Living off Capital vs Living off Dividends

Another great post previously about Japan by @dunno:

Sequence of Return Risk

 

@dunno thanks for the clarification.

Yes definitely good idea about new thread to talk diversification.

Have you given much thought on how you will deal with situation where you have been active and focused so long and probably will know when market is going through its inefficiencies and your passive investments are suffering because of that. How would you handle such a situation?

For someone like you does broad diversification make sense? Would you be happy to accept 4.4% return over 20 years as is the case of MSCI World ex Australia? And it’s not like that market is really cheap and a screaming buy now so next 5 year returns will be double digit. Look at Europe nothing to get excited. Same with Japan.

I understand things can change quickly but looking at developed nations we have

US GDP 20 trillion and 62k gdp per capita
Japan GDP 5 trillion and 39k gdp per capita
Germany GDP 4 trillion and 48k gdp per capita
UK GDP 3 trillion and 42k gdp per capita

China is second largest economy with GDP of 12 trillion and GDP per capita of $10k but you have a communist government whose top priority is not having a capitalist society and investors returns.

Would like to write more but constraint by small tablet.

Cheers
Oracle

 

Yes on lot of measures Japan has done well. But on measure of stock market returns which is really important to building wealth not so great since 1990. For average investor that is 29 years of their investing time.

Unlike the US where the society and the Government likes Wall Street to succeed and see it as an important measure of country’s progress other countries don’t share a similar enthusiasm for their enterprises to be profitable which gets reflected in stock market returns.

Cheers
Oracle

 

Not all income is able to be (efficiently) invested. It is capital if it is/will be invested. Check BRK cash holdings...

Alternate example: farmer Joe owns farmland and a tractor and some seeds or something (I know nothing about farming). The sun shines, the rain falls and he grows crops which he sells for cash. He spends some on tractor maintenance and other things, maybe some new seeds. He reckons the land can support one cow so he buys one, but can't see any more opportunities to expand. The rest is distributed to his only shareholder, his daughter Jane.

Jane, bewildered looks up and asks him "Daddy did the tooth fairy bring all these dividends?"

He smiles gently and says "it was the judicious use of my capital, darling".

His wife wanders out of the barn, cuffs him round the ears and says "might have had something to do with Mother Nature too, mate".

She winks at her daughter and confides "she's friends with the tooth fairy".

 

I may be wrong but I wouldn’t be surprised when some readers see posts from wealthier members of the forum it may give rise to negative feelings of despondency / envy etc.

It triggered a memory of something Thornhill wrote:

Of course Thornhill is quite well off but I think there’s an important message in the above quote. There are countless retirees with little in the way of wealth enjoying great happiness. There are plenty of wealthy retirees who are miserable. Those who make an effort to invest often end up with “more than they expect”.

 

I don't think your wrong at all. And that's not saying anything against anyone on this site but just generally in life. In saying that when I hear about people doing well and doing better than me, it actually motivates me. I like associating with people doing better than me, in the hope that there knowledge and experience will rub of on me.

Reading @dunno post about his handsome dividend payment lights a fire under me to go harder and build up a larger portfolio so I can be collecting bigger / fatter dividends. I applaud his achievements and the competitive nature in me drives me to want to out do him and be able to say my dividend payment is bigger than yours. In saying that while I thrive to always reach new heights I never wish for others any less so I can get ahead. There are plenty out there who try and drag others down so they can be above them. I strive to be above others but never by dragging anyone below me but by working harder and smarter so I naturally move up.

 

In economics there is a term called declining marginal utility, where the more you get of something the less you value each additional unit. That certainly describes money for me.

Financial freedom money is so much more significant than any that comes after it. Financial freedom money is with-in reach of all, that’s the most exciting thing about investing.

When you have managed to get a a bit of money behind you and you have a low marginal utility towards it, ie spending it is not a great thrill. An Ironic thing tends to happen – you keep doing what you did, and the investing start snowballing. 1Million to 10Million is the same percentage return as 100K to 1Million, 10M to 100M is the same again. The extra money really makes very little difference to your life. Its that first FU chunk that is life changing. Actually, the inverse relationship of money was true for us – We gave a chunk away and it lifted a real weight from me, I got the snowball back to a manageable size. Something I feel comfortable with for me and the next generation, to whom I will start transferring as early as practical as part of their education process about hopefully ethical and sensible use of money.

We all have a different relationship with money, I hope the above explains mine a bit and I don’t come across as an unintentional dick when I open an window into our situation. The reality is I love investing, but don’t care that much for money, except for the chunk that gives us freedom, that part I love with a passion.

 

Some of the best times in my life were when I had very little. To be honest the more wealth we accumulate, now beyond our current needs and wants, the more I’m prone to worry about it. It’s in my mind a lot - how to protect it, how to invest it better, how to build more of it, how to reduce tax on it, what about country risk, are we diversified enough, ETFs vs LICs, currency risk, what if my wife survives me or one of us gets a serious illness ... I could go on and on.

I love investing for dividends BUT when I think of it my wife and I have often said if we knew in advance when our time is up we’d go to our graves having spent our last dollar. Gee what a hypocrite when I think of what I often post here.

