal bonds to avoid. Perhaps buying bonds who are backed by revenue streams from say water utility billings would be more sustainable. I do not want to spend my research times analyzing bonds – fixed upside. I would much rather spend my time analyzing companies for their higher upside potential – better ROI on my time potentially.
      What do you mean by risk of fraud with CD’s? If you buy a CD at an FDIC insured bank, you cannot lose principle.

      Delete
  3. I love the CD per month idea. As a financial planner I advocate for both capital appreciation through equities with growing dividends and preservation of capital. The CD ladder is an effective tool in today's economic environment. Rates won't be very high but should be reasonable given our current low rate of inflation. Excellent post. I have enjoyed reading your work very much over the past year!

    ReplyDelete
    Replies
    1. Hi Lisa,
      Thanks for reading. A modest allocation to fixed income through a CD ladder will make my portfolio stronger and more immune to a different set of economic conditions. It is similar to insurance – you will likely never need it, but if you do, you will be happy you bought it.
      I would be happy to learn more about you and your practice. Would you mind dropping me an email?
      Best Regards,
      DGI

      Delete
  4. Even though there is always a possibility of another Great Depression, I am not convinced it would or could happen. The Government intervened during the Great Financial fiasco and I see no reason why they wouldn't do it again. Having said that, it's great to hedge yourself and I kind of look at bonds like cash and in tough times cash is king. I don't see myself getting into bonds anytime soon other then a very different animal of the two bond funds in my 401k plan.

    ReplyDelete
    Replies
    1. Hi Raymond,
      I see this mostly as a hedge against deflation. I see that as a risk when we have so much technological competition and disruption, and we have so much global competition in businesses. I also see it as a hedge in case my dividend income projections don’t turn out as expected.
      I prefer ladders of individual bonds/CD’s to a bond fund – I will get my principal back at maturity with CDs/bonds.
      DGI

      Delete
  5. I will stay with high yield stocks like T in my IRA vs CDs or bonds. Over five years, the 4% difference between the two gives me an extra 20% tax free cushion to absorb any price declines. USA and world economies are still tilting towards recession and higher CD rates are not likely for many years in the future.

    ReplyDelete
    Replies
    1. I am a fan of equities, which is where I currently have over 98% of money. I don’t think that in retirement a 10 – 15% allocation to fixed income will hurt. I won’t have a pension. If I were in my 50s today, I would likely not even touch fixed income – Social Security would be a very good substitute available at age of 62.

      Delete
  6. I would caution against trying to run out the clock on a 10-point lead at the beginning of the 3rd quarter. I'm in a similar position and think I'm too young to be going into a bond ladder. In my opinion, if one has reached the cross-over point, now is the time to take some risk with some extra money. If you win, you pad your nest egg. If you lose, then you still have your dividend portfolio and time in your career to recoup any losses.

    For me, I think a 5-to-10 year strategy of investing in a basket of well-regarded energy stocks is the right play now. The stocks have bottomed and are yielding healthy dividends (eg, DVN, XOM, ATW, HP, HAL, etc.). There is risk, but there's also a good chance of hitting the trifecta with these stocks: big capital appreciation, good current income, and healthy dividend increases in the future. And if they all go bust (very unlikely), then there's still the safety net of my current investments and time to heal before retirement.

    You're in a good spot financially at an early age, but instead of protecting against loss, I would champion the idea of allocating a portion of the discretionary portfolio towards more smart risk (when the opportunities arise).

    ReplyDelete
    Replies
    1. Thanks for commenting. You have to do what is best for you.
      I have decided against swinging for the fences. If my projections are correct, I will reach the crossover point in 2018, and double dividend income without adding any new capital by 2024 or so. An allocation to fixed income will protect me from risks that a 100% only equity portfolio cannot. Granted, this will be a slow accumulation, that will likely take 4 - 5 years or so. The idea is about managing risk, though at the expense of future appreciation.
      Good luck in your income investing journey!
      DGI

      Delete
  7. Approximately 2% on 5 year CD's, after taxes perhaps 1.5%. IMHO far too soon in your investing career to do this. "The goal is to have a CD worth about $1,000 maturing every month for about five years, starting out approximately five years from today. Because I believe that I will not use this money." That $1,000 per month is very expensive when you compare putting the same money in T or other 4-5% producers.

