FIRE

[NickCQ]

Fatlad1973 said:

Given the FTSE100 dividend yield is over 4%, if all your money was invested there why would a drop of 20% have any impact at all? If you're not selling shares to fund your 4% SWR then the price of the index doesn't matter at all.
If you're in the very highly priced and low yielding US indexes (so not the US REITS that seem a decent yield play with real asset backing) then falling share values will have a significant impact.
Or am I missing something?

When people talk about 4% what they are doing is taking a fixed £ annual spending and capitalising it a 4% to get the required amount of assets. If your assets go down 20%, now your fixed £ spending isn’t 4%, it’s 5%, so much higher chance of failure.

[red_slr]

TBH SWR is all about beating inflation. i.e £1M cash pot = 40k over 25 years.

OR using 4% SWR from £1M invested pot its £40k over 30 years inflation adjusted.

So in year 25 your cash will be £40k. However in year 25 using 4% SWR it might be £65k.

You have to pretty much ignore short term rises and falls in the value of your pot.

IYSWIM.

From reading MMM the people who have already FIRE'd they seem to be doing ok, if anything for the moment their pots seem to be growing much faster than expected but this just strengthens their position for the mid term future of their plan as they have much further to fall.

I think if you can get through the first 5 years of early retirement and be on or above track then you should be fine, the big worry for me is some kind of major problem in the early years.

[mikeiow]

red_slr said:

I think if you can get through the first 5 years of early retirement and be on or above track then you should be fine, the big worry for me is some kind of major problem in the early years.

I would definitely agree with this.....the "sequencing of returns risk" is a very real issue for when one stops actively making investments....
Anyone got that crystal ball with "market performance numbers" on?

[Fatlad1973]

NickCQ said:

Fatlad1973 said:

Given the FTSE100 dividend yield is over 4%, if all your money was invested there why would a drop of 20% have any impact at all? If you're not selling shares to fund your 4% SWR then the price of the index doesn't matter at all.
If you're in the very highly priced and low yielding US indexes (so not the US REITS that seem a decent yield play with real asset backing) then falling share values will have a significant impact.
Or am I missing something?

When people talk about 4% what they are doing is taking a fixed £ annual spending and capitalising it a 4% to get the required amount of assets. If your assets go down 20%, now your fixed £ spending isn’t 4%, it’s 5%, so much higher chance of failure.

Sorry but that's rubbish: or at least too simplistic. Say you need £25k p.a. So you capitalise at 4% and get £625k needed. You buy a dirt cheap FTSE100 tracker at a 4% dividend yield. In practice, if the FTSE100 falls 20% you'll still get your £25k of dividends, but now at a 5% yield - you've not sold any shares so no higher risk of failure. In fact, if you're clever and running an 80/20 shares to bonds/cash mix and rebalance you'll be buying more shares at their bargain level, so less chance of failure.
Now admittedly I haven't checked for sure that dividend levels are less volatile than their related share prices but I'd be interested to know if anyone else has. Yes, on a low yielding portfolio it's absolutely true that the sequence of returns risk holds true, but I'm far less convinced it's as relevant to higher yielding share indexes or property portfolios.

[Mazinbrum]

mikeiow said:

I would definitely agree with this.....the "sequencing of returns risk" is a very real issue for when one stops actively making investments....
Anyone got that crystal ball with "market performance numbers" on?

But surely you wouldn't just have one big pot. You would have at least 3, one low risk low yielding pot to drawdown on in the near future, a pot invested in high risk funds for drawing down on after 10 years at least and maybe one in between.

[red_slr]

Mazinbrum said:

mikeiow said:

I would definitely agree with this.....the "sequencing of returns risk" is a very real issue for when one stops actively making investments....
Anyone got that crystal ball with "market performance numbers" on?

But surely you wouldn't just have one big pot. You would have at least 3, one low risk low yielding pot to drawdown on in the near future, a pot invested in high risk funds for drawing down on after 10 years at least and maybe one in between.

