# Risk in terms of maximum drawdown



## james4beach (Nov 15, 2012)

This chart comes from a SocGen report. It's a history of maximum drawdown of asset classes going back 63 years. Maximum drawdown means the maximum loss from the peak to trough of a portfolio value; this is the worst case loss you may experience.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2016/10/26/20161026_cash.jpg

This chart is very important! It shows you the risk of loss in terms of the magnitude of the decline.


 Cash ... max drawdown 0%. That's the point of cash; you can't lose money.
 10 year bonds (this means XBB, VAB) ... max drawdown -15%
 Stocks ... max drawdown -50%

I'm posting this because I see comments in other threads about how bonds are dangerous, in a big bubble, and claims they are more dangerous than stocks (ludicrous). Yes bonds are overpriced and are a bubble, but bond risk still pales in comparison to stocks. Here we see that in the brutal bond bear market of the 1970s, the worst loss of a bond portfolio was -15%.

Don't eliminate your bond holdings. They offer both vital diversification, and reduce your portfolio risk -- even if you buy them at the worst possible time. And there is no way to know if you are buying them at a good time or bad time, of course.

Say that you are just entering retirement. The greatest danger to your wealth is a sharp drop early in retirement. The only way to reduce that risk is to have a higher fixed income allocation at the start of retirement.


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## Eclectic12 (Oct 20, 2010)

james4beach said:


> This chart comes from a SocGen report. It's a history of maximum drawdown of asset classes going back 63 years. Maximum drawdown means the maximum loss from the peak to trough of a portfolio value; this is the worst case loss you may experience.
> http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2016/10/26/20161026_cash.jpg
> 
> This chart is very important! It shows you the risk of loss in terms of the magnitude of the decline.
> ...






One can't lose money with cash?

It makes me wonder why the in laws used to convert their cash to tangible things like soap etc. then selling or barter when they wanted to use it. Maybe it had something to do with living with 1000% inflation per month?

I'll have to check.

I'm not saying Canada is there but the claim is the worst case, right?


Cheers


*PS*

With groceries climbing dramatically, doesn't cash mean something like 30% fewer groceries in a short order?


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## doctrine (Sep 30, 2011)

Cash can easily draw down 30-40% over 10 years or less. Over 20 years, 50%+. Relevant numbers, especially when tracking assets over 63 years. If you held cash for 63 years, what is it worth now? Very important question.

That being said, I do hold bonds to reduce risk, but only in registered accounts to avoid 40%+ taxes.


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## mordko (Jan 23, 2016)

If we have 1000% inflation then the real value of shares and bonds will be decimated and soap would be the best investment.


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## agent99 (Sep 11, 2013)

Bonds are not a single category. 

Government bonds may be the most secure, but that would depend on which country. Even in a secure country, their yield may be lower than the inflation rate, especially if in a taxable account. That is the case now in Canada. You lose every day you hold them, but slightly better than holding cash. Both are low risk of a major loss, but will still lose you money.

Corporate bonds have some of the same risk as equities. And of course there are many equities all with different risk levels. These may have less risk of a major loss than the same company's equity, but still significant risk.


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## Pluto (Sep 12, 2013)

mordko said:


> If we have 1000% inflation then the real value of shares and bonds will be decimated and soap would be the best investment.


Or stock in the soap company could be the best investment. They will just keep raising the price of soap.


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## Pluto (Sep 12, 2013)

The draw downs should be important to people who have bought stock in companies that will be mortally wounded in a recession. Otherwise, why worry? I'm concerned because I have a stash of cash that I want in stocks, but I don't want to invest it shortly before a 25% - 45% draw down. I'd rather buy low. But that's just me. Lots of people claim they don't care, and that's their prerogative.


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## lonewolf :) (Sep 13, 2016)




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## andrewf (Mar 1, 2010)

james4beach said:


> This chart comes from a SocGen report. It's a history of maximum drawdown of asset classes going back 63 years. Maximum drawdown means the maximum loss from the peak to trough of a portfolio value; this is the worst case loss you may experience.
> http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2016/10/26/20161026_cash.jpg
> 
> This chart is very important! It shows you the risk of loss in terms of the magnitude of the decline.
> ...


I think this is meaningless if done in nominal terms. In real terms, cash can definitely have huge drawdowns. Just ask anyone holding 100 trillion zimbabwean dollar notes.


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## lonewolf :) (Sep 13, 2016)

A lot of bonds are paying negative interest rates holding to maturity will lock in a loss. The only way to make money is to sell to someone who wants to make a bigger loss holding to maturity.


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## pwm (Jan 19, 2012)

I don't buy it. There's no future in holding bonds now with interest rates at lows that have never been seen before. All you're saying is that stocks are volatile. We all know that, but the volatility of a security does not imply losing money. Volatility is not another word for risk.

I retired in 2005 with 100% dividend paying stocks. When 2008/2009 happened I didn't lose anything because I didn't sell anything. I just kept on collecting my dividends and ignored the craziness. I still hold no bonds and don't intend to make any changes.


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## james4beach (Nov 15, 2012)

I agree that one has to look at real return (after inflation) but that still doesn't make stocks less risky. Stocks are not guaranteed to perform well during high inflation.

I'm kind of shocked that so many of you are dismissive of the maximum drawdown


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## doctrine (Sep 30, 2011)

Not only is cash subject to inflation risk, but also currency risk. Canadian cash, which is by far what most Canadians hold, has seen 25% erosion in just 3 years. That is as volatile as stocks and has real, tangible impacts on purchasing power as well as pricing of goods in Canada.


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## pwm (Jan 19, 2012)

As I've said before, volatility does not concern me. It's philosophical question I guess. It's like the tree in the forest question. If the tree falls, and no one is there to hear it, does it make a sound? The correct answer is NO it does not make a sound because that requires a sensor to detect the compression and rarefaction of the medium and label it as sound. Similarly, if others are trading a stock at lower prices than I paid, have I suffered a loss? I would say NO because I haven't sold.


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## james4beach (Nov 15, 2012)

For those of you who are totally immune to portfolio drawdown, I presume then that you are making purely leveraged stock investment? You probably should, because if you have decided that stocks MUST go up long term and that periods of losses are irrelevant (they don't affect you at all), then you should be leveraged long at all times.

But even if you aren't bothered by paper losses, for those of you in retirement it still matters whether you like it or not. It is destructive to your portfolio to have large losses and be drawing down from that portfolio. *A retiree who is living off capital has to care about maximum drawdown.* Drawing money out of a depressed portfolio is highly destructive to your capital, whether you use dividends or not (the dividends are irrelevant).

pwm, are you not living off your capital? You seem to not be worried about periods of loss in your portfolio. If you're still earning income and growing your capital, I understand.


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## humble_pie (Jun 7, 2009)

.

_why has everybody started shouting today_


.


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## pwm (Jan 19, 2012)

james4beach said:


> ]A retiree who is living off capital has to care about maximum drawdown.[/B] Drawing money out of a depressed portfolio is highly destructive to your capital, whether you use dividends or not (the dividends are irrelevant).
> pwm, are you not living off your capital? You seem to not be worried about periods of loss in your portfolio. If you're still earning income and growing your capital, I understand.


OK, now I understand what you're getting at. I am not touching my capital, the dividends are more than enough to live comfortably. If I was "eating my seed grain", then I would probably structure my holdings differently.


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## mordko (Jan 23, 2016)

Was this forum around in 2008? Would be interesting to read whether all the participants were just as cool with drawdowns at the time.


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## mordko (Jan 23, 2016)

Having said this, I am forced by the circumstances to have most of my assets in cash until January. I will buy stocks as soon as the money is free, but would love to see a nice drawdown in November or December.


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## doctrine (Sep 30, 2011)

Many people were buying in 2008 and 2009, yes, I remember looking back shortly after I joined. I'll also point out there have basically been extended periods of good value in almost every year since then. 