Sometimes I wonder if my not wanting to draw on capital at this stage of our life is simply a fear of an unknown future. Then again I have always been a nervy type. What if this happens or that happens including such things as possibly needing high dependency aged care down the track after seeing our mothers go through a long drawn out horrible end. To be able to afford the best in such a circumstance should it arise is high in importance for us.

I think I’m in need of a long visit to @truong ’s meditation / contemplation hut.

Anyhow on that note time is nearing for me to make a decision on adding hedged Global in SMSF. As you can see some of us are beyond help.

 

Top post !

Cheers
Oracle

 

I don’t think anyone here would think that @dunno. We’re not as wealthy as you but still well off compared to most and I have at times shared quite a lot of detail. I also hope others don’t think I’m coming across as an unintentional dick.

I like to think it gives others hope. After all our families had very little in the way of wealth. My wife’s parents were very poor having suffered a great deal of misfortune with health and money throughout their life. So any thing we have now is a result of education, hard work, saving, investing and perserverance.

 

Great insight into mindset and relationship with money / investing.
I think I am more like you @Nodrog , the more I accumulate the more I worry about it. But don't get me wrong I would rather have more than less any day of the week. I agree with what @dunno is saying that the more you accumulate the less impact it has on your life. A sum that you once thought was huge to earn all of a sudden feels like not so much.
I have a weird approach to wealth building. I want to invest more so I can earn more so I can spend more. But to earn more from investing I must spend less to earn more to spend more.
I want a collection of exotic cars, a boat and all the other fancy toys. But I want to do it in a sustainable way through investment income streams. No point buying all these fancy toys and then having no money left over to maintain that lifestyle for years to come.

 

Will the coffee I've ordered be hot this time is the worry. It certainly wasn't on the flight back from Sydney this morning.

Have to get the priorities right. Money, as an item to exchange for goods and services, isn't one of them.

 

What I should have mentioned also is that in my case there is great enjoyment derived from investing and continuing to learn. But I have an obsessive nature so keeping that under control is not always easy. I do feel greater wealth has resulted in a potentially unhealthy obsession with it at times.

 

He he. Yeah I get the point. It’s not for the want of trying. I’ll get there one day. My nature unfortunately works against me much of the time.

 

I wish I could be more like that. Unfortunately I am more like @Nodrog ( No offence Mr Nodrog )
Over think , over analyse and over obsesses. We might have to start some therapy group for our types.

 

I'll refrain from saying what I think about group therapy. Suffice to say it'd be full of narcissists aka investors, which would defeat the purpose of group therapy.

 

No - It's more value averaging. The asset allocations are moving over time, so are the market prices - when one of the passive allocations is lower by an economical parcel size for brokerage, I top it up. It all depends on how things move relative to each other. I don't trim the passives when they get ahead.

I’ve retained the 25% active Australian exposure in the long-term plan specifically to scratch my itch’s.

Hopefully that will stop me from tinkering with the passive too much. (but sometimes I read @Nodrog posts and think I'm looking at myself in 10 years and he's still tinkering, so there is probably little hope for me)

Really, I know stuff all about international Macro and so many other things for that matter. I’m really only a novice on passive as well. What, its been probably less than two years since I started my conversion. I’m still atop Mt Stupid.I know a bit about investing in mainly smallish Australian companies, that’s the limit of any insight I would proclaim.

I still constantly mull over your approach of giving up a bit of potential diversification return that may or may not occur for the certainty of simplification and cost saving, against my asset allocation and have no idea what is optimum. You, @Redwing, @pippen and many others here are certainly further ahead on the passive journey than me.

So the inclination to invest as though I’m smarter than global markets isn’t that great in me. In saying that I have departed from pure broad exposure to indulge a small Asian tilt, mainly at the expense of non-Asian developing markets, which just feels comfortable for me living in this part of the world. I don’t foresee staying the course being an issue on this tilt.

The value tilt comes out of viewing the micro of the Australian market where there is real bifurcation of the market. Loved is well loved and disliked is well disliked, Value normally does well over the medium term starting from this basis. So yes I’m guilty of tinkering with the passive here. Once markets become more homogentisic in how they value companies I will most likely do away with the Value exposure. I just can’t get comfortable only accumulating Market cap at this point. If I had started where I’m heading from the get-go, I wouldn’t have a value allocation now.

 

Happy Money, The Science of Smarter Spending.

Two professors combine their fascinating and cutting-edge research in behavioral science to explain how money can buy happiness—if you follow five core principles of smart spending.

and

“High Income Improves Evaluation of Life but Not Emotional Well-Being.”

The researchers found that happiness increases with levels of income until our basic needs are met.

 

He he. I’ve become more accepting of this fault. Provided it keeps our wealth heading upward which has been the case for sometime now I don’t beat myself up as much about it nowadays.

Hey @dunno, there’s a rumour that VEU will be locally domiciled sooner than expected. But of course not wanting to fiddle further with the passive portfolio that wouldn’t interest you.

 

I'm obviously at the unconscious competence stage