Not really the basis of FIRE is an 80/20 investment. If you start splitting the pots into high, low risk etc you run a real risk of not achieving 7% return which in turn returns the 4% SWR.

[NickCQ]

Fatlad1973 said:

Sorry but that's rubbish ... Now admittedly I haven't checked for sure

Nice one

Fatlad1973 said:

In practice, if the FTSE100 falls 20% you'll still get your £25k of dividends, but now at a 5% yield

http://siblisresearch.com/data/ftse-all-total-return-dividend/

2 minutes googling will tell you that the FTSE 100 div yield is reasonably bounded - look at the data back to 2000 in the data I link to and you can see it only briefly spiked above 5% in 2009.

Even that spike is illusory because div yield is backward looking - i.e. if the share price falls the div yield goes up mathematically until the div gets cut at the next payment date.

It is simply not true to say that the FTSE100 div amount is a fixed £ and only share price movements change the yield. When recessions come, earnings go down, companies fail or cut dividends (except for a few 'heroes' that have been paying the same since 1784 or whatever).

[Mazinbrum]

NickCQ said:

http://siblisresearch.com/data/ftse-all-total-retu...

2 minutes googling will tell you that the FTSE 100 div yield is reasonably bounded - look at the data back to 2000 in the data I link to and you can see it only briefly spiked above 5% in 2009.

Even that spike is illusory because div yield is backward looking - i.e. if the share price falls the div yield goes up mathematically until the div gets cut at the next payment date.

It is simply not true to say that the FTSE100 div amount is a fixed £ and only share price movements change the yield. When recessions come, earnings go down, companies fail or cut dividends (except for a few 'heroes' that have been paying the same since 1784 or whatever).

Plenty of links around as to why investing for growth is better than investing for dividends.

[anonymous-user]

Buying bonds for income gives a different result.

The price of the asset (bond) may rise or fall but the income stream derived from that asset should remain stable.

However, holding bonds generally tends to miss out on (some of) the capital growth associated with shares.

As ever, if you want "insurance" you need to be prepared to bear the cost of "the premium"!

[Fatlad1973]

Mazinbrum said:

NickCQ said:

http://siblisresearch.com/data/ftse-all-total-retu...

2 minutes googling will tell you that the FTSE 100 div yield is reasonably bounded - look at the data back to 2000 in the data I link to and you can see it only briefly spiked above 5% in 2009.

Even that spike is illusory because div yield is backward looking - i.e. if the share price falls the div yield goes up mathematically until the div gets cut at the next payment date.

It is simply not true to say that the FTSE100 div amount is a fixed £ and only share price movements change the yield. When recessions come, earnings go down, companies fail or cut dividends (except for a few 'heroes' that have been paying the same since 1784 or whatever).

Plenty of links around as to why investing for growth is better than investing for dividends.

Yes, investing for growth is better when you are still building your investments and probably my preference in any event if your retirement is planned to be 30 years plus. My point here is more around how the sequence of returns risk is affected by higher yielding assets.

NickCQ: Apologies for seeming rude.

Thanks for the heads up on the dividend to index movements, but the graph on the link you provided does rather seem to support my point (albeit not over a long enough period to be compelling). Broadly, when the index drops the yield goes up and vice versa. It doesn't seem to indicate that dividends get cut to any significant degree or that share price falls are accurate predications of future dividends. More that the yield drops because the market rises again. Yes, I fully agree that in a long and harsh recession dividends may well be cut and companies go bust, but history indicates that the market overreacts somewhat in terms of share price falls (and rises). If you've got a link to data on total dividend payments over the last 30+ years I'd be very interested to look at that.

Am I right in thinking that most research on the SWR is US based - I believe the Trinity study used S&P 500 as the stock element - where yields are traditionally lower? (but absolute returns higher - again a link to useful data if I'm wrong would be genuinely welcome).