There was even a bear market just this year! And also many people were here were buying, myself included. National Bank at $40, Royal Bank at $70, Telus at $39, Transcanada at $45, Fortis at $39, and so on. Not as much buying in the last few months. Valuation matters to me. When something like Transcanada drops 35%, I will take sharp notice.


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## james4beach (Nov 15, 2012)

pwm said:


> OK, now I understand what you're getting at. I am not touching my capital, the dividends are more than enough to live comfortably. If I was "eating my seed grain", then I would probably structure my holdings differently.


With dividends being paid out you still _are_ touching your capital ... any extraction of cash from your portfolio is drawing money out of the equity. The dividends hide the effect, but a steep portfolio loss is still detrimental to your capital even if you're only taking dividends out of it. Those SWR studies don't (as far as I recall) distinguish between dividends and capital appreciation, because the two are conflated.


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## james4beach (Nov 15, 2012)

pwm: you're not going to like this, but I am trying to be helpful. I think you are incorrectly treating your dividend-paying stocks as if they're bonds. You think you're leaving your "capital" alone by only living off the dividend payments.

That is true for bonds, but not for stocks. Every dividend payment, if you take it out as cash, impedes the ability of your stock portfolio to keep growing... and therefore you are eating into your capital. Normally this is not a problem except when there's a sharp decline in equities. Imagine your $2 million stock portfolio declines to $1 million. Each dividend you now receive is robbing you of future returns.

This is why I think you _should_ worry about the maximum drawdown of your portfolio. Large declines will make your money run out sooner, even if you are only living off dividends.

Consider this: when that $2 mln portfolio drops to $1 mln, what if you were reinvesting each dividend instead of removing the cash? If you were reinvesting it, you'd get the maximal "total return" of the portfolio. By virtue of taking the dividend, you are impeding that performance. The large portfolio decline is very harmful to you, especially early in your retirement years.


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## atrp2biz (Sep 22, 2010)

What happened the last time interest rates were essentially zero? Has there been a last time?


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## agent99 (Sep 11, 2013)

james4beach said:


> pwm: you're not going to like this, but I am trying to be helpful. I think you are incorrectly treating your dividend-paying stocks as if they're bonds. You think you're leaving your "capital" alone by only living off the dividend payments.
> 
> That is true for bonds, but not for stocks. Every dividend payment, if you take it out as cash, impedes the ability of your stock portfolio to keep growing... and therefore you are eating into your capital. Normally this is not a problem except when there's a sharp decline in equities. Imagine your $2 million stock portfolio declines to $1 million. Each dividend you now receive is robbing you of future returns.
> 
> ...


James,
We save for our retirement so we will have money to spend. What should we use for money if we don't spend our dividends? 

pwm seems to be retired and in similar position to us. We live off our dividends regardless of what the markets do. 

Using some fictitious numbers, we had say $1million invested in 2003. This grew to about 1.5Million by 2008. Then markets crashed and portfolio went down to say 1.1million. Now it is back to $1.5million. All this while we were drawing about 4% of original portfolio value plus inflation each year for 14 years. Sure we would have had more if we re-invested our dividends. But what good would that be to us? We invest in companies that pay dividends just so we have a steady cash flow to spend. No point in hoarding dividends. And no worry if markets are volatile. We are not spending our original capital and it is growing by more than the inflation rate. Lucky for us. Doesn't apply to everyone.


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## Argonaut (Dec 7, 2010)

atrp2biz said:


> What happened the last time interest rates were essentially zero? Has there been a last time?











Pretty unprecedented. Only comparable time is Great Depression. Even then rates weren't as low as now, especially with lots of countries having sub-zero rates. This is a huge problem that effects the very foundations of finance and economics and I don't think it's yelled about from the rooftops enough.

Interesting looking at the 1800s, which I consider the golden age of capitalism. Long term trends were stable, but short term rates varied wildly. May have been a good strategy.


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## hboy54 (Sep 16, 2016)

james4beach said:


> Say that you are just entering retirement. The greatest danger to your wealth is a sharp drop early in retirement. The only way to reduce that risk is to have a higher fixed income allocation at the start of retirement.


The thing is, at this point I have made so much in extra returns over the decades by only holding the historical highest returning asset class, stocks, that even a 50% drop now leaves me better off than the so called less risky approach to investing that others have taken over the same decades.

To my way of thinking, bonds with a historical return of about 2% points lower return than stocks on average does indeed make them in the long term riskier to my financial health than stocks. You call this ludicrous, but my thinking in this ludicrous fashion has made me wealthy with very little effort.


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## peterk (May 16, 2010)

james4beach said:


> pwm: you're not going to like this, but I am trying to be helpful. I think you are incorrectly treating your dividend-paying stocks as if they're bonds. You think you're leaving your "capital" alone by only living off the dividend payments.
> 
> That is true for bonds, but not for stocks. Every dividend payment, if you take it out as cash, impedes the ability of your stock portfolio to keep growing... and therefore you are eating into your capital. Normally this is not a problem except when there's a sharp decline in equities. Imagine your $2 million stock portfolio declines to $1 million. Each dividend you now receive is robbing you of future returns.
> 
> ...





agent99 said:


> James,
> We save for our retirement so we will have money to spend. What should we use for money if we don't spend our dividends?
> 
> pwm seems to be retired and in similar position to us. We live off our dividends regardless of what the markets do.
> ...


The problem, and I'm inferring from your tone of writing here agent99 and pwm, is that you seem to be under the impression that your dividend payments are acting as some sort of "smoothing" mechanism that is helping you "weather the storm" (imagined quotes) of market volatility. That taking a 6+% dividend (which is what it'll be during a 50% market correction) is not the same as selling 6% of your capital after a market crash. But it is. It really is, I know it doesn't feel like it is, but it is.

Having a 2-3 year cash/bond cushion, which would be about a 90% stock : 10% bond/cash portfolio would immensely help a retiree properly "weather the storm", the cash/bond portion to be infiltrated and spent down to 0 during times of market crisis.

The issue, which James is trying to hammer home, is that dividends do _not_ provide any sort of _stability_ to one's portfolio. That "steady cash flow" does not mean that "volatility doesn't matter to me", but we hear it all the time from retiree's on here talking about wanting secure dividend income and steady cash flow. A 90/10 or 80/20 portfolio with the cash/bond cushion used during stock market corrections (eek! market timing!) would provide a much superior portfolio than 100% stocks for a retiree, imo.

Taking 50k/year (for example) in dividends from your retirement portfolio, is exactly the same as selling 50k/year of stock from your retirement portfolio. And you wouldn't feel very comfortable selling 50k/year if your 1.5M retirement portfolio just dropped to 800k, would you?


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## peterk (May 16, 2010)

hboy54 said:


> The thing is, at this point I have made so much in extra returns over the decades by only holding the historical highest returning asset class, stocks, that even a 50% drop now leaves me better off than the so called less risky approach to investing that others have taken over the same decades.
> 
> To my way of thinking, bonds with a historical return of about 2% points lower return than stocks on average does indeed make them in the long term riskier to my financial health than stocks. You call this ludicrous, but my thinking in this ludicrous fashion has made me wealthy with very little effort.


I think this may be only valid in the accumulation stage. In retirement, is it? I don't think so, I'm not sure why, that's just my gut feeling. I think it might stem from my assertion, which is also a gut feeling, that "it's much easier to pick a bottom, than pick a top". I don't really know if this is true, but it seems so to me. If the market corrects and you start buying, it will eventually bottom out at ~50%. That's about the worst that can happen and if you're already buying at -20% and -30% then it's got even less of a drop. "Averaging down" has got to get your portfolio within 25% of the bottom, which isn't too bad really. On the way up however, you could be way the hell off. You could have sold in 2010 after the S&P500 went up 80%, only for it to go up another 80% to today, and we still don't know if we're at a top...It could go up 80% again!


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## Eclectic12 (Oct 20, 2010)

mordko said:


> Was this forum around in 2008?
> Would be interesting to read whether all the participants were just as cool with drawdowns at the time.


