Does being full-time investors help you getting better return?

[Junior R]

27 minutes ago, SharperDingaan said:

There is a very simple test for this ...... cdn example

 

TFSA: The 2024 LTD maximum contribution is 95K, inclusive of a 7K 2024 contribution. TFSA contributions/withdrawals are tax-free, and there is no tax on gains/dividends earned while the money is in the TFSA (ie: there is zero tax impact). If your total TFSA investment earned 7K/yr in dividends; would you also make the 7K 2024 TFSA contribution ? Would your answer change if you had invested 'wisely' , the TFSA had 250K in it, and now earned 18.75K/yr (7.5% cash yield) in dividends before trading gains/losses.  https://www.wealthsimple.com/en-ca/learn/tfsa-limit

 

If the answer is that you would stop contributing ... continue working; as the TFSA is now self-financing ... enjoy yourself and spend the foregone TFSA on additional/better vacation. Those near retirement might do the same analysis on their RRSP, and spend the foregone RRSP contribution on house renovation/upgrades prior to retiring.

 

When the numbers are small .... quitting your job to go full-time into investing is a pretty dumb idea 

 

SD 

 

 

lol good one its interesting number of people who do not maximize there tfsa

[Xerxes]

9 minutes ago, Junior R said:

lol good one its interesting number of people who do not maximize there tfsa

i had used TFSA several times in the past ten years to do in-kind transfer to RRSP to “freeze” large capital gain in specific stocks in TFSA, thereby making large RRSP contribution w/o any new incremental dollar needed for the year. 
 

Your accounting cost average goes up as a by product of this transaction but there is no economic gain/loss. 

 

Of course the TFSA would have a hole in it which can be filled the year after with new money.  
 

 

[Viking]

1 hour ago, Junior R said:

@Viking Nice post what stocks did you own in 1999 during .com bubble? Which of the 3 bear markets was your best one? I think 2020 since you were fully in cash and that's when mr market gave us all a good opportunity on FFH

 

20% cagr over the 25 years is wonderful 

@Junior R 2020 was actually a disappointing year for me. I think i finished the year up about 15%. Yes i nailed Covid coming (going to 100% cash). I also deployed my cash well… into the perfect long term portfolio (mostly large cap US tech). And then i sold it all after I got a quick high single digit return - thinking i would be able to buy it all back on the next big pullback. Which of course never happened.

 

But i got bailed out later in the year when Sanjeev (and a few others) kept posting about how cheap Fairfax was. For some reason, Fairfax never participated in the big run up in stocks that happened over the summer of 2020. So i jumped back into Fairfax in October. And when the vaccine news came out (early November) i backed up the truck. I was also tracking Fairfax’s stock portfolio back then and i could see a massive gain was building - it just hadn’t been reported yet. 
 

So my mistake (not holding my ‘perfect’ portfolio) actually sewed the seeds of my big Fairfax purchase. Had i held on to my ‘perfect’ portfolio i am not sure i would have invested in Fairfax at all at the time. And with hindsight, my oversized Fairfax position kicked my ‘perfect’ portfolio in the teeth return wise since 2020. So it actually worked out pretty well in the end. 
 

The key is to not give up - to keep at it.

Edited September 3 by Viking

[Redskin212]

@Viking

 

Thanks for your response - like you said a little bizarre and definitely not the answer I was expecting.  Thanks to all the chimed in as well, the collective knowledge and soundboard is very helpful in thinking about how to fund living expense/operating costs.  I am recently retired and have investments across my taxable account/tax deferred accounts/Roth IRA and real estate (rental property), so all of a sudden, I am managing my portfolio "full time", but more importantly struggling with how, when and what to drawdown to fund my living expenses.  The board raised a number of great points that will help shape my thinking.

 

Thanks all!

[ICUMD]

4 hours ago, Munger_Disciple said:

 

Very few people are aware of sequence of returns risk with periodic withdrawals, let alone understand it. Great post & I wish I could give it more than 100% emoji. 

Agree, great explanation.  I would add that cash flow (ie. Income, Dividends) has a tremendous optionality that is under recognized.  Particularly enjoy targeting undervalued high dividend paying equities with cash flow, knowing that my 'gun' will be reloaded in 3 months time to shoot again. The key is to ensure the reload gets bigger after every shot.