Current dividend yield on the FTSE 100 is significantly above the long run average (3.4% 1995-2015 from the article you linked) and the quantum paid out is at an all time high (again caveat that relatively few stocks provide the bulk of this). I don't know if that means prices will rise when Brexit fears pass or dividends fall when the fan turns brown, or if the current high level will persist. But even at the long term average level it must provide a serious mitigation to the impact of short term share price falls in the context of a 4% withdrawal need?

http://i1.wp.com/siblisresearch.com/wp-content/upl...

[anonymous-user]

Fatlad1973 said:

Broadly, when the index drops the yield goes up and vice versa. It doesn't seem to indicate that dividends get cut to any significant degree or that share price falls are accurate predications of future dividends.

• Typical dividend yield as a % has remained broadly stable for many years.
• When a company's dividend is cut the share price tends to fall. The yield % may not change much but you will receives LESS actual cash.
• When a company is doing well it tends to pay higher dividends and you get MORE cash. But the share price will rise to reflect the company's good health and the dividend % is likely to remain broadly the same.

These facts of life are undeniable and are reflected on the graph. The effect is very similar to what you see with bond yields. In most cases the coupon (dividend) is fixed and never changes - but the market price of the bond will move up and down depending on how the market values that income stream. Put simply, if shares are having a bad time bond prices tend to rise because their income stream becomes relatively more valuable - the cash payout remains unchanged but the yield % will fall.

Another percentage to watch out for is that if a company's share price falls by 10% and then goes up by 10% you haven't got back to where you started, you're still 1% down...

100 - 10% = 90
90 + 10% = 99
100% - 99% = 1% down

[Fatlad1973]

rockin said:

• Typical dividend yield as a % has remained broadly stable for many years.
• When a company's dividend is cut the share price tends to fall. The yield % may not change much but you will receives LESS actual cash.
• When a company is doing well it tends to pay higher dividends and you get MORE cash. But the share price will rise to reflect the company's good health and the dividend % is likely to remain broadly the same.

These facts of life are undeniable and are reflected on the graph. The effect is very similar to what you see with bond yields. In most cases the coupon (dividend) is fixed and never changes - but the market price of the bond will move up and down depending on how the market values that income stream. Put simply, if shares are having a bad time bond prices tend to rise because their income stream becomes relatively more valuable - the cash payout remains unchanged but the yield % will fall.

Another percentage to watch out for is that if a company's share price falls by 10% and then goes up by 10% you haven't got back to where you started, you're still 1% down...

100 - 10% = 90
90 + 10% = 99
100% - 99% = 1% down

Well I hope those 'facts of life' are undeniable (rather than a decent and worthwhile generalisation) as the FTSE 100 index yield has risen significantly, so you seem to be stating as a fact of life that the index must rise. Now, I do own some FTSE100 tracker units I bought recently so I hope (and broadly expect, hence the purchase) that you're roughly right. But if it was as simple as that the index would already have risen... and I don't think you really mean that as obviously share prices reflect the expectation of future returns.
Analysts' and investors' guesses, fears and hopes drive share prices while company actual performance and what the directors wish to signal to investors drive dividend levels (hence varying levels of dividend cover). The two are obviously closely related but my point is that they are not the same and I'm not convinced the SWR research properly reflects U.K. biased portfolios.
BTW I'm not dividend obsessed and I'm not interested in building a high yielding defensive portfolio. Also not trying to be argumentative - genuinely interested in whether the analyst/investor view vs delivered reality shows a relatively lower level of dividend volatility than share price volatility (on a index basis, not an individual company basis).

[NickCQ]

Fatlad1973 said:

NickCQ: Apologies for seeming rude.

Thanks for the heads up on the dividend to index movements, but the graph on the link you provided does rather seem to support my point (albeit not over a long enough period to be compelling). Broadly, when the index drops the yield goes up and vice versa. It doesn't seem to indicate that dividends get cut to any significant degree or that share price falls are accurate predications of future dividends.

No offence taken!

I think the effect you are seeing on the chart is my point about div yield being backward looking, i.e. last quarter's dividend over today's share price.
Look at the chart on page 5 of this link
https://www.linkassetservices.com/documents/uk-div...