I can remember reading people debating what to do and what to buy in late 2008/2009. 
Some were like my co-worker liquidating as "I can't take any more paper losses", some where holding off and some were buying as well as debating the best stuff to buy.

From going to earliest thread in each section, the earliest I can find are around April 2009 so the custom search might be the only way to get to the threads.

I read for a few years then started posting in 2010 but I did find a could of other users with Join dates of April 2009.


Cheers


*PS*

It looks like I am confusing conversations with people with the CMF conversations. The Wayback Machine as well as the announcements of the start of CMF put the start at April 3rd, 2009.


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## humble_pie (Jun 7, 2009)

peterk said:


> The problem, and I'm inferring from your tone of writing here agent99 and pwm, is that you seem to be under the impression that your dividend payments are acting as some sort of "smoothing" mechanism that is helping you "weather the storm" (imagined quotes) of market volatility. That taking a 6+% dividend (which is what it'll be during a 50% market correction) is not the same as selling 6% of your capital after a market crash. But it is. It really is, I know it doesn't feel like it is, but it is.
> 
> Having a 2-3 year cash/bond cushion, which would be about a 90% stock : 10% bond/cash portfolio would immensely help a retiree properly "weather the storm", the cash/bond portion to be infiltrated and spent down to 0 during times of market crisis.
> 
> The issue, which James is trying to hammer home ...





yes, james4 & yourself are *trying to hammer* certain financially successful retirees in a manner that does seem to be a wee bit on the disrespectful side. 

what neither of you seems to understand is that these parties have ended up with large enough portfolios that they can weather almost any storm. Trying to intimidate them with babble about a 50% market meltdown - as if a 50% meltdown were an everyday occurrence - is meaningless. 

the world has not seen a 50% market crash since the 1930s. That's eight decades ago. The retirees whom you are hammering were probably not even yet born.

turning now to the 2-3 year cash/bond position that you mention as being the go-to spending money which seniors should utilize during down market periods, there are many threads in this forum that deal with this topic. It's usually referred to as cash damming. There is at least one cmffer nearing retirement who has operated a large cash dam for a few years now & speaks approvingly of the sense of comfort it gives to herself & her husband.

some don't see much difference between cash damming & maintaining a healthy emergency fund. As it happens, i'm one of the parties who doesn't see much difference. 

but anyone & everyone can see the utility in such a cash buildup/cash dam, especially for the early retirement years. If the worst should happen in stock markets, recent retirees would be immune because they would not have to invade their capital. Instead they will be able to retreat to Fortress Cash & live on that for a year or two.

however, exceptions would be the significantly wealthy. Parties with perhaps $2 million or more. Even in a worst case scenario, at least some of their dividends would continue to flow in, while they are living day-to-day in Fortress Cash. This would produce a rolling dividend situation, in that cash would be depleted while dividends would accumulate to replenish the cash.

what would be the purpose of the action in the preceding paragraph? it looks like nothing more than an issue in semantics to me. In reality, these well-off seniors would be spending their dividends on a current basis. In reality, they would simply be maintaining a normally healthy cash emergency fund while spending their dividends on their life expenses as per usual.


.


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## Pluto (Sep 12, 2013)

james4beach said:


> pwm: you're not going to like this, but I am trying to be helpful. I think you are incorrectly treating your dividend-paying stocks as if they're bonds. You think you're leaving your "capital" alone by only living off the dividend payments.
> 
> That is true for bonds, but not for stocks. Every dividend payment, if you take it out as cash, impedes the ability of your stock portfolio to keep growing... and therefore you are eating into your capital. Normally this is not a problem except when there's a sharp decline in equities. Imagine your $2 million stock portfolio declines to $1 million. Each dividend you now receive is robbing you of future returns.
> 
> ...


1. you seem to be ignoring the recovery after the draw down. for people who are accumulating, a draw down time is an opportunity to buy more at lower prices. 
2. dividends don't necessarily impede growth. What if the dividends are invested? What if the dividends were used to buy bonds, would that make you happy? 
3. the retired folks here who have their savings in dividend stocks and live off the dividends seem to be happy about it. You seem to be overlooking that. They seem to feel secure that their stocks will recover. Your pessimistic portrayal of their circumstances doesn't correspond to their reality. they are trying to teel you that if you buy quality stocks, the draw down isn't permanent.


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## humble_pie (Jun 7, 2009)

Eclectic12 said:


> I can remember reading people debating what to do and what to buy in late 2008/2009



cmf forum did not exist in 2008. Was created in the first half of 2009, march or later i believe, ie every member who ever joined the forum would be a post-collapse bull market participant.


.


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## hboy54 (Sep 16, 2016)

peterk said:


> I think this may be only valid in the accumulation stage. In retirement, is it? I don't think so,


My point was mostly that my answer to the original question re a 50% drop is don't care I have 100% more to start with because I have spent my early life that is 21 to today's 54 in "risky" "ludicrous" stocks instead of FI. The OP talks and invests like he is 70 and he is shooting himself in the foot, but he likely won't understand this for another 20 or 40 years, if ever.

As to your other point about picking bottoms and tops, I can't really do that. I don't even try to. All I can report is that over almost a 2 year period, in buying say TCK.B starting at $24 down to under $5 over something like 6 or 8 transactions, and then selling at about $12, $14, $18, $24, and a few days ago $28 things have worked out tremendously. My first 4 sells look tragic now don't they, yet I am up on TCK accrued capital gains, realized capital gains and dividends over $200,000. All my buys looked tragic until way back in February. Sure it is unfortunate I left somewhere between $50K and $100K on the table with my first 4 sells. I can't predict the future. At $12, it was something like 12% of my portfoilio and I tempered my greed. Slightly, I am still at double weight what most folks will do. And on up the chain of sell transactions. As of today, TCK.B is still about 10% of the portfolio. Still, contrast that to the guy who bought a few years ago at $50 and sold at $5. Or the guy who like me bought at $24 and did nothing else. Or the guy that refuses on principle to own resources because he labels them excessively risky. I have not a bad result I think for a stock that went from $24 to $28 in just under 2 years. 

Even if we go way back a month or so ago when it was a $24 to $24 round trip, my results are fantastic. How often have we heard from the OP that the TSX has done nothing for what is it 9 years now not even back to whatever it's peak was 15000 or something. Or how often have we heard from the OP that you need to hold stocks for 20 years to be assured a good outcome? What does that have to do with your results, or my results? SFA if you work with the nature of stocks and markets instead of fighting that nature.

Stocks are not excessively risky, people's behaviour around them is excessively risky. I have used a maul to split firewood and I have used a maul to strike my big toe. Since I did something that disrespected the nature of a maul in action by not wearing steel toed boots, I took some painful consequences. Most investors do the equivalent with their investments. They don't respect the nature of stocks and find themselves hurt. It isn't the fault of stocks, any more than it was the fault of the maul that I had a really sore toe and eventually lost the toe nail.

So much of life is like a coin with 2 sides. One side is loss/tragedy/failure. Often the other side is opportunity/good stuff. These imaginary coins are lying all about sprinkled throughout life. Many if not most people carry them around in their pockets, but never pull them out to examine the other side. They just know they have a coin with tragedy on one side and are saddened by it. Also, they are certainly not looking out for other people's tragedy coins. They are the best kind, you don't have to pay the cost of the tragedy, but can reap the opportunity that lies on the other side.

Outside of money, a classic example would be I think Dr. Temple Grandin.

Much of investing can be slotted into this idea.

Really happy I pulled out my TCK.B tragedy coin a few times after the initial buy at $24. Actually, I think this is someone else's tragedy coin, for I did not ride this one very far down for very long from its $50 high, unlike OSB where I will likely never see the $100 I paid for my first share a decade ago.

Just to be fair in my recent investing tragedy coins, the TCK.B and ECA tragedies have paid out, the BBD.B, and BTE ones have not as yet (~-10% currently), and LRE came out slightly positive, about double GIC return. The totality is most excellent.

In one sense my response here is way out of the scope of the original post. Yet it isn't in the sense of the entire body of work of the OP, he is always hammering away at how stocks are dangerous and risky and how he is all wise and in a fatherly way he can show us all the path to financial enlightenment. 