[Viking]

3 hours ago, Redskin212 said:

@Viking

 

Thanks for your response - like you said a little bizarre and definitely not the answer I was expecting.  Thanks to all the chimed in as well, the collective knowledge and soundboard is very helpful in thinking about how to fund living expense/operating costs.  I am recently retired and have investments across my taxable account/tax deferred accounts/Roth IRA and real estate (rental property), so all of a sudden, I am managing my portfolio "full time", but more importantly struggling with how, when and what to drawdown to fund my living expenses.  The board raised a number of great points that will help shape my thinking.

 

Thanks all!

@Redskin212 , your post beautifully highlights one of the key realities of personal finance (of which investing is but one part) - it is constantly changing. This requires life-long learning. I am in the same boat as you… i am entering a different life stage. At the same time, my personal financial situation has also materially changed in recent years - for the better.
 

As a result, my situation is now more complex. That is not a bad thing - it is what it is. But there are many new things that i now need to learn. It doesn’t stress me out. My approach is to start learning - a little better every day. I find keeping things (relatively) simple is important (for me). I am starting with the big rocks - the most important things. I am trying things and then keep learning/modifying. 
 

I can see how lots of people get overwhelmed. 

[Munger_Disciple]

3 hours ago, ICUMD said:

Agree, great explanation.  I would add that cash flow (ie. Income, Dividends) has a tremendous optionality that is under recognized.  Particularly enjoy targeting undervalued high dividend paying equities with cash flow, knowing that my 'gun' will be reloaded in 3 months time to shoot again. The key is to ensure the reload gets bigger after every shot.

 

Well, the sequence of return risk is independent of whether one receives dividends or not. It's just that large, consistent dividend payers tend to be in the defensive sectors like consumer staples and healthcare which outperform in bear markets and that explains the graph more so than they pay dividends. 

Edited September 4 by Munger_Disciple

[73 Reds]

8 hours ago, Viking said:

@Redskin212 , your post beautifully highlights one of the key realities of personal finance (of which investing is but one part) - it is constantly changing. This requires life-long learning. I am in the same boat as you… i am entering a different life stage. At the same time, my personal financial situation has also materially changed in recent years - for the better.
 

As a result, my situation is now more complex. That is not a bad thing - it is what it is. But there are many new things that i now need to learn. It doesn’t stress me out. My approach is to start learning - a little better every day. I find keeping things (relatively) simple is important (for me). I am starting with the big rocks - the most important things. I am trying things and then keep learning/modifying. 
 

I can see how lots of people get overwhelmed. 

Indeed, the key to financial happiness is managing your lifestyle with your means and steadily growing both.

[bizaro86]

23 hours ago, thepupil said:

 

This isn't about CAGR, but rather sequence of returns risk. 

 

From Jan 1999 to August 2024, S&P 500 has CAGR'd at 8.1%/year. 

From Jan 1999 to August 2024, Divvy Aristocrat CAGR'd at 9.7%/ year

 

With 308 months of data (25.6 years), one might think the ending values would be different by something like this: 

 

1.081^26=7.57  1.097^26=11.1  7.57 / 11.1 = 68%, but I calculate that with $1mm starting out $40K annual withdrawals and 3% inflation of withdrawals that the S&P 500 investor ends with $720K and the divvy aristocrat investor ends with $4.0mm. My numbers are different than that post but are directionally in line with his. 

 

Why does the divvy aristorcrat do so much better and end w/ 5.7x as much? 

 

It's because from 1999-2008 the S&P 500 index lost a cumulative 13% and the aristocrats made a cumulative 40%, including the first 4 years where SPX lost 25% and Aristocrats eked out 4%. This is the S&P 500's infamous "lost decade", so you impair the capital by withdrawing money from a declining portfolio 

 

When people say volatility or drawdowns don't matter, I strongly disagree if one is making regular withdrawals from a portfolio. 

 

there's a HUGE difference between CAGR and withdrawal rate. the withdrawal rate is much lower than CAGR and there's also sequence of returns risk. 

