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Comment by sushshshsh | Hacker News Reader

Ok so say I have enough risk tolerance to put my money in something other than cash, but not more aggressive than a fund that tracks the S&P, what precise steps should I do to live off of my cash stack while doing absolutely 0 work other than sitting on my couch?

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> what precise steps should I do to live off of my cash stack while doing absolutely 0 work other than sitting on my couch?

I would put X% in Vanguard 500 Index Fund[1], and in Y% Vanguard Total International Bond Index Fund[2].

X% should represent the amount of money you can afford not to touch during the entire economic downturn.

Y% should represent the amount of money you want to be able to cash out at any point during the economic downturn.

Another alternative to S&P-500 for putting X% in is Nasdaq-100[3]. It has performed much better over the years, but it's significantly more tech-focused:

> The table below and the charts above display historical performance figures for both the Nasdaq-100 TR and the S&P 500 TR between Dec. 31, 2007 and June 30, 2020. Despite recent overall market volatility, the Nasdaq-100 TR Index has maintained cumulative total returns of approximately 2.5 times that of the S&P 500 TR Index.

[1] https://investor.vanguard.com/mutual-funds/profile/overview/...

[2] https://investor.vanguard.com/mutual-funds/profile/overview/...

[3] https://www.nasdaq.com/articles/when-performance-matters%3A-...

Why not the Vanguard Target Retirement 20xx Fund? Unless you really know how to assess your risk or manage a portfolio I think it’s what you are looking for.

(20xx is the year you should be retired)

Ordinarily, I'd say you want a product like Vanguard Managed Payout Fund. But they've just revamped them into the Vanguard Managed Allocation Fund (VPGDX): https://retirementincomejournal.com/article/vanguard-reboots...

If it’s all in the market, most wisdom says you can take out 4% a year and never run dry. Is 4% of your stash enough to live on? Congratulations you are financially independent. You can read through mr money mustache if you want more depth..

To be clear, the 4% rule assumes a 30 year retirement (i.e. retiring at ~50-60). For early retirement you should target a 3.5% annual withdrawal rate.

https://www.madfientist.com/safe-withdrawal-rate/

Exactly this. Put your cash in S&P500 and live a peaceful life. For optimization: take out a little bit more when the price is considered to be high and take out a little bit less if it's low.

Is this not timing the market? How do you calculate what is "high" and "low" - rolling average increasing 7% per year, compare current price to that expectation?

Mean reversion.

> Mean reversion in finance suggests that asset prices and historical returns eventually revert to their long-term mean or average levels

The avg. 7% per year will break down into very good years and bad years. Let's say the S&P500 is already down -5% YTD and has underperformed over recent years, then you would it considered to be low, because you would rather expect the performance to increase in order to match the long-term avg. of 7%. So at this point you would happily buy in and expect mean reversion. But of course there's no such thing as perfect timing (except in hindsight) and no guarantee for mean reversion to happen.

Timing the market is doable I'd say. Not all the time and not by everyone but it is completely doable. Sometimes you will buy too late or sell too early but even buying the dips is timing the market. If you partook in some stocks, more so than otherwise, during the March lows you were also timing the market.

The current risk free rate is absurdly low, which would suggest a much lower sustainable draw down than 4% for the next 10-30 years, probably only around .5 to 1.5% at most.

I agree the 4% rule is too aggressive nowadays. But every .25% increment lower means a huge improvement in sustainability, so even adjusting down to 3% is profoundly more conservative than the original rule. At 1.5% you are going lower even than endowment funds aiming for perpetual maintenance of principal (they often use 2%-2.5%).

The 4% rule of thumb was calculated to minimize risk of running out of money during the time period. 1.5% * 30 years = 45%, so an investment that simply keeps up with inflation would leave you with more than half your cash after 30 years.

And note that the stock market almost always has positive real returns over periods as long as 30 years (see William Bernstein’s book Deep Risk), so the assumption “just keeps up with inflation” is already very pessimistic.

You can take a 4% draw based on any 50 year period in the past 100 years. It is not risk free correct. There are many books and articles on the topic that are not worth trying to fit into a comment.

For most people, being able to retire and never work again with 95% certainty enough, especially when tweaking consumption and tweaking side income are easy knobs to turn. No reason to delay retirement 20 years to be 100% confident. Raises the risk a lot you just die before you retire.

That's rubbish that you think you can predict a 1% return in the market over the next couple decades. It would be extremely unprecedented, and you'd need a very solid argument to have any confidence at all in that prediction.

Not to mention SPY has a 1.75% dividend yield.

Well, inflation is also absurdly low. The direct return on equity, globally, is around 5% for a pure stock portfolio.

What is your basis for believing that the safe withdrawal rate will be less than half this, at less than 1.5%? That sounds excessively pessimistic to me.

Some of my money is in high-dividend ETFs. They have been returning between 5-10% over the past several years.

TL;DR: Interest rates don't just affect one side of thing. They are tied to all aspects of pricing.

That's very simplistic one-sided view of interest rates. If interest rates stay low or go lower, the stock prices will keep skyrocketing which balances the equation on the other side increasing your stock portfolio returns. The P/E capacity will be much higher than it is today in a perpetual low-interest-rate environment.

that should be a temporary swing though right? once the P/E capacity normalizes to the lower interest rates appreciation should be proportional to the base rate.