    ReplyDelete
    Replies
    1. Hi Anonymous,
      You are correct that there is opportunity cost to fixed income. However, I don’t think that a 10% - 15% allocation in say a few years will really “cost” that much. If I get to sleep better at night, I would say that the trade would be worth it. A 5 year CD can yield a little over 2.20% today, but it is a risk-free investment. An investment in T is not – the dividend could be cut in half, or the stock price could go down. Thanks for stopping by!
      DGI

      Delete
  8. DGI,
    I think that your plan is solid. My wife and I started retirement with 2 years of cash equivalents, plus enough money to buy the Jeep that we were leasing and eliminate the monthly payment. As you know, I collect a pension, so we didn't keep as much of a float as you plan to do, but your situation is different. We also have zero bonds primarily because they offer lower returns than CDs at our credit union (and they have more risk of loss of principle if you have to cash them in early).
    Keith

    ReplyDelete
    Replies
    1. Hi Keith,
      Thanks for stopping by. You brought up a couple of good points – with CD’s you can “cash them in earlier” if you have to with minimal penalties. You are also guaranteed to get your principal back, though its purchasing power will likely be lower. With a bond fund however, you may have to sell at a much lower price and have no idea what price you will get.
      I don’t have a pension unfortunately, and even if I did, I won’t qualify for at least 20+ years for it. Social Security is approximately 3 – 4 decades away for me. I believe it will be still around for me, though I am not sure how different it will be from today.
      The other point – this is something I am doing in my situation, given my limited set of opportunities. For someone else, the opportunity set and outcomes and decision trees will be different.
      Please enjoy your retirement!
      DGI

      Delete
  9. You should consider writing books, creating online courses, etc. that can provide you with royalty payments (another source of passive income).

    ReplyDelete
    Replies
    1. I earn a few bucks for every 1000 visitors that come here. But the amount of work translates into an hourly wage that is pretty low. Writing a book sounds like a bad use of my time – I would likely earn more for the time by greeting people at the local WMT (and get employee stock at a discount)

      Delete
  10. Now that I'm in FIRE, fixed income is an increasingly important part of my asset allocation. I'm at 18.6% fixed/preferreds/variable debt instruments and growing by 800 dollars each month. I am a big fan of closed end municipal bond funds and I use 4 that have an average yield a little over 6% (IIM, IQI, NEA, NIO) - 7.5% after tax yield. I also have a preferred shares fund (JPS) - 8.14% yield at cost. And some variable debt and international debt instruments (JRO, GIM) - 6.3%, 7.59%, respectively. My beta is a lot lower, my current income gets a boost as these pay more yield than DGI type stocks, and I sleep better at night. I have enough surplus income in FIRE that I can add to my snowball from distributions and most of that goes to additional debt instruments as listed here.

    I didn't do the Dividend Crossover point thing as I trade options for part of my income. But I do meet 92% of my budget from various forms of dividends and cash distributions.

    I think my Friday blog post may be a longer commentary on your post here and exploration of my approach vis-a-vis. Great post, DGI!

    ReplyDelete
    Replies
    1. Hi FV,

      The goal of my fixed income allocation is not to boost income, but to provide insurance in case we get a poor economy, deflation, corporate profits don't do well etc. Fixed income provides safety in case everything goes down the drain ( highly unlikely, though still a risk with a 5 - 10% probability = to my allocation there). I get some income and I will get my principal back. Though in my case, CD's won't protect me from stagflation - TIPs would.