 

	SPY	Aristocrat
1999	21.0%	-5.37%
2000	-9.1%	10.13%
2001	-11.9%	10.82%
2002	-22.1%	-9.87%
2003	28.7%	25.37%
2004	10.9%	15.46%
2005	4.9%	3.69%
2006	15.8%	17.30%
2007	5.5%	-2.07%
2008	-37.0%	-21.88%
2009	26.5%	26.56%
2010	15.1%	19.35%
2011	2.1%	8.33%
2012	16.0%	16.94%
2013	32.4%	32.27%
2014	13.7%	15.76%
2015	1.4%	0.93%
2016	12.0%	11.83%
2017	21.8%	21.73%
2018	-4.4%	-2.73%
2019	31.5%	27.97%
2020	18.4%	8.68%
2021	28.7%	25.99%
2022	-18.1%	-6.21%
2023	26.3%	8.44%
2024	19.5%	11.44%

 

 

 

 

I think on of the primary mitigants I'd use for sequence of returns risk are to not retire at the top of a huge bubble and assume that high water mark was a sustainable value. More seriously, if I was considering retiring after a number of good years I'd definitely de-rate the value I was using (eg, assume I was 21% too high at the end of 1999 and that the previous year's gains were unsustainable.) That effectively would mean only using the 3.3% rule instead of the 4% rule, and would make a big difference. 

 

The other thing I think would help quite a lot is tactically holding a year or two of cash. If you went 90% equities/ 10% cash and then spent down only the cash part when the market was down more than 10-15% you'd avoid a lot of the selling-at-the-bottom problem that eliminates the ability to re-grow the portfolio base.

I do something similar in my current financial life. My business is very volatile. It looks like I'll make about 100% of my annual personal expenses in September, but be at zero income or small losses in October and November. To keep that from stressing me out I tend to keep about a year worth of personal expenses in cash in a savings account. Whenever I have a good month I take cash out and replenish. 

 

While the portfolio analogue is a bit "market timing heresy" I think it's really not that hard to know in the moment when the market is "down". There's always a reason, but don't convert stocks to cash then, spend the cash. If the market isn't down then build the cash buffer back up. 

[thepupil]

1 minute ago, bizaro86 said:

 

 

I think on of the primary mitigants I'd use for sequence of returns risk are to not retire at the top of a huge bubble and assume that high water mark was a sustainable value. More seriously, if I was considering retiring after a number of good years I'd definitely de-rate the value I was using (eg, assume I was 21% too high at the end of 1999 and that the previous year's gains were unsustainable.) That effectively would mean only using the 3.3% rule instead of the 4% rule, and would make a big difference. 

 

The other thing I think would help quite a lot is tactically holding a year or two of cash. If you went 90% equities/ 10% cash and then spent down only the cash part when the market was down more than 10-15% you'd avoid a lot of the selling-at-the-bottom problem that eliminates the ability to re-grow the portfolio base.

I do something similar in my current financial life. My business is very volatile. It looks like I'll make about 100% of my annual personal expenses in September, but be at zero income or small losses in October and November. To keep that from stressing me out I tend to keep about a year worth of personal expenses in cash in a savings account. Whenever I have a good month I take cash out and replenish. 

 

While the portfolio analogue is a bit "market timing heresy" I think it's really not that hard to know in the moment when the market is "down". There's always a reason, but don't convert stocks to cash then, spend the cash. If the market isn't down then build the cash buffer back up. 

 

On this, I actually got curious last night about this (yea I'm weird) and ran two "retire at the top scenarios" to modify this. In one you make no withdrawals for 2000,2001,2002 in that you know those will be bad years and you deplete a 3 year cash reserve over that time frame. This results (in my spreadsheet) in an ending total of $1.7mm, a full $1mm difference than the $720K of the all equities approach even though it starts with $130K / 13% more. 

 

Since one would not have known in real time that those three years would be bad, I also did a different scenario where you start with $1mm in S&P 500 and $130K in cash making 4%. If SPX is positive for a month, you withdraw from that. If negative, you take from the cash pile. This could theoretically have been done without any knowledge of the future. This ended with $1.85mm (the cash is depleted in 2007 though). I was surprised this did better than the first which knows the down years. 

 

In both cases keeping some cushion led ending values approximately 2.5x more than the $1mm w/ all stocks.