He: banks are risky bla bla. Me: Picked up RY at $66. 
He: banks are risky bla bla. Sold short RY at what was it about $76? Me: Do nothing but collect a RY dividend or two. 
He: banks are risky bla bla. Cover short at what $80? Me: do nothing ... 
He: banks are risky bla bla. Buy RY at what about $82? Me: Still doing nothing ...

WTF??? 

So, we net about $38,000 annually in dividends after interest payment on the margin loan. If my wife retired today, her pension would be about $30,000. If we had to, we could live on either figure by itself. Even a family income of $30,000 is probably more than what 1/4 of the families in my area live on. 

If the tragedy coin of a 50% market drop rolls my way, I'll pick it up and turn it over. It will probably look very similar to the one I had in 2008/2009 and I'll likely do the same things I did then. What will you do?

hboy54


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## like_to_retire (Oct 9, 2016)

peterk said:


> The issue, which James is trying to hammer home, is that dividends do _not_ provide any sort of _stability_ to one's portfolio. That "steady cash flow" does not mean that "volatility doesn't matter to me", but we hear it all the time from retiree's on here talking about wanting secure dividend income and steady cash flow. A 90/10 or 80/20 portfolio with the cash/bond cushion used during stock market corrections (eek! market timing!) would provide a much superior portfolio than 100% stocks for a retiree, imo.
> 
> Taking 50k/year (for example) in dividends from your retirement portfolio, is exactly the same as selling 50k/year of stock from your retirement portfolio. And you wouldn't feel very comfortable selling 50k/year if your 1.5M retirement portfolio just dropped to 800k, would you?


The advantage of taking the $50K in dividends, as long as the companies don't reduce their dividend payout in a market drop (which they're loath to do), would leave the total number of shares the retiree owned unchanged. The hope would be that the market would recover and the market price of those shares would return to previous values (and doesn't it almost always). This scenario has occurred many many times. 

If the retiree has only growth stocks, then to obtain the $50K income during a market drop they must sell shares that suffer from a depressed market value. More shares have to be sold to obtain the same $50K they enjoyed before the drop. This could be especially damning during early drawdown.

I do realize that dividend stocks are generally associated with larger, well established companies that produce predictable cash flow. They pay out this cash rather than use it for capital projects to grow the company, but as long as this payout is at a reasonable level they can still grow slowly and also weather large drops in market value over time. I usually consider these companies less volatile than growth companies. The growth companies that don't pay a dividend would generally do better during market rally's, and may be smaller in size, and would also be considered more volatile and so exacerbating the problem of selling extremely depressed shares. I wouldn't enjoy selling my depressed shares of growth companies during a 50% market drop. The blue chip dividend companies would simply be paying a larger portion of their cash flow to support their dividend payout until the good times returned.

I understand that everything being equal in the two $50K examples you gave would mathematically be the same, but in reality, given the above, wouldn't the dividend method be a better way to go for a retiree?

ltr


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## Argonaut (Dec 7, 2010)

Excellent post by hboy. A lot of wisdom in there.

The secret to investing is high reward with low risk. Bonds right now to me are low reward and high risk.


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## peterk (May 16, 2010)

humble_pie said:


> yes, james4 & yourself are *trying to hammer* certain financially successful retirees in a manner that does seem to be a wee bit on the disrespectful side.


I truly hope it's only a wee, tiny bit, which even then is not meant.  I, and perhaps James, are just trying to diversify the conversation... Lots of retirees on here are I'm sure quite successful, happy and well off, and are more than satisfied with a set it and forget it live-off-the-dividends portfolio. But this is a financial forum for advanced discussion is it not? It's not the workplace lunchroom table where me and James, the 30 year olds, are calling out the senior folks for being idiots! I see nothing even mildly disrespectful about pointing out that "living off the dividends" _might_ not be the ideal set-up for a retirement portfolio, nor that 100% equities without a couple-years cash dam is, perhaps, also not ideal. I hope these aren't drastic, disrespectful statements. I learn lots from reading you wise, experienced individuals, and on balance I'm sure I get more from the seniors on here than they get from me. 



hboy54 said:


> All I can report is that over almost a 2 year period, in buying say TCK.B starting at $24 down to under $5 over something like 6 or 8 transactions, and then selling at about $12, $14, $18, $24, and a few days ago $28 things have worked out tremendously. My first 4 sells look tragic now don't they, yet I am up on TCK accrued capital gains, realized capital gains and dividends over $200,000. All my buys looked tragic until way back in February. Sure it is unfortunate I left somewhere between $50K and $100K on the table with my first 4 sells. I can't predict the future. At $12, it was something like 12% of my portfoilio and I tempered my greed. Slightly, I am still at double weight what most folks will do. And on up the chain of sell transactions. As of today, TCK.B is still about 10% of the portfolio. Still, contrast that to the guy who bought a few years ago at $50 and sold at $5. Or the guy who like me bought at $24 and did nothing else. Or the guy that refuses on principle to own resources because he labels them excessively risky. I have not a bad result I think for a stock that went from $24 to $28 in just under 2 years.
> 
> .
> .
> ...


Awesome post hboy! My thought, that you can pick a bottom easier than a top, is with the general market in mind, not a company like TCK, obviously. I started selling my TCK recently at $21 and up, so I missed the top too!
Of course, it takes all kinds. James' pessimism might be justified or might not for the future. Maybe your 30 years of positive results gives you a good feel of the financial markets that I can't understand yet. 

I also suspect that maybe the forum is experiencing retirees more excited to talk about the more exiting parts of their portfolios! A cursory glance and one would conclude that you are dumping a significant portion of your portfolio into small cap resource stocks, pwm is all equities all the time, and 1980z28 has sold most of his lands for an un-diversified portfolio of Canadian mid-caps.  I'm sure the reality is that there are boring blue-chips, bonds, cash emergency funds, paid off houses, and pensions, that make your total portfolios a lot more retiree-friendly, but that the conversations around here don't fully reflect that because they would be, frankly, boring conversations.


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## peterk (May 16, 2010)

like_to_retire said:


> If the retiree has only growth stocks, then to obtain the $50K income during a market drop they must sell shares that suffer from a depressed market value. More shares have to be sold to obtain the same $50K they enjoyed before the drop. This could be especially damning during early drawdown.
> 
> I do realize that dividend stocks are generally associated with larger, well established companies that produce predictable cash flow. They pay out this cash rather than use it for capital projects to grow the company, but as long as this payout is at a reasonable level they can still grow slowly and also weather large drops in market value over time. I usually consider these companies less volatile than growth companies. The growth companies that don't pay a dividend would generally do better during market rally's, and may be smaller in size, and would also be considered more volatile and so exacerbating the problem of selling extremely depressed shares. I wouldn't enjoy selling my depressed shares of growth companies during a 50% market drop. The blue chip dividend companies would simply be paying a larger portion of their cash flow to support their dividend payout until the good times returned.
> 
> I understand that everything being equal in the two $50K examples you gave would mathematically be the same, but in reality, given the above, wouldn't the dividend method be a better way to go for a retiree?


Sure. We can definitely make the assumption that 2-5% dividend paying companies are generally larger companies, and probably more stable and successful companies, in general. Excellent companies for anyone, and particularly for retirees, to hold.

But in your first paragraph you say that selling during a market correction would be "especially damning", compared to dividend taking, and in the last paragraph you agree that it would "mathematically be the same", these seem to be in conflict. That it's mathematically the same is the whole point that I'm trying to make (very respectfully of course), and taking dividends during a downturn is just as detrimental as selling stock... that if you have other sources of money that are not from depressed stocks then you should consider drawing on those funds instead, and allowing your dividends to re-invest during the downturn period.


