Living off Capital vs Living off Dividends

I’ve just set myself the modest goal below courtesy of Rick Ferri. To give myself the best chance of success I’ve set a reasonable timeframe to achieve it - Age 90:

A successful index fund investor goes through four phases:
1) Darkness - takes advice from everyone;
2) Enlightenment - realizes a market return is superior to their return;
3) Complexity - overdoing everything to find optimal;
4) Simplicity - invests in a few total market funds

 

Rather tight time-frame if I have my numbers right. Sure you don't want to make it medium term of, say, 40 years?

 

Actually you’re right. 99, increases my chance of achieving the goal.

 

Excuse my ignorance, but doesn't the amount of tax you pay depend on the profit based on the cost base?

If I bought and sold for $40k I would not pay tax - master of investment.

If I bought for $20k and sold for $40k, profit is $20k, CGT discount assumed so $10k taxed equals 0. Grand master of investment.

If I bought for 1 cent and sold for $40k, $20k taxed after CGT discount is 19% on $2k which is minimal. Super grand master of investment.

Wow, that is very cool. Although actual tax free point is 2 x 18200 = 36400.

Thanks for pointing that out.

On the original question, I'm certain everyone gets some sort of dividend, which by definition can't be excluded from your spending just because it is reinvested. Therefore the question is really what percentage of our spending is funded by selling off shares.

Personally I am not selling anything at the moment. Although I can envisage a future scenario where I can supplement dividend income with capital from selling shares if the dividends don't exceed our spending.

 

Yes when selling it is only the profit that is taxed. So in retirement you can have a large cashflow with a small or no taxable component by selling shares with a 50% CGT discount involved.

 

Tax free point for ye oldies is considerably higher (SAPTO).

 

Hi @Terry_w, can you give one or two example of the investments that satisfy this criteria? thanks in advance.

 

I can't give investment advice but there are LICs that offer bonus shares instead of dividends. Might be a great strategy for someone who has paid off the main residence.

 

Isn’t it even better if the shares are owned in Super - 10% if in accumulation phase and 0% if in pension phase?

 

Yes. But it is not always possible to divert capital into a superfund and it is not really a question of one or the other, but you can do both. And by 'retirement' I really meant financial independence which might happen before access to super is possible.

 

Catching up on this thread and I have a set of questions for @dunno that may have been answered already, sorry if that's the case.

Obviously feel free to ignore my questions as they are personal in nature and in that case I hope you've taken no offence. However, given that my entire strategy is based on the belief that markets can't be timed and that passive generally beats active, I'm very interested in contrary viewpoints and in this case, a real world example where the proof is in the pudding.

You made your money in direct shares. If you had to start over again today would you use direct shares or another strategy? If you said direct shares, how confident would you be in replicating your previous success? If another strategy, could you explain?

I guess the fundamental question is, how much do you think your investing success was attributed to luck over skill?

Thanks in advance.

PS, you are clearly a very intelligent and skilled investor, maybe even a professional. You are also willing to call a spade a spade, and although generally people aren't humble enough to say they were lucky, instead preferring to claim skill, I feel you'd be honesty and analytical in your response. Hope that makes some sense.

 

dunno has written about luck vs skill here: Asset Allocation

 

Hi @Zenith Chaos

And thankyou @MarkW That previous post still basically sums it up.

But because I still have no real idea where the line that luck plays should be drawn, I'll take this opportunity for another self indulgent ramble.

Its not as though I just went out and bought a lotto ticket and won the jackpot. So, it’s not all luck. The work, learning and resilience I put into it had something to do with the outcome.

But even my ability to participate in the markets comes largely down to what Buffett calls the Ovarian Lottery. To be born in this era, In Australia and with an aptitude for investing is none of my doing, that is Luck. To be conformist enough to get educated and non-conformist enough to break out of 9-5 wage safety is not even really my doing but the luck of my upbringing. That I used those advantages and did not waste them, I will take some credit for.