      Actually, that was your most helpful response you have written on this site. I have dismissed the idea of municipal bonds, due to the fact that there is indeed risk of default. I also do not like the fact that my quoted value for a fund will fluctuate and I do not have a set amount I am due at maturity.

      But those muni funds sound interesting - looks like some have maintained distributions for a few decades. Plus, it looks like their distributions are tax-exempt. I will have to research them better - the diversification aspect of those funds protect me if say a city in CA goes bust.

      I am not a fan of international bonds in general ( even if they are denominated in USD). Though a variable bond could come in handy if interest rates start going up.

      Either way, you have to do what works for you. I would be interested in reading your post about what you are doing with fixed income and why.

      Best Regards,

      DGI

      Delete
    2. Thanks DGI. I'm still outlining what I want to say in the post in my head. Again, thought this was a very important post. There is a whole blogoverse about DGI, stocks, asset allocation concepts, etc., but almost no one writes regularly about the fixed income component. Very surprising when so many people are put on 60/40 allocations by their paid advisers.

      There is a huge bond education gap out there!

      Delete
  11. I don't have any fixed instruments yet. Still building the DGI ball. Although from reading Velociraptor's comment the yields are interesting. The prob is the distributions are pretty fixed and don't grow like DG stocks.

    ReplyDelete
    Replies
    1. Hi DFG,
      If you are in the accumulation phase, it makes little sense to buy bonds. I would say that approximately 5 years before the date you think you will retire, it may make sense to start buying fixed income. Fixed income won’t grow as quickly as equities, but it provides “insurance” against certain risks that an all equity portfolio would not protect against. Granted I am talking about Treasury bonds and CD’s – you cannot lose nominal dollars if you hold to maturity with those ( assuming I stay below $250K in CD’s, which won’t be an issue)
      Best regards,
      DGI

      Delete
  12. "Buffett wasn’t nervous about Berkshire’s employee pension plans when bond guru Bill Gross retired unexpectedly from Pacific Investment Management Co., known as Pimco.
    “We are all-equities, anyways,” Buffett told CNBC last week. “We don’t have any bonds in our pension funds,” which cover many of Berkshire’s 330,000 employees."

    Quoted from the Omaha World Herald- http://m.omaha.com/money/warren-buffett-watch-omaha-auto-staff-all-smiles-over-buy/article_ca7b570c-0a5f-5560-9e37-acbd20b3776a.html?mode=jqm

    ;)

    That said, I'm always impressed when someone is conservative, thoughtful, responsible, and forward thinking. I can't say I'm much of a fixed income investor, though. Thanks as always for your perspectives and attitudes which are always appreciated.

    -J

    ReplyDelete
    Replies
    1. Hi J,
      It is interesting that Buffett is all equities in his BRKB pensions. He is correct because equities have historically offered better returns than bonds over a period of 30 years. In addition, bonds will likely maintain purchasing power at best ( or slightly lose it after-tax).
      Yet, when he discussed how his wife’s money will be invested after he is gone, he decided to have 90% in US stocks ( S&P 500) and 10% in bonds. He has also been a fan of holding at least $20 billion in cash for Berkshire Hathaway.
      Another article talks about him scaling down on Municipal obligations, which have underfunded pensions. http://www.bloomberg.com/news/articles/2014-03-06/buffett-cuts-bond-allocation-as-berkshire-warns-on-yields
      In reality, it looks pretty dumb to be buying CD’s today – they have a yield of 2.50% - 3% for 10 years. In contrast, stocks on S&P 500 have a yield of 2% and earnings yield of 5%. However, I think a 10 -15% allocation, built up slowly over a 5 year period can offer some advantages to a portfolio.
      Thanks for stopping by!
      DGI

      Delete
    2. Hi J,

      Actually, according to the Berkshire Hathaway annual report for 2014, his pension funds do hold bonds and cash. It looks like at 12/31/2014 they held $2.201 billion out of $13.366 billion in fixed income/bonds/cash ( which is a 16.50% allocation to fixed income).