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## 1980z28 (Mar 4, 2010)

Say that you are just entering retirement. The greatest danger to your wealth is a sharp drop early in retirement. The only way to reduce that risk is to have a higher fixed income allocation at the start of retirement.[/QUOTE said:


> I will start to draw down in 2017 at 56,,,will start with my RRSP,,try to get it out before i die,,,,i do not think i have enough time,,,if i live to 100 it only gives me 44 years


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## humble_pie (Jun 7, 2009)

we started off with pwm, agent & hboy as examples of successful investors whose portfs were large enough to provide retirement income largely as dividends, for the simple reason that interest rates are too low to make bonds worth holding.

peterk says seniors should also hold big cash as buffer against market downturns & i agree with this. 

in fact it never occurred to me that anyone would *not* hold cash/emergency funds/cash dam. I've always had one. The proportion swings up & down, currently just north of 20% but creeping higher.

i would imagine that pwm, agent & hboy do have cash or liquid funds on hand. In fact i would count upon them to have liquid on hand. All that happened was that this information was so basic that it got overlooked in posts to the forum.

meanwhile, here's another reason why retirees with large portfs would choose to keep bonds surprisingly low. The heirs. The estate plan. For the sake of 2nd generation heirs, it's a sound plan to retain common stock exposure in a portfolio. This is the sector that will permit capital growth. Ultimately, the heirs will benefit.

.



.


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## 1980z28 (Mar 4, 2010)

Now looking at posts and reading most,,as hboy54 stated i had the same thing happen to me with FM chased it from 12 down to 4 or 5 and back up for a lot of shares,,,i could only do this because of leveraging below prime,,at times i was not happy,,,i now see this with LIQ going from 12 down to 5 or 6 i am still buying,i own a lot of this also,,,maybe i think that i will never be wrong,,,i was wrong on rim and nortel big time but i was younger at that point of my life and have recovered from that,,,lucky that owning property has also paid well


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## mordko (Jan 23, 2016)

OK, here is what investors were thinking in 2008: http://www.financialwisdomforum.org/forum/viewtopic.php?f=29&t=108570

Very educational. About half stuck to their plans (or so they claim) but slightly over 50% did not. You can see some of the trends we are observing now taking hold, including:

- Pulling out of the US and focusing on Canada (Canada seemed far more stable)
- Re-classification of preferred shares (Prefs did not behave "fixed")
- Pulling out of shares and moving money into property. 
- Safety in dividends (the drawdown was relatively short-lived and most companies paid the same dividends)

Of cause the next battle is guaranteed to be exactly like the last one.

Very, very few of those who commented were cool with what was going on in the markets at the time.


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## pwm (Jan 19, 2012)

humble_pie said:


> we started off with pwm, agent & hboy as examples of successful investors whose portfs were large enough to provide retirement income largely as dividends, for the simple reason that interest rates are too low to make bonds worth holding. peterk says seniors should also hold big cash as buffer against market downturns & i agree with this. in fact it never occurred to me that anyone would *not* hold cash/emergency funds/cash dam. I've always had one. The proportion swings up & down, currently just north of 20% but creeping higher. i would imagine that pwm, agent & hboy do have cash or liquid funds on hand. In fact i would count upon them to have liquid on hand. All that happened was that this information was so basic that it got overlooked in posts to the forum. meanwhile, here's another reason why retirees with large portfs would choose to keep bonds surprisingly low. The heirs. The estate plan. For the sake of 2nd generation heirs, it's a sound plan to retain common stock exposure in a portfolio. This is the sector that will permit capital growth. Ultimately, the heirs will benefit.
> .


Good post, as usual HP. You've got it exactly right on every point.

1). Bonds pay nothing in real terms.
2). My company pension, CPP & OAS are enough to live on, and my investment income is much more than that, so it is almost entirely re-invested. 
3). I have $80k in EQ Bank HISA at 2% just in case. (Two years living expenses, or a Cash dam as you call it).
4). I want to leave my children and grandchildren a large estate because they deserve it. Holding bonds won't help that endeavor.

Now, having said that, if I was in a position where I had to draw down my investments to provide cash flow, I would have some FI with maturities synced such that I would never have to sell securities at depressed prices just to survive. So J4B makes a valid point about holding some form of FI in a "draw down" situation, but in this environment I would not hold bonds but rather some other form of FI such as laddered GICs at a credit union to get the best rates, for example.


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## My Own Advisor (Sep 24, 2012)

I was thinking about this recently for us, even though we have a long way to go, up to 10 years:
http://www.myownadvisor.ca/generating-retirement-income/

"I will invest in income generating assets and employ some sort of modified cash wedge in retirement while opening up the investment taps. That might look something like this:

We intend to keep at least one years’ worth of basic living expenses in cash savings. That is likely somewhere up to $50,000.
After this one-year cash fund is tucked away in a high interest savings account, we will rely on the following for income beyond any workplace pensions:
Cash from dividend-paying stocks from Canada and the U.S. (up to 40 stocks in total). We will use the dividend income generated monthly and quarterly to pay for living expenses, keeping the cash buffer I mentioned above intact.
Cash from a couple of low-cost, diversified, U.S. equity or dividend ETFs that pay distributions. Examples of those ETFs are VTI or HDV, the latter is a high dividend iShares ETF. We will spend the distributions generated by our ETFs each month and quarter, and eventually draw-down the capital. Over time our draw-down approach will be as follows: 1) RRSPs first before our non-registered accounts. 2) Non-registered accounts before tax-free savings accounts. We intend to spend a good portion of our RRSP assets before taking CPP or OAS to help smooth out taxes over many years."

So, not unlike pwm....

1) We'll have cash, at least one year, in a HISA or whatever exists.
2) We'll spend the income from our portfolio, and slowly sell-off equity assets over time.
3) Any pensions we have we'll defer ideally to age 60 or so, until all RRSP assets are completed.


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## canew90 (Jul 13, 2016)

james4beach said:


> For those of you who are totally immune to portfolio drawdown, I presume then that you are making purely leveraged stock investment? You probably should, because if you have decided that stocks MUST go up long term and that periods of losses are irrelevant (they don't affect you at all), then you should be leveraged long at all times.
> 
> But even if you aren't bothered by paper losses, for those of you in retirement it still matters whether you like it or not. It is destructive to your portfolio to have large losses and be drawing down from that portfolio. *A retiree who is living off capital has to care about maximum drawdown.* Drawing money out of a depressed portfolio is highly destructive to your capital, whether you use dividends or not (the dividends are irrelevant).
> 
> pwm, are you not living off your capital? You seem to not be worried about periods of loss in your portfolio. If you're still earning income and growing your capital, I understand.


I'm with PWM, living off dividends, not touching capital, not affected by market drops, as in 2008/2009, and not invested in leveraged stocks, rather in those that have a consistent record of paying and increasing their dividend. Oh no bonds, etfs, preferreds or mutuals.

Yes, if one plans on living on Capital, one should worry about the market ups & downs. Too bad!


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## humble_pie (Jun 7, 2009)

pwm said:


> I have $80k in EQ Bank HISA at 2% just in case. (Two years living expenses).


of course you do. So does every other successful investor. To repeat: if emergency funds/cash wedges are not being discussed, it's because having this backup in place is so basic that many parties are simply overlooking or forgetting to mention their short-term savings allocations.





> I want to leave my children and grandchildren a large estate because they deserve it.


aww, sweet

i very much like the idea of trying to serve as the steward of a portfolio. Keeping it sustainable. Making it serve & help others. The opposite of greedily spending it on oneself.


* * *


we should focus now on the middle-grounder, who is most of us. The sub $1M portfolios. Especially in cases where aggregate net worth either includes the house, or else does not include large DB pensions, or both.

here the cash wedge becomes critically important. Even for young people, since jobs have become & are becoming increasingly unstable.

we can see an excellent example of this prudence with young engineer peterk, who has a good job in fort mcMurray & has been building up a large cash wedge in recent years. At times he's mentioned buying a house with the cash, at other times he's thought of saving it for an early retirement launch. 

recently, following the fires last summer in fort Mac, peterk has said he's just happy to hold the cash. His own job & career appear to be thriving, but he has mentioned that his gf would be laid off for a while. No doubt he can see widespread job chaos on all sides, in fort mcMurray right now. The view must be sobering.

then there is james4, who has always skewed to a strategy of holding large proportions of investments in safe vehicles. Even though he holds down an excellent job at present, jas4 has known unstable employment periods earlier in his young life, so IMHO his carefulness in maintaining a strong cash wedge sets an excellent example for all.

