01-27-2014, 11:44 AM
(01-23-2014, 09:20 PM)hendi_alex Wrote: For a pure growth portfolio, selling shares does not equate to drawing down the principal. If growth is greater than the value of liquidation each year, then the growth portfolio could also fully fund retirement without drawing down the principal from its initial value at the start of retirement. Personally, I don't really see any difference. Dividends paid out are essentially 'return of capital'. Either way, spending dividends or selling shares moves the portfolio from the accumulation phase to the distribution phase. To me the real problem with the growth portfolio comes when distributions must be taken during a harshly down market. During those times, IMO a dividend portfolio is clearly superior.
Unless you are taking profits in all the up years and taking more than what you need then you end up selling in down years quite often. Also, up years after even one down year can still be far from you breaking even.
The DJIA counting dividends, was down -5.23%, -4.6%, -16.54% in 2000, 01, 02. In 2003 it was up 31.54%. looks great but if you were needing to take principle in addition to dividends or just principle then you are hurting pretty badly.
If you spend a fixed $50K per year and started with $1M in 2000 by then end of 2003 you be down to around $648K. Well, $648K needs a 54.3% return year just to reach your original investment. in 2003 you got 31.94, or you went up to $854,970 but you took out $50,000 so net $805K, or still needing a 24% year to break even. With 2004, 2005 giving you 7.1% and 1.75% you are down even more again.
That is the problem that is over looked by the principle only arguments. It can work if you happen to own all the right stuff but that is much more often NOT the case. If people owned the right stuff most of the time then investors would not do so horribly on average.
My spreadsheet that I have has the DJIA and S&P 500 back to 1958 thru end 2013 including dividends and you often have two years or more of poor performance. And, even after the poor years when you have a good year or years in a row it is often not even close enough in performance to reach par let alone perform well enough to also compensate you for inflation.
Since nobody can predict the future, I would suggest trying to get 80% or more of your retirement income from dividends alone in order to minimize selling of capital until you are in your late 70s or early 80s. Waiting that long you will probably have your money, even taking principal, outlive you. Starting that as part of a regular retirement in the early to mid 60's....ouch! you could live another 30+ years and half of those being broke.