      Please go to page 80 on this site

      http://www.berkshirehathaway.com/2014ar/2014ar.pdf

      Best Regards,

      DGI

      Delete
    3. Nice catch, D! Serves me right for not checking the sources of a news article.

      Excellent...Your prudence is inspiring, I look forward to getting to the place of security in my income where I can seriously plan a fixed income allocation. Thanks for sharing your process!
      -J

      Delete
  13. I am surprised no comments on liability insurance including an umbrella policy. Do you consider this an expenses only? There are also life insurance policies one can play games with.

    Also, I did not see mention of trusts. You may want to consider some.

    ReplyDelete
    Replies
    1. Those are good questions and ideas.

      Trusts are a complex topic, and are pretty expensive for those who only have a six figure portfolio. This is why it is preferable that a DYI investor actually use the services of a professional there.

      The umbrella insurance is a good idea that could be expanded further upon in the future.

      Not sure I understand the part about playing games – please expand on that topic with some actionable insights.

      DGI

      Delete
  14. Given bond yields are likely to be horrible for years, in the U.S. or north of the border, if not for decades ahead, this is my approach: a cash wedge:
    http://www.myownadvisor.ca/cash-wedge-opening-investment-taps/

    After the one-year cash fund is tucked away I will create a 50/50 split of the remaining portfolio funds this way:
    1. 50% invested in dividend-paying stocks from Canada and the U.S. (about 30-40 stocks in total) and use the dividend income generated from these investments for living expenses, and
    2. 50% invested in a couple of low-cost, diversified, equity ETFs that invest in thousands of stocks from around the world. We will spend the distributions from these investments and keep the capital intact for long-term growth.

    Maybe it's too simple but I think it works for me.
    Mark

    ReplyDelete
    Replies
    1. I expect to live off dividends in retirement. I get dividends, I spend almost everything, and reinvest what is left over. People who will sell assets in retirement are opening themselves to a whole set of risks, since they do not realize that the prices at which they will sell are unknown. So they may run out of funds quickly.
      The idea on fixed income is an insurance policy against deflation.
      If I were in my 50s, and I knew I will have a pension and social security in a few years, I would skip fixed income.

      Delete
  15. DGI - you are touching on a very interesting subject and good for you to protect the downside. You don't have to go far and research any of the greatest investors of all time they talk about tail risk and margin of safety, never losing $ ie Klarmen, Buffet or Taleb. As a financial planner dealing with today's low interest rate environment we can't take a one shoe fits all approach to income. Some might say a paid off home is a good source of protection. CD and T notes are great for emergency funds but typically lose after tax to inflation over long run. We are similar in age based on your expected SS start date, and similar 90/10 equity to fixed income ratio. You have covered longevity and inflation risk, your just trying to protect market risk which is systematic or non diversifiable. Annuities may not be the answer because your not allocating a single premium up front, or else this could provide guaranteed income from a low cost provider. Continue searching down the path of multiple revenue streams which might require some up front leg work. I myself should have SEPP or 72t payments covering basic needs but will also have a Xmas tree farm which we will plant enough each year to 'ladder' income from harvesting x amount every year. May not be profitable and risk free first few years but should provide a lot of non monetary enjoyment along the way. And if the wreaths and ancillary products do well hey we might just make a $1.

    ReplyDelete
    Replies
    1. Hi Matt,
      Life is full of risks – inflation, longevity, deflation, stragflation, market risk, investor risk – the risk that I have selected investments that will do poorly 30 years from now. I am thinking about risks these days and ways to mitigate them, without sacrificing upside potential. And while I challenged the poster above on trusts and umbrella policy insurance, this is something I have been working on as well. Though I doubt trusts are something to think about if your networth is not in the 7 digits.
      I am actively exploring purchasing a home. However, since I do not know where I will decide to settle 5 – 10 years from now, I am refraining from this decision. If I knew I were going to sit somewhere for a decade, I will buy ( assuming the entry price was reasonable)
      Thank you for your comments. At times, I am not able to verbalize my thoughts as well as others. Your comment was helpful in discussing tail risks etc,
      I am thinking more about Roth Conversion Ladder rather than SEPP/72T in retirement. Having multiple streams of income and cash flow, along with a way to cut recurring expenses as much as possible ( housing) could be helpful.
      I am thinking of agricultural land too, though it looks as if it is overpriced in North America these days.
      DGI