.


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## My Own Advisor (Sep 24, 2012)

Absolutely nothing wrong with a healthy cash wedge. Just that all investments, including staying in cash, have risks. i.e., inflation. 

"So does every other successful investor. To repeat: if emergency funds/cash wedges are not being discussed, it's because having this backup in place is so basic that many parties are simply overlooking or forgetting to mention their short-term savings allocations."

Well said +1


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## TomB19 (Sep 24, 2015)

Twice in my investment history, I've been all in with no cash reserve. February of this year was one of those times.

Normally, I try to keep 10~15% cash.

When I spent all of my cash in February, I felt pretty weird about it. It was a more uneasy feeling than having my other holdings go in the tank. Perhaps that is because I'm used to market slow downs but it wouldn't surprise me if I never go all-in again. It would take a major market event before I'd consider it.


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## CPA Candidate (Dec 15, 2013)

It must be sad to go through life obsessed with financial disaster and general doom and gloom.


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## mordko (Jan 23, 2016)

Planning for a financial downturn is called risk management. It's not "obsession". It's common sense. That does not mean being risk averse, it just means being in a strong position when markets go south. Doom and gloom is what happens when we have the inevitable downturn and one is not prepared.


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## twa2w (Mar 5, 2016)

My Own Advisor said:


> Absolutely nothing wrong with a healthy cash wedge. Just that all investments, including staying in cash, have risks. i.e., inflation.
> 
> "So does every other successful investor. To repeat: if emergency funds/cash wedges are not being discussed, it's because having this backup in place is so basic that many parties are simply overlooking or forgetting to mention their short-term savings allocations."
> 
> Well said +1


I don't agree that all successful investors have an emergency fund/ cash wedge. Many, including myself believe in being 100% invested other than maybe when we are transitioning between investments or taking some money off the table in boom times and waiting for re-entry points. Why would you want 10% or whatever of your portfolio earning nothing.
Emergencies rarely happen and most small ones can be acommodated through cash flow. 
A line of credit can cover anything else at very low cost until I am ready to sell something in my portfolio. 
Having said that, I recognize that some people are in less than secure occupations and in different stages and a cash wedge may be suitable but to say it applies to all is just wrong.


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## hboy54 (Sep 16, 2016)

mordko said:


> OK, here is what investors were thinking in 2008: http://www.financialwisdomforum.org/forum/viewtopic.php?f=29&t=108570


I looked at the above, but found I had no participation. Did take a walk down memory lane on a few other threads. I wonder what happened to the guy who went into fall 2008 with 65% of his portfolio in MX.

On another topic here, I do in fact not hold much cash, usual about $10,000 lingers about split between Canadian and US dollars over many accounts. Just a side effect of avoiding account fees and having too little cash in one place to make a $10 commission seem reasonable. My observation over the decades has been that the expected value of the various options is always greatest by being fully invested in stocks.

I did this year cover a different risk. I am the sole source of firewood in the household, so we purchased a heating option by way of a propane furnace. 3 or 4 months planning allowed the $10,000 cash to emerge from the stock holdings without undue hardship.

Hboy54


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## agent99 (Sep 11, 2013)

peterk said:


> The problem, and I'm inferring from your tone of writing here agent99 and pwm, is that you seem to be under the impression that your dividend payments are acting as some sort of "smoothing" mechanism that is helping you "weather the storm"


No not at all - It is just cash flow, just like non-retirees collect their pay check. 



peterk said:


> A 90/10 or 80/20 portfolio with the cash/bond cushion used during stock market corrections (eek! market timing!) would provide a much superior portfolio than 100% stocks for a retiree, imo.


pwm may have an all stock portfolio, but we have 40-50% in fixed income, all in registered accounts. But not in low yield FI. Corporate bonds, convertible debentures, split preferreds and some preferreds. More like equity risk, no doubt. But take risk with eyes open and you can do quite well.


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## humble_pie (Jun 7, 2009)

hboy54 said:


> I do in fact not hold much cash ... we purchased a heating option by way of a propane furnace. 3 or 4 months planning allowed the $10,000 cash to emerge from the stock holdings without undue hardship.



interesting. Everyone has to find their own comfort zone.

me i would not be happy needing 3 or 4 months to materialize $10k out of stock holdings. My comfort zone would gladly forego opportunity lost on $10k while having the funds handy in a HISA account.

.


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## agent99 (Sep 11, 2013)

twa2w said:


> I don't agree that all successful investors have an emergency fund/ cash wedge. Many, including myself believe in being 100% invested other than maybe when we are transitioning between investments or taking some money off the table in boom times and waiting for re-entry points. Why would you want 10% or whatever of your portfolio earning nothing.


I never hold much in cash. In fact I get antsy when I see significant amounts of cash in accounts earning nothing. This mostly happens in registered accounts where putting in LISA is not an option. So I look for something that is depressed or otherwise attractive. FI or equity. Right now have about $35k sitting in my RRIF looking for a home. Tried to by DH convertible debentures when they hit 90c, but they rebounded quickly.


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## hboy54 (Sep 16, 2016)

humble_pie said:


> me i would not be happy needing 3 or 4 months to materialize $10k out of stock holdings.
> 
> .


I was unclear. The 3 or 4 months was there due to the time between making the decision to get the furnace, and the desired time of year for the install, not to raise funds. 

We must have credit card aggregate limit of something like $50,000, $300,000 margin, and settlement T+3 for a stock sale to fund anything big and sudden. I have no recollection of ever having an emergency that required funds in a hurry.


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## pwm (Jan 19, 2012)

I normally don't hold such a large amount in cash. I've been waiting for a correction for a while and the money builds up fast. Even so, it only amounts to ~3% of my invested assets. I try to imagine that I am a fund manager, and as such it would be normal to have some cash on hand for buying opportunities. It's not really cash for an emergency. If I needed a new furnace or roof, I could handle that just like any day to day expense and just put it on my credit card.


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## james4beach (Nov 15, 2012)

I think most of you disagree with me on whether or not those interim (nominal) price declines matter or have any negative consequence. Most people here think that the price declines are a non-issue. Am I reading this right from you folks?

Here is why I think the price declines and steep maximum drawdown are of concern:

(a) most investors are unable to ignore serious declines in their portfolio, and these kinds of steep losses disrupt investment plans. It's stressful to many people to see their net worth plummet. But let's assume you have nerves of steel, and ignore this point.

(b) the SWR studies have shown definitively that heavy portfolio losses early during the living-off-capital are very destructive to the longevity of your capital. Your capital simply cannot last as long if you experience sharp losses early on, _even if the assets recover fully._

(c) my assertion is that living purely off dividends changes nothing. As peterk repeats in his post, just living off dividends does not put you in a different position than if you were selling shares to live off capital. There is no difference. The dividends give the perception that something different is going on, but you are still fully exposed to the danger in (b). For yet another source that backs up my assertion here, see this report from a wealth advisor co: https://www.ljcooper.com/wp-content/uploads/2015/03/Yield-vs.-Total-Return-1-1.pdf

Point (c) is the key part in the argument I'm trying to make. Perhaps I'm wrong about (c).

Consider for a moment, what if I am right about (c). If I am correct that dividends are a moot point in total return/capital drawdown, *this means that even if you live purely off dividends, a sharp temporary decline in your portfolio early in retirement will harm you and deplete your capital earlier*. Therefore it's important to insulate your portfolio against large % drops, even if they are temporary. Which is where fixed income comes in.