How I went about investing would produce a distribution of outcomes if repeated many times. I like to think the median of that distribution would be slightly to the positive side of a market return distribution over the same periods. That would be an indication of skill, but I can’t prove that with just one observation. This is where my vanity comes in, despite any proof I believe it was more than just luck. One thing I do give myself unequivocal credit for is being able to get up after the many knocks along the way.

Where luck certainly played a part is that I got an outcome in the far positive tail of what would be the distribution if I could repeat my investing journey many times. It is pure arse that on the my one and only shot I got a positive tail distribution outcome. To take the luck and start to de-risk before my luck runs out, I’ll take credit for as good judgement.

However, to invest the way I did, High risk with no safety net, was bad judgement that I ultimately got away with. Maybe it was a bit of resilience, a bit of brains but it was mostly luck that I survived to prosper. I now think getting yourself secure with a nice passive safety net before taking on extra risk for faster reward is better judgement. However there is one thing for sure though, the younger me would not have listened to the current me and maybe that’s even a good thing because I’m not sure the current me could have done what the younger me did. Stupidity and luck are powerful combination if it comes off.

 

@dunno that kind of self awareness and insight are in short supply. Good post, many would be well served giving it consideration....including a younger me!

 

Great post as always. Thanks for your honesty and objective self reflection.

My skill and risk tolerance don't bode well for a concentrated single holding strategy - the outcome curve would definitely be left skewed compared to market returns and most success would in all likelihood be attributed to luck. Spending time improving myself and creating opportunities around my skillset are the optimal strategy for me as an individual as well as society as a whole.

I'm sticking with VAS, VGS, VGAD, DJRE and LICs with a total 50/50 allocation on ASX / international and AUD / NON-AUD.

.....and some VVLU because of the ramblings of a random dude on the internet.

 

On Japan

The Japanese stock market is the poster child for equity bubbles and markets that don’t recover. This reputation is true, if you had invested all of your money at the market peak in 1989. However, if you had starting buying monthly (i.e dollar-cost averaging) in 1980 and never stopped, the post-1989 decline is far less pronounced [Note: The dotted line in the plot below represents your monthly contributions into the Japanese equity market while the solid line is your current portfolio value]:


As you can see, there are times when the solid line (portfolio) is below the dashed line (contributions), but for those investors that held on and kept contributing, their experience improved with time.

This is the difference between taking a snapshot approach and an approach that reflects an investor’s actual experience. With this framework in mind, what would it have been like for a hypothetical U.S. investor who bought into the market during different periods in market history?

Realistic Investment Results – Of Dollars And Data

 

I am a very green investor, started with about $7.5k... Currently split between 2 holdings; AFIC ($4K) & VGS ($3,500).. I have DRP on both and don't plan on touching this for at least 20+ years.. at least! My intention is to buy more shares in $1k amounts (2-3 times a year).

I know I'm not talking about huge numbers, but for future buys, should I focus on growing my AFIC allocation? Or will I be better with more VGS exposure?

Not sure what ratio I should be aiming for/what will be more beneficial in the long run?

Appreciate your time

 

There’s so many answers to this as discussed in various threads ranging from all in one index funds (eg VDHG), unlisted index funds with auto BPay (minimises behavioural Issues) or multi funds as you’re doing (be mindful of brokerage for small purchases) etc.

Personally (I can’t advise others) a 50 / 50 split of what you’re already doing (although VAS could be a great complement or substitute for AFI) is a pretty good option. Others might suggest the addition of VGE / VAE being emerging markets/ Asia only.

Or for simplicity with everything covered there’s VDHG:

https://api.vanguard.com/rs/gre/gls/1.3.0/documents/11894/au

Some other ideas can be found here. Expect to be confused:

Asset Allocation

 

This will be helpful in deciding for yourself:
Passive Investing Australia
Equity funds - Passive Investing Australia
The Australian version of the 3-fund-portfolio - Passive Investing Australia

See how you go with that website but you'll definitely have more questions (investing is very confusing and overwhelming at first).

The link doesn't work for me, I assume it's just the VDHG main page?

 

Sorry. It’s the FACT SHEET link from there.