On some occasions, I feel the need to write some articles over at Providend.
If they benefit Investment Moat’s readers, management is OK for me to share them over here.
We observe certain misconceptions that are rather pervasive when it comes to funds our clients held, what we recommend to them, and what they are considering to purchase.
The really popular produces are the First State Dividend Advantage kind of distributing unit trusts. This is pretty similar to a Lion-Phillip S-REIT ETF, which is a distributing ETF.
What is common among the unit trust and the ETF is that both provides a dividend income. For investors that are nearing retirement, they have this idea that their portfolio would need to be filled with stocks, bonds, unit trust, ETF that distributes income.
In my post this week, I have laid out my argument of using a dividend only income strategy.
This post explains to readers how an accumulating fund can also provide regular income that you need in your financial independence days. An accumulating fund is a fund that does not pay out an income. The dividend income or interest income the underlying shares earned are reinvested back into the fund.
The way to do it is to sell the units when you need them.
Suppose we have a $1 million portfolio, and we spend an initial amount of $35,000 in the first year. For subsequent years, the previous year’s spending is adjusted to prevailing inflation rates.
We invest this portfolio in a 100% DFA Global Core Equity Index with a total annual all-in cost of 1%.
We start off with 1,000,000 units valued at $1 each.
Every year, we sell the equivalent of the annual expense worth of units.
The following illustrates how this portfolio will live through the 29-year period of 1989 to 2018:
This period has 3 bear markets. The average compounded returns is 5.68% net of cost. Average inflation is 2.5%.
The portfolio ends up back with $1.1 million.
The investor enjoys inflation-adjusted income from $35,000 to $71,634 at the end of 2018.
I doubt its easy for you to find a low-cost product that gives you inflation-adjusted income over such a long period.
We can see that the 1 mil units held gradually fell to 237k units but the price rose from $1 to $4.96.
The point I wish to drive across is: Separate the financial planning function from the investing function.
The fund does not know you so why should it carry out the financial planning part of figuring out how much income should it give out to you be sensible?
It should focus on the execution of the strategy, keep costs low, rebalance in the most efficient manner.
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