 

$1mm of S&P 500 + $130K of cash is 2.5x better than $1mm of S&P 500 starting in Jan 1999. 

 

It's one time frame, but I think the scenario should make anyone who is 100% or 130%+ long of equities while withdrawing from a portfolio think twice about such a stance. 

[73 Reds]

6 minutes ago, thepupil said:

 

On this, I actually got curious last night about this (yea I'm weird) and ran two "retire at the top scenarios" to modify this. In one you make no withdrawals for 2000,2001,2002 in that you know those will be bad years and you deplete a 3 year cash reserve over that time frame. This results (in my spreadsheet) in an ending total of $1.7mm, a full $1mm difference than the $720K of the all equities approach even though it starts with $130K / 13% more. 

 

Since one would not have known in real time that those three years would be bad, I also did a different scenario where you start with $1mm in S&P 500 and $130K in cash making 4%. If SPX is positive for a month, you withdraw from that. If negative, you take from the cash pile. This could theoretically have been done without any knowledge of the future. This ended with $1.85mm (the cash is depleted in 2007 though). I was surprised this did better than the first which knows the down years. 

 

In both cases keeping some cushion led ending values approximately 2.5x more than the $1mm w/ all stocks.

 

$1mm of S&P 500 + $130K of cash is 2.5x better than $1mm of S&P 500 starting in Jan 1999. 

 

It's one time frame, but I think the scenario should make anyone who is 100% or 130%+ long of equities while withdrawing from a portfolio think twice about such a stance. 

I thought a lot about this subject long ago before quitting my "day job".  Over the years certain things have become clear.  One, debt is OK for building wealth, but unnecessary and potentially counterproductive for retaining wealth.  The very worst thing that can happen to you is forced selling and at the wrong time.  Two, always have a cash cushion of some sort.  Whatever amount you think you'll need, double it (at least).  In fact, the larger the cushion, the more potential you have to take advantage of times when everyone else is selling.  One never knows when the next crisis will hit, but being able to take advantage from time to time will help you build net worth even with systematic withdrawals from your investment account(s).  Three, find something you really enjoy doing and try to monetize the activity.  You will quickly forget your day job.   Everyone is good at, and enjoys doing something.    

[bizaro86]

27 minutes ago, thepupil said:

 

On this, I actually got curious last night about this (yea I'm weird) and ran two "retire at the top scenarios" to modify this. In one you make no withdrawals for 2000,2001,2002 in that you know those will be bad years and you deplete a 3 year cash reserve over that time frame. This results (in my spreadsheet) in an ending total of $1.7mm, a full $1mm difference than the $720K of the all equities approach even though it starts with $130K / 13% more. 

 

Since one would not have known in real time that those three years would be bad, I also did a different scenario where you start with $1mm in S&P 500 and $130K in cash making 4%. If SPX is positive for a month, you withdraw from that. If negative, you take from the cash pile. This could theoretically have been done without any knowledge of the future. This ended with $1.85mm (the cash is depleted in 2007 though). I was surprised this did better than the first which knows the down years. 

 

In both cases keeping some cushion led ending values approximately 2.5x more than the $1mm w/ all stocks.

 

$1mm of S&P 500 + $130K of cash is 2.5x better than $1mm of S&P 500 starting in Jan 1999. 

 

It's one time frame, but I think the scenario should make anyone who is 100% or 130%+ long of equities while withdrawing from a portfolio think twice about such a stance. 

 

Nice. Thanks! I always like it when my intuition matches the quantitative analysis. 

 

I like the second scenario better, more because it doesn't require hindsight than because it worked out slightly better. For my own use I think I'd probably add cash replenishment on some algorithmic basis (ie, any time the market is up more than XX% from the lows add 0.5%-1% cash per quarter). Having more cash in 2008-2009 instead of running out in 2007 would almost certainly improve things further, because you wouldn't be selling during the GFC. 

 

Now, obviously this is a bit of a worst-case scenario. But it's pretty hard to predict in advance what scenario you're going to get, and it's a lot easier for me to work 2 extra years once I'm in my 40s than it would be to try and go back to work in my 70s because I'm out of money... It's probably all academic anyway for me, because I always find something I enjoy doing that earns money, so I doubt I'll ever truly/fully "retire".  