Yes but only if people are convinced to make the call to consider interest rates to remain this low for a long time at once. If they gradually do it and the underlying businesses continue to generate the earnings and growth expected, the outcome is different. In any case if you have made your money today and investing it, 4% may still be quite reasonable.

You'll need a fund with good dividend payout. SPY is currently at $1.30 and cost $327. If you put $450k into SPY you make $1870 per quarter. So, might need to buy $2MM of SPY.

But there are other good dividend funds and/or individual equities.

Dividends are left-pocket right-pocket. Dividends can help you psychologically, but in a way, it’s like forced selling once per year or per quarter.

Edit: if it helps you to invest, by all means, do it. But since dividends are mostly psychological, there is no point in limiting your stock picks to companies with a high dividend.

On the other hand, companies with long histories of sustained and rising dividend payments also tend to outperform the S&P500 in terms of total return (dividends + capital gains), and do so with lower volatility. Reasons include having a business that is profitable and stable enough to sustain such payouts and a management culture that appropriately balances shareholder interest (by paying dividend) against the long-term viability of the business (and can therefore continue its dividend payments over multiple decades).

Just a nitpick:

> a management culture that appropriately balances shareholder interest (by paying dividend)

In theory a company should invest in whatever has the most favorable risk-return profile. If it pays dividends, that means dividends are judged by management to be the best risk-return profile among all other alternatives. A company can pay zero dividends and still protect shareholders interests.

That’s not quite accurate. A company is ultimately controlled by it’s owners who may prefer dividends. One possible example is maintaining the current ownership structure while providing an income. Think someone owning 51% and wishing to maintain control.

> A company is ultimately controlled by it’s owners who may prefer dividends.

If the reason they "prefer" dividends is not because they evaluated the alternatives and decided that the risk-return profile was favorable (for the company, not for themselves in particular)), then they are acting against the interests of the minority shareholders. That may carry legal consequences or not, depending on your jurisdiction. In my country (Brazil), there are laws protecting the interests of minority shareholders. If you have 51% of a company that is listed on the stock exchange, you have significant but not unlimited power.

Also, maybe the company sees it as a risk that, in reducing the dividend, it may suffer in the short term due to the outflux of shareholders who see it as a dividend play. In that case, the risk-return profile of paying zero dividends is not favorable.

In practice protection for majority shareholders does not extend to a preference of dividends over investments in any jurisdiction. All investments carry risks, dividends don’t so the only legal justification required is to select a low risk threshold. Such protections are designed to avoid selling off assets at below market rates to majority shareholders and other such clearly suboptimal choices.

Counter example: Apple. Low dividend, but all other check boxes apply.

Sure, but let me make two points:

1. I did not say anything about how high the dividend is, only that it has been sustained and has not decreased for a long period of time (multiple decades). Some companies on the list currently pay relatively low dividends as well.

2. It is a heuristic, so it will definitely miss a few great companies and some companies on the list will go on to do poorly (not that any method of stock picking will be any different).

>On the other hand, companies with long histories of sustained and rising dividend payments also tend to outperform the S&P500 in terms of total return (dividends + capital gains), and do so with lower volatility.

Source?

it's not psychological at all. Dividends give you returns that can be reinvested in whatever you want, so it helps with diversification. Now, in the US companies have muddled the field so good dividends don't mean much, but it is still useful to remember this.

So does an equivalent increase in the share price of the underlying

Not really. Share buyback may be an advantage, but it doesn't necessarily reflect on the price of the stock. In other words, a company can buy its own stock and price can fall anyway (see for example GE). This cannot happen with money deposited on your account.

You’re conflating daily price action and the balance sheet. From a pure financial perspective, the stock price is reduced by exactly the amount of the dividend and nothing is reduced if a company doesn’t pay a dividend.

Everything else is the typical movement of any stock, that of course can be detached from reality. The thing is: people are way too focused on the dividend part as if this was the only valid way to investing.

Traditional investing focused on dividends for a good reason: you can live on dividends without paying long term capital gains (taxes on dividends are usually lower). At a time when most investors were common folks trying to make a long term investment decision, this was a good thing. Moreover, companies that pay dividends are by definition more mature, which can be a good sign for some investors that want more predictability in their portfolios. The reality is that dividend-based investment has its advantages, which were forgotten by the current generation of investors.

You can sell shares of a no-dividend company and reinvest the money in something else.

Do not do this. Dividends are not a good way to pick stocks. Dividends and buybacks are fungible, except that buybacks are more tax efficient. All equities should have the same risk-adjusted expected total return (i.e. including dividends, if markets are efficient), so you should not be picking stocks based on their dividend yield alone. If you want income from your equity portfolio, just periodically sell shares.

From the perspective of an investor this is spot on but on a societal scale it would be better if capital gains were taxed more than dividends. Dividends have to be paid from the income a company generates, meanwhile the stock price can be influenced by almost anything and it doesn't actually require the company to generate more value.

Ya, I think which way the rules should be here is a complicated question, but it certainly shouldn't be the case that we have two arbitrarily different taxation schemes.

If you make less than 38600, you pay ZERO dollars in taxes on the first $75k of qualified dividend income

Your sentence contradicts itself. How can you make less than $38,600 when you're making $75,000?

Also note that long-term capital gains are also taxed at the same rate as qualified dividends, but can be deferred into the future. Your argument doesn't seem to advocate for the thing you think it does.

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