      Delete
  16. If you really want to take no risk in fixed income then treasurys are a good bet. If you can handle a a little high grade diversified corporate bonds can be good. Long BBB+ to A bonds currently yield north of 5%. Also preferred stocks are good options as well. There are many investment grade equivalents that trade at 6pct or more yields.

    If you really want low risk maybe you can start selling puts on Treasurys. Either you collect premium which can be held in cash as you desire or you get assigned treasurys at lower prices and higher yields.

    I really like the discussion of derisking. Maybe it can be achieved with equities though. Instead of holding higher risk equities like industrials which get recked in deflation so you feel the need to hold cash or CDS to derisk one can just hold lower risk dividend equities maybe...more utilities or consumer staples

    ReplyDelete
    Replies
    1. As discussed in the article, fixed income serves a particular purpose. If I wanted to take risk, I would purchase equities rather than riskier bonds. If I am going to take up risk, I should be compensated in higher expected returns.
      CD’s and Treasuries serve this purpose. Agencies could help too. I don’t want any risk on that portion of the portfolio – hence why I see it as a type of“insurance”

      Delete
  17. Hi DGI - I was the one who asked about this topic in the comments from your margin of safety article. I think having the first few years expenses invested risk free is a good decision if it lets you sleep well, and my plans are similar. I look at it this way - with 3x expenses you can either increase your margin of safety 12% buying stocks with a 4% yield - or increase it by 100% for the front 3 years, and as long as you don't use it keep rolling it forward.
    It's useful not only for scenarios of recessions/dividend cuts etc. but also just for the ability to weather unplanned/emergency expenses when life happens.

    mdc

    ReplyDelete
    Replies
    1. Hi MDC,
      The funny thing is that I had this article scheduled to post when you asked for it. I guess you are reading my mind. Thanks for your comments
      Best Regards,
      DGI

      Delete
  18. I manage my mother's registered dividend portfolio - she started earning a fixed government pension when my father passed away two years ago that contains an cost-of-life indexing provision and provides 60% of what my dad would have earned in retirement. For me, this represents the solid fixed-income portion and will simply be supplemented by her dividend growth machine, never having to touch the capital base. I give this site credit for convincing me to convince her that this was the right approach for her retirement and in less than 5 years her porfolio has nearly doubled in value while delivering ~7% dividend growth with no signs of slowing down.

    All I can say is thank you DGI for showing us the way and allowing me to sleep at night knowing my mom will be well taken care of even though my dad is no longer around.

    ReplyDelete
    Replies
    1. Hi Mattyboy,
      I think that you are the one who deserves credit for the portfolio you manage – you have done all the legwork to pick the stocks and hold them. You need to give yourself all the credit for it. In this site, all I talk about is what I plan to do with my money –and it might or might not be relevant to others. For example, I may write about trusts or umbrella insurance, but if I don’t think that anyone else will benefit from this, I won’t write about it.
      DGI

      Delete
  19. Very interesting post. I have always been interested in the Permanent Portfolio concept. It seems to provide a great deal of safety. The original was 25% Gold, 25% T-Bills or Cash, 25% LT Government Bonds, and 25% stocks. You can read more about it here: http://www.crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/

    I've also tinkered with a dividend growth modification for the portfolio here: http://www.suredividend.com/do-dividend-aristocrats-the-permanent-portfolio-make-the-perfect-match

    ReplyDelete
  20. I am enjoying you good writing here a lot, and I hope you will not quit once you reach your crossover-point.... THANKS A LOT for sharing your journey!

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

Popular Posts