And I didn't even mention the fact that SWR studies show that there is virtually no advantage of boosting your stock allocation above ~ 70%. Folks here are telling me that they have experienced terrific returns in stocks and have enough wiggle room to tolerate losses and that the very high returns make 100% stocks worthwhile. That's NOT what SWR studies say. They say that sharp portfolio losses are very detrimental to all retirees, and there is not an advantage to 100% stock allocations. If you get lucky, it works out great. But if you get those bad losses early in retirement, you are screwed.

I'm not trying to talk down to anyone or say that I know how to invest better than others. All of the above is what I have understood from the various papers and studies I have read. I acknowledge that my understanding may be wrong.

On another point: yes you are all also correct that a young person who still earns employment income (like me) doesn't need much fixed income me. Yes, I have been wrong about this part.


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## james4beach (Nov 15, 2012)

This is very current research that describes why "rising equity glidepath" is a great approach to managing sequence of return risk:
https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

That research shows an optimal glidepath is: *start retirement at 30% stocks 70% fixed income*. By spending from fixed income and leaving the stocks alone, after 30 years you end up with 70% stocks 30% fixed income. This provides superior results to starting with 100% stock exposure.

This is very different than the "100% stocks in retirement" message that echoes through this thread. Even if we account for cash reserves, it sounds like 80%+ stocks is common around here.

I just hope those of you doing those heavy stock allocations have considered sequence of return risk.

Pfau and Kitces, who do this research, are experts in portfolio modelling. Even if you don't believe a word I say, please go and read their study.


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## pwm (Jan 19, 2012)

All valid points J4B. Here's the problem. All the rules of thumb for bond allocation such as the "60%/40%" rule or the "90 minus your age" rule etc. for stocks/bonds and all the studies regarding withdrawal rates in retirement, are all based on past experience with a "normal" situation. I'm old enough to remember when things were "normal" which was when bond yields were higher than stock dividends but stocks had a potential for growth. This was true for decades, and bonds were especially good investments for the past 30 years. See the accompanying graph of 10 year Canada bonds from 1986 to 2016. 

I hate to use the phrase "this time it's different" because those words have such a bad connotation in the investment world, but I really do believe that it applies today to bonds. Interest rates are at lows that have never been seen in history. I have held bonds and bond funds in the past, but will not do so going forward.

View attachment 12354


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## mordko (Jan 23, 2016)

I am with pwm on this one. Ironically, those investing in long-term bonds today are doing it in the hope of a short-to-medium term gain which would come if the rates dropped further. Over a long period of time the risk of the downside is large and any potential for the upside in terms total real returns is very limited.


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## like_to_retire (Oct 9, 2016)

mordko said:


> I am with pwm on this one. Ironically, those investing in long-term bonds today are doing it in the hope of a short-to-medium term gain which would come if the rates dropped further. Over a long period of time the risk of the downside is large and any potential for the upside in terms total real returns is very limited.


Yeah, I agree. When rates are near zero, there's a floor on the upside for bonds/fixed income. Has there been a situation like this before that's included in all the various papers and studies?

ltr


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## pwm (Jan 19, 2012)

There's an old saying that generals always fight the last war. I think that idea applies to the studies J4B refers to.


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## hboy54 (Sep 16, 2016)

james4beach said:


> This is very current research that describes why "rising equity glidepath" is a great approach to managing sequence of return risk:
> https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/
> 
> That research shows an optimal glidepath is: *start retirement at 30% stocks 70% fixed income*. By spending from fixed income and leaving the stocks alone, after 30 years you end up with 70% stocks 30% fixed income. This provides superior results to starting with 100% stock exposure.
> ...


James presents good points and is arguing for what my grade 11 Politics teacher referred to as "the common ordinary slob", everyman and everywoman, the average.

People like myself argue for what is possible if you can be brutally rational, which of course for 90 or 99% of the population is not possible. 

The studies you quote no doubt make assumptions about how people behave that are simply not true in my case. So if the assumptions don't apply to me then neither do the conclusions. 

Bottom line is that both positions are correct for their respective audiences.


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## Pluto (Sep 12, 2013)

james, the essential idea is to buy quality stocks: - a good balance sheet, management that will keep it that way, and a customer base that can not disappear over night are a few of the essential characteristics. It just so happens that many companies that fit that criteria pay dividends. 

Regardless of the analysis in 

https://www.ljcooper.com/wp-content/uploads/2015/03/Yield-vs.-Total-Return-1-1.pdf 

if you want quality you will get some companies that pay dividends. 

If no dividends is an absolute criteria for your search, you are automatically eliminating many quality businesses. 

Also the assumption is that the price of dividend stocks will go down upon payment, but I don't see that as necessarily true. If the dividend payout is 40% of net earnings, then 60% is retained, so the stock might go up. Based on the example, in which presumably everything is equal between the two, theoretically the non-dividend paying stock would go up even more. This assumes a very efficient market which doesn't always work out according to theory. 

Obviously you want capital growth, and that means no dividends. There is nothing wrong with that. Many older folks want cash with out selling stock. They trade off some possible capital appreciation for regular cash payments. It isn't clear to me why that is bad. They just choose a different method to get some cash.


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## GreatLaker (Mar 23, 2014)

like_to_retire said:


> Yeah, I agree. When rates are near zero, there's a floor on the upside for bonds/fixed income. Has there been a situation like this before that's included in all the various papers and studies?
> 
> ltr


Remember as rates go up bond prices will fall, then in a bond fund, as older bonds approach maturity and are sold they will be replaced by higher yielding bonds that then drive returns up. The following article from Vanguard explains it in a good level of detail. Probably won't persuade anyone that has the luxury of living just off dividends from a 100% equity portfolio in retirement, but that's not really who it is aimed at. 

https://personal.vanguard.com/pdf/s807.pdf

This blog post also discusses it:
http://vanguardblog.com/2013/09/30/bond-risk-a-theory-of-relativity/

Conclusions from the pdf document:



> Conclusion
> The implications of this paper’s analysis are clear:
> (1) For a majority of diversified, long-term investors,
> a potential bond bear market should not be viewed
> ...


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## twa2w (Mar 5, 2016)

Ok long post warning :-( 
Many of these studies use long term average returns and assume the investor is using capital in retirement. They do not differentiate between different types of returns on stocks.
Lets use a different analogy which may putbthe dividend vs growth stock in perspective.
J4b and I both decide to buy real estate to fund our retirement. We both are the same age and invest the same amount each year.
But j4b decides he is going to buy growth real estate on the fringe of the city. It pays no rent or only enough rent to cover taxes and it goes up in value 10% per year on average. He coninues to do this until retirement and invests and reinvests all proceeds into more growth real estate until retirement. He makes an average return of 10% and ends up with 1,000, 000 at retirement. He needs 50,000 a year to live on. He figures he will continue to get 10% or 100,000 a year so he will sell 50,000 in real estate each year to live on. And still get some growth of 50 k per year.
I on the other hand decide to buy rental properties. They only grow at 5% per year but I net another 5% a year in rentals which I reinvest in more rentals so my total return on average is 10%, the same as j4b. 
So I end up at retirement, ta da with the same 1,000,000. I will get rental income of 50,000 per year and hope to continue to see 5% growth in my property value.
I decide to stop reinvesting my rental and commence living on it.
J4b decides to sell 50,000 each year 
to live on.

Oh crap, a severe drop in real estate of 50% due to rising rates, recession or whatever. The values do not increase for 3 years. No growth. Then the economy starts to pickup and the portfolios resume their prev growth. J4b gets 10% on his remaining capital, I get 5% on mine

Ok so j4b and I had portfolios worth 1,000,000 when we started retirement but they dropped to 500,000 

After the 3 years, I still have my 500,000 portfolio of rentals and continue to make my rental income of 50,000 per year and after 3 years when things start to improve, I will start to get growth of 5% of 500,000.

J4b on the other hand had to take 50,000 per year out to live on so he now has 350,000 left. 

After 3 years when things start to improve, he will now get growth of 10% per year which is 35,000 per year but he has to continue taking 50,000 out to live on. So he falls behind and soon runs out of money.

