This happens even if the funds' average annual gains exceed the 4% to 5% being withdrawn because mutual fund withdrawal strategies are based on selling shares, and withdrawal selling at bear market prices bleeds your capital until there's just not enough left.
That is the mutual fund investor's withdrawal dilemma: A big portfolio drop means a big income cut, or a fatal increase in the withdrawal rate. And while a cash reserve is a good first-aid kit for a garden variety down market, it's not the CPR needed for a multiyear mega bear (more on this later).
But it's all low sweat (investing is never 'no sweat') if a big part your living expenses comes from high quality fixed income investments and stocks with rising dividends. You collect interest and dividends without having to sell into a nasty market, and the dividend increases help offset inflation. You're taking some risks, sure, but running out of money isn't one of them.
I don't advocate avoiding mutual funds entirely, by the way, providing they are only a secondary or discretionary source of income. Mutual funds are excellent for indexing, diversifying into certain asset classes and investing styles, and averaging cash into and out of the market. But as a primary source of living expenses they are Russian Roulette, Monte Carlo style.
In future posts I'll discuss how different types of assets, including cash reserves, make for low sweat investing, and also track a simple portfolio that pays 4% to 5%, gives annual inflation increases, and won't ever go broke. But next up: how dividend cuts compare with Monte Carlo risk.
Background link:
No comments:
Post a Comment