[Saluki]

21 minutes ago, 73 Reds said:

 Three, find something you really enjoy doing and try to monetize the activity.  You will quickly forget your day job.   Everyone is good at, and enjoys doing something.    

 

I don't think that's such a good idea.  I know people who love working out or martial arts and end up opening a gym and are miserable. I met a couple who moved to Costa Rica, opened up a surf school and got divorced.  Ironically, the cash cow was the shady online credit repair business that they owned before they moved down there, which nobody enjoyed but provided lots of cash and no headaches (the surf school did the opposite). 

[KCLarkin]

55 minutes ago, bizaro86 said:

I think on of the primary mitigants I'd use for sequence of returns risk are to not retire at the top of a huge bubble and assume that high water mark was a sustainable value. More seriously, if I was considering retiring after a number of good years I'd definitely de-rate the value I was using (eg, assume I was 21% too high at the end of 1999 and that the previous year's gains were unsustainable.) That effectively would mean only using the 3.3% rule instead of the 4% rule, and would make a big difference. 

 

Another option, is to dynamically adjust your withdrawals based on the sequence of returns:

 

https://cornerstonewealthadvisors.com/wp-content/uploads/2014/09/08-06_WebsiteArticle.pdf

 

Rather than retiring with a given lifestyle and hoping your capital lasts. You adjust your lifestyle to guarantee your capital lasts.

 

[Red Lion]

1 hour ago, bizaro86 said:

The other thing I think would help quite a lot is tactically holding a year or two of cash. If you went 90% equities/ 10% cash and then spent down only the cash part when the market was down more than 10-15% you'd avoid a lot of the selling-at-the-bottom problem that eliminates the ability to re-grow the portfolio base.

 

I've had this thought before as well. Between the cash and dividends this should be enough for over 3 years of living expenses before selling any stock to raise capital even if you're using the S&P for all your equities. 

[73 Reds]

30 minutes ago, Saluki said:

 

I don't think that's such a good idea.  I know people who love working out or martial arts and end up opening a gym and are miserable. I met a couple who moved to Costa Rica, opened up a surf school and got divorced.  Ironically, the cash cow was the shady online credit repair business that they owned before they moved down there, which nobody enjoyed but provided lots of cash and no headaches (the surf school did the opposite). 

Surfing lessons?  All you need is an ocean.  Personal trainer?  A few pieces of equipment will do.  The point is, anything extra that you bring in from enjoyable activities is that much less that you'll need to withdraw.

[bizaro86]

40 minutes ago, Saluki said:

 

I don't think that's such a good idea.  I know people who love working out or martial arts and end up opening a gym and are miserable. I met a couple who moved to Costa Rica, opened up a surf school and got divorced.  Ironically, the cash cow was the shady online credit repair business that they owned before they moved down there, which nobody enjoyed but provided lots of cash and no headaches (the surf school did the opposite). 

 

I think you have to consider what you actually like and whether that's saleable.

 

Eg: if you love surfing you might not love TEACHING surfing. It's not the same thing.

 

[73 Reds]

1 minute ago, bizaro86 said:

 

I think you have to consider what you actually like and whether that's saleable.

 

Eg: if you love surfing you might not love TEACHING surfing. It's not the same thing.

 

LOL, should have added a 4th item to the earlier post:  Avoid coming up with excuses.

[Munger_Disciple]

1 hour ago, thepupil said:

 

On this, I actually got curious last night about this (yea I'm weird) and ran two "retire at the top scenarios" to modify this. In one you make no withdrawals for 2000,2001,2002 in that you know those will be bad years and you deplete a 3 year cash reserve over that time frame. This results (in my spreadsheet) in an ending total of $1.7mm, a full $1mm difference than the $720K of the all equities approach even though it starts with $130K / 13% more. 

 

Since one would not have known in real time that those three years would be bad, I also did a different scenario where you start with $1mm in S&P 500 and $130K in cash making 4%. If SPX is positive for a month, you withdraw from that. If negative, you take from the cash pile. This could theoretically have been done without any knowledge of the future. This ended with $1.85mm (the cash is depleted in 2007 though). I was surprised this did better than the first which knows the down years. 

 

In both cases keeping some cushion led ending values approximately 2.5x more than the $1mm w/ all stocks.