Total annual dividends paid in the 5 crisis years - look at the nominal decline in 2008-9 and the probably real terms decline in 2009-10:
2007 £57.6 bn
2008 £62.0
2009 £54.1
2010 £54.6
2011 £61.8

Edited by NickCQ on Monday 23 September 21:23

[Fatlad1973]

NickCQ said:

Fatlad1973 said:

NickCQ: Apologies for seeming rude.

Thanks for the heads up on the dividend to index movements, but the graph on the link you provided does rather seem to support my point (albeit not over a long enough period to be compelling). Broadly, when the index drops the yield goes up and vice versa. It doesn't seem to indicate that dividends get cut to any significant degree or that share price falls are accurate predications of future dividends.

No offence taken!

I think the effect you are seeing on the chart is my point about div yield being backward looking, i.e. last quarter's dividend over today's share price.
Look at the chart on page 5 of this link
https://www.linkassetservices.com/documents/uk-div...

Total annual dividends paid in the 5 crisis years - look at the nominal decline in 2008-9 and the probably real terms decline in 2009-10:
2007 £57.6 bn
2008 £62.0
2009 £54.1
2010 £54.6
2011 £61.8

Edited by NickCQ on Monday 23 September 21:23

Interesting that the 2007 peak FTSE100 mkt cap to Mar 09 low has a pretty terrifying 47% fall, but the dividends don't move anything like as much. Initially they go up for 2008 but then fall 13% (no inflation in 2009 to adjust for). Inflation adjusted it looks like 2012 before dividends fully recover ahead of inflation. It looks quite a bit longer before mkt cap recovers plus inflation. Looking at this period, for this market, I still think the dividend yield reduces the sequence of return risk.

There's a whole different discussion on how since 2000 dividends have been about the only good thing about the FTSE100! Either dividends must fall or the index rise, surely? Not sure which...

[anonymous-user]

Fatlad1973 said:

There's a whole different discussion on how since 2000 dividends have been about the only good thing about the FTSE100!

Such discussion would be pointless. As I indicated on another thread recently, taking 1 Jan 2000 as a starting point is mind-bogglingly misleading. It may conveniently be the first day of a new millennium but it's also a weirdly extreme stock market peak from which to begin measuring anything....

[Fatlad1973]

rockin said:

Fatlad1973 said:

There's a whole different discussion on how since 2000 dividends have been about the only good thing about the FTSE100!

Such discussion would be pointless. As I indicated on another thread recently, taking 1 Jan 2000 as a starting point is mind-bogglingly misleading. It may conveniently be the first day of a new millennium but it's also a weirdly extreme stock market peak from which to begin measuring anything....

Totally take your point that this period sets off from a high point. It might not be pointless to review/discuss if instead of looking at it as an arbitrary date, we look at it as a time when the CAPE was sky high and took the lesson that buying at those levels isn't a great idea. As you say, 'weirdly extreme peak' in the sense that pricing was too far above a long term average.

I note that Mr. Buffett is sat on a mountain of cash just now rather than buying in the US market, where pricing is similarly high (yes, I acknowledge that we have different markets and they typically are more highly rated).

[bitchstewie]

A good article.

HOW TO BUILD A COMPOUNDING MACHINE

Though I always struggle with the 100% equities route these FIRE type articles always seem to suggest.

I doubt the next 10 years will be as easy to make money as the last ten were, with the beauty of hindsight.

[anonymous-user]

bhstewie said:

I doubt the next 10 years will be as easy to make money as the last ten were.

Yes, but what was your view back in 2009?

If you would have been mistaken in 2009 you're just as likely to be mistaken now.

[Derek Chevalier]

bhstewie said:

Though I always struggle with the 100% equities route

I'm not sure how many people would be comfortable with the potential drawdowns of 100% equity portfolio.

[bitchstewie]

Derek Chevalier said:

I'm not sure how many people would be comfortable with the potential drawdowns of 100% equity portfolio.

Oh I know full well that I wouldn't.

But it amazes me the number of FIRE type sites and other financial forums where there's a very common view or bias that 100% equities is the way to go.