A rather crude example but hopefully you get the point.
This is why dividend investors, assuming the dividends cover all their needs and they don't panic, don't really care so much about flucuations in value. They never need to sell any stocks. Dividends increase to cover inflation so no worries about that.

But before the dividend investors start getting smug...
We have been in a goldilocks situation in canada and the USA for large dividend companies in the last 100 years or so.
Companies, economies etc change or fail to adapt. Divendends can be cut, companies go under etc. Banks,pipelines and utilities have enjoyed great times with steady growth and dividends. What happens over the next 100 years with disruptive technologies ie cold fusion, peer to peer lending. Etfs, robo advisors, climate change..
Remember only 100 years ago cars, airplanes were disruptive technologies. Banks were just getting started in growth.
What would you have bought for dividend stocks back then? 
How long has Google been around. Look at how quickly things change now. What are the next disuptive technologies. Who will be the steady dividend payers in 10, 15 years.
Will your dividend payers still be players.


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## My Own Advisor (Sep 24, 2012)

@Twa2w,

Potentially you don't feel you need for an emergency since you haven't had an emergency. I can tell you from experience I was happy to have some money set aside when things went south....

Being 100% invested has risks. Just like sitting on lots of cash has risks.

Why does your cash position need to be 10%? As you say, it depends.

Based on who I've talked to, maybe my sample size is too small(?) but folks with >$1 M portfolio usually keep some cash on hand vs. 100% invested.


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## james4beach (Nov 15, 2012)

pwm said:


> All valid points J4B. Here's the problem. All the rules of thumb for bond allocation . . . are all based on past experience with a "normal" situation. I'm old enough to remember when things were "normal" which was when bond yields were higher than stock dividends but stocks had a potential for growth.


Sigh, I remember the tail end of those days too. Even my GICs used to yield 6%.

OK to see if I have this right, you're saying that those results made sense with historical bond yields, but what we're facing now with ZIRP (zero interest rate policy) is likely throwing it all out the window.

I understand that criticism. The only thing I'll raise is that in the most recent Pfau/Kitces study (link here), they also used an alternate dataset that addresses lower returns going forward. You might still think this is still too unrealistic for bonds:



> Of course, some will contend that today’s environment will have diminished returns, even over the long run, relative to historical standards. Accordingly, the chart below shows the glidepath results with the return assumptions that Harold Evensky recommends for the popular MoneyGuidePro financial planning software package (arithmetic real returns of 5.5% for equities and 1.75% for bonds, which given their volatility result in geometric means of 3.4% and 1.5% respectively). Notably, these assumptions reflect both a lower overall return environment compared to historical averages, and also a reduced equity risk premium (i.e., the excess return of stocks over bonds is diminished).
> 
> Given the reduced return environment (and especially the reduced “bonus” for owning equities), all the scenarios face earlier failure points (the “best” is only 23.1 years at the 5th percentile!), and the optimal glidepath becomes even more conservative, starting at 10% [equity allocation]


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## james4beach (Nov 15, 2012)

If the concern is that bond yields under ZIRP change everything, then why not look at sustainable withdrawal rate and portfolio modelling from the Japanese experience? Surely it's relevant. They've had zero interest rates for about 20 years.


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## humble_pie (Jun 7, 2009)

james4beach said:


> This is very current research that describes why "rising equity glidepath" is a great approach to managing sequence of return risk:
> https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/
> 
> I just hope those of you doing those heavy stock allocations have considered sequence of return risk.
> ...




jas4 when it comes to the significantly well-off - as in >2M = i can see a fatal flaw in the wizards' modelling. Since you've accepted their thesis, IMHO the same flaw appears in your own thinking.

the flaw is perceiving the evolution of a portfolio as ending totally with one individual's life. Like an option with an expiration date. 

in reality, the portfolio belonging to one of those lucky old boyz will not vaporize at the very moment he draws his last breath. Instead, it will coast gently on as before, probably with very little change if the old boy planned his estate right. It will continue to thrive in the hands of his spouse or divided among his heirs, which might include some charities.

a portfolio might have a "life" of 50 years in the hands of its original owner, but easily a life of 80 or 100 years when viewed from a broader perspective as the life of an assembly of assets that will be passed on from one generation to the next.

seen from this broader perspective, a 30% downward correction during years 40-45 of a century portfolio - the very years when an original owner might be retiring aged 65 - would have no effect. This is exactly what some individual posters have been saying upthread.

on the other hand, one can see that the most serious setback of all would be the one that might occur during years 5-15 of a century portfolio's life. A 30% downward correction would wipe out significant assets at a time when a portfolio owner's earnings would not yet have peaked, while the arrival of children & other growing family responsibilities might make it extremely difficult to replace vanished capital.


all this being said, i would like to add that none of the above would apply to a family with a more modest - shall we say normal - financial profile. A couple with <1M, for example. Or any person who will need to liquidate assets during retirement. Here everyone can see that jas4's sequence-of-withdrawal warnings about the harmful effect of a market setback in early retirement are highly appropriate.


.


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## james4beach (Nov 15, 2012)

humble_pie thanks those are very good points. You're right; talking about estates and family money, yes, the time span is not 30 years (like in the SWR studies).


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## agent99 (Sep 11, 2013)

Pluto said:


> Obviously you want capital growth, and that means no dividends. There is nothing wrong with that. Many older folks want cash with out selling stock. They trade off some possible capital appreciation for regular cash payments. It isn't clear to me why that is bad. They just choose a different method to get some cash.


Very True, but this doesn't seem to register. 

We are not all at the same stage of life nor in the same financial situation, so no one rule fits all. Us retirees worked and saved hard. Now we spend our savings and we have enough to last us and leave a substantial inheritance for our kids (who will likely need it!). No need for capital appreciation, but we get some anyway. At least enough to maintain real value of our original portfolio. What's the problem with that?


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> cmf forum did not exist in 2008. Was created in the first half of 2009, march or later i believe, ie every member who ever joined the forum would be a post-collapse bull market participant.


True ... as noted in my *PS*, where the announcement date was found to be April 3rd, 2009.

At the same time, there were lots of discussions on what would be good to buy on the recovery. I'd have to find the MFC thread to see how far after 2009 the question came up "why buy a dog like MFC" where the response was "Asian exposure, issues are being worked on ... buy/hold types who aren't buying more at $10 then selling at $16 or above are missing volatility gains".


Cheers


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## My Own Advisor (Sep 24, 2012)

No big problem I can see with an income approach agent99!


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## Eclectic12 (Oct 20, 2010)

peterk said:


> The problem, and I'm inferring from your tone of writing here agent99 and pwm, is that you seem to be under the impression that your dividend payments are acting as some sort of "smoothing" mechanism that is helping you "weather the storm" (imagined quotes) of market volatility.
> 
> That taking a 6+% dividend (which is what it'll be during a 50% market correction) is not the same as selling 6% of your capital after a market crash. But it is. It really is, I know it doesn't feel like it is, but it is ...
> 
> The issue, which James is trying to hammer home, is that dividends do _not_ provide any sort of _stability_ to one's portfolio. That "steady cash flow" does not mean that "volatility doesn't matter to me", but we hear it all the time from retiree's on here talking about wanting secure dividend income and steady cash flow.


I get the message based on theory but it is time to do more digging in my RRSP during the 2008/2009 era of a broad drop.

Interestingly, at the same time XIU was showing a 37% loss, my RRSP equity shows an 11% loss.
From an total FMV, picking the same date as XIU's loss - the RRSP FMV is showing an 3.6% gain.

I'm not drawing from the RRSP so the dividends are being re-captured instead of the "retiree drawing income" situation.


What seems to be suspect IMO is that an index loss of 37% = all investors are losing 37%.


In my case, the index may have dropped 37% but instead of the $1.5M portfolio dropping to $945K, based on 2008/2009 would be more like $1.5M dropping to $1.33M, which doesn't seem like such a great risk to using up one's capital.


When I have the time and figure out a way to get more granular, I'll let you know the results.


Cheers



*PS*

Having cash, cash equivalents and dividend cash did work out well when purchasing in Mar 2009.


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