 

$1mm of S&P 500 + $130K of cash is 2.5x better than $1mm of S&P 500 starting in Jan 1999. 

 

It's one time frame, but I think the scenario should make anyone who is 100% or 130%+ long of equities while withdrawing from a portfolio think twice about such a stance. 

 

Good work! I especially like the 2nd scenario as the first one is mostly hypothetical since no one knows when or how long a bear market will last beforehand.

For the comparisons to be more fair, I would suggest your simulations of various scenarios with the same amount of total capital of $1mm. So you would start with $130K in cash + $870K in S&P 500index in both scenarios you outlined and run the simulations again. This gives a more accurate comparison to the baseline case of starting with $1mm in S&P 500 index with periodic withdrawals. 

Edited September 4 by Munger_Disciple

[bizaro86]

1 hour ago, 73 Reds said:

LOL, should have added a 4th item to the earlier post:  Avoid coming up with excuses.

That was actually advice based on my experience of earning a multiple of my previous professional income with a passion based (travel) business in my 30s. But you do you. 

 

By the standard you're suggesting I retired at age 31. And there's some truth to that - if you gave me $25MM I wouldn't stop running my business, because I like it. That wouldn't have been true of my previous corporate employment.

 

[RichardGibbons]

On 9/2/2024 at 6:07 PM, alertmeipp said:

I have been wondering from time to time whether it's a good idea to quit day job to spend more time managing the stock portfolio.

would one get a better return?

 

I'm not sure if my anecdote is useful, but I'll share anyway.  I roughly did this, and though the periods aren't long I suspect the results are statistically significant.

 

In the seven years before retirement, my returns almost exactly matched the S&P 500.  In the eleven years afterwards, my compounded annual returns were about 6.5 percentage points better than the S&P 500.  (Also, my total returns typically included some cash, fixed income and different currencies, so it's not a total apples-to-apples comparison.)

 

That said, I think it's still pretty hard to determine causality and attribute difference to any one thing. I do try to refine mental models and improve strategies. So, it's unclear to me the extent to which my investing decisions would have diverged over time if I'd chosen a different path and had continued working.

 

(Also, if an all-knowing deity inspected my portfolios and strategies, I'd be pretty surprised if the "expected" out-performance is 6.5 percentage points.  I have a feeling that maybe the expected out-performance is a few percentage points, and the rest was luck.)

[thepupil]

2 hours ago, Munger_Disciple said:

 

Good work! I especially like the 2nd scenario as the first one is mostly hypothetical since no one knows when or how long a bear market will last beforehand.

For the comparisons to be more fair, I would suggest your simulations of various scenarios with the same amount of total capital of $1mm. So you would start with $130K in cash + $870K in S&P 500index in both scenarios you outlined and run the simulations again. This gives a more accurate comparison to the baseline case of starting with $1mm in S&P 500 index with periodic withdrawals. 

 

fair point. differences are less dramatic if doing this.

 

still higher but more like 

 

$720K 100% stocks

$812K 87% stocks 13% cash, bonds are depleted in 3 year bear market

$888K 87% stocks 13% cash, the "use cash after negative month method". 

 

the bottom line is a 4% WR is simply too high if you retire at the absolute peak of a bubble and stocks do nothing for a decade after that. 

[Munger_Disciple]

7 minutes ago, thepupil said:

 

fair point. differences are less dramatic if doing this.

 

still higher but more like 

 

$720K 100% stocks

$812K 87% stocks 13% cash, bonds are depleted in 3 year bear market

$888K 87% stocks 13% cash, the "use cash after negative month method". 

 

the bottom line is a 4% WR is simply too high if you retire at the absolute peak of a bubble and stocks do nothing for a decade after that. 

 

Thanks. These results make sense and agree with my intuition. I agree  with your conclusion that 4% WR is too high if one retires close to the peak of an overvalued market. 

[james22]

1 hour ago, thepupil said:

the bottom line is a 4% WR is simply too high if you retire at the absolute peak of a bubble and stocks do nothing for a decade after that. 

 

Nah, the very point of the 4% SWR is that it has survived starting points of high valuation.

[John Hjorth]

SWR explained, thanks for bringing this concept into the discussion, James [ @james22 ].