My post from the other day about the 4% rule drew out the usual suspects in the Dividend Zealot crew at Seeking Alpha which surprised me as these guys have come to hate me (maybe a sort of reverse confirmation bias?). As I was reading through the comments a thought occurred to me at a slightly more macro level of the nature of the debate.
As best as I can tell the DZ crew believes that a portfolio should consist of mostly or exclusively (depends who is talking) companies that grow their dividends. This should, they feel, get the portfolio to the point where the yield alone covers the 4% so that no shares ever need be sold to meet the withdrawal need.
If a portfolio last year was at $500,000 and then grew to $550,000 and $20,000 was withdrawn then I don't think it matters how it got to $550,000. Both dividends and gains are taxable or it came out of an IRA so the distribution is taxable. Likewise if a portfolio last year was at $550,000, dropped with the market to $500,000 and $20,000 came out then again I don't think it matters how it got there.
My own preference is a diversified portfolio that includes dividend stocks along with growthier stocks; really having holdings with all sorts of attributes providing a combo of yield, price appreciation and exposure to multiple (repeated for emphasis) attributes. As I read the comments a new term popped into my head that might describe this which is dimensions. Building a portfolio in the manner that I believe the DZ crew is talking about is one dimensional. There are all sorts of single dimensions that work over long periods of time and of course data can be mined to support every single one.
The point is not whether any form of one dimensional investing can work because, again, they all can work so it about the risk taken in betting on one dimension. If they can all work (depending on the person) then they can all fail. The does not mean something is likely to fail in fact DZ philosophy is far less likely to fail than many other single dimensional strategies. I think the big psychological divergence between what I am talking about and defenders of single dimensional investing is not allowing for the possibility that something somehow goes horribly wrong with the strategy. Paraphrasing 0ne of my favorite quotes from the show Deadwood, it is a conversation they cannot hear.
If Seeking Alpha chooses to rerun this post I am sure there will be plenty of comments attacking this line of thought but the post is not for them, it is intended for people less entrenched in one concept to serve as reminder that "obviously great strategies" can foul up for reasons that are not reasonably foreseeable.
Not being able to allow for the possibility that something could go wrong is a behavior that has repeated many times before in investing history. There probably will never be a problem with this particular dimension but that does not make the behavior any different from previous single dimension strategies.
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11 comments:
As a sometimes DZ person myself, the (almost certainly naive) appeal boils down to: if you can get an extra 4%, why not take it? Of course it's not a free lunch. The trick is accurately describing the risk. The upside appeal (extra N%) is cognitively easy to latch on to; the downside "FUD" (fear-uncertainty-doubt) is likely easier to dismiss as it's harder to prove.
I am curious, though, if a reasonably-diversified portfolio of exclusive dividend-yielders would outperform a "regular" equity portfolio especially if you use the simple 200MA defensive threshold. You still get the yield during downturns, just off a lower basis.
Thought-provoking post, thanks for the regular reflections. It's hard for me to remember how few of these conversations took place pre-blog.
RickB,
Maybe you should take the 4%. I am very doubtful that a portfolio can be "reasonably diversified" and yield 4%. Reasonably diversified, in my opinion, is more than many different stocks.
I don't understand your comment if a reasonably-diversified portfolio of exclusive dividend-yielders would outperform a "regular" equity portfolio especially if you use the simple 200MA defensive threshold. You still get the yield during downturns, just off a lower basis.
A portfolio of dividend yielders exclusively may or may not outperform, at times they have and at times not and going forward there is no way to know.
Maybe the key is how you define "reasonably diversified."
If you are a DZ (and I am on the fringe of that movement), then you likely are diversified among large (mega) cap U.S. equities. And that's pretty much it. Foreign dividend-paying equities don't hold so much appeal for a variety of reasons.
A person with a broader definition of diversified, say for example, our host, is going to be in foreign stocks, foreign etfs, bonds?, commodities ? precious metals?
If you think you can make it solely on mega-cap U.S. equities and their dividends, then go for it. I would not, however, say that that is true diversification. And while I like dividends a whole lot, I don't construct my portfolio entirely around them.
So for the DZs, you construct your portfolio your way and I'll do it my way. I read a small handful of internet gurus such as our host with the hope of picking up an insight now and then. I appreciate their efforts.
(And I only snipe at the gurus when I am particularly irked. Sniping is a nasty habit to get into.)
BillM
Roger, you knocked it out of the park with this post. And I love the Deadwood allusion. Smartest TV show ever, in my opinion.
The unfortunate mentality of BEING 100% SURE you are taliking about has unfortunate consequences in the market, politics, life in general.
Durango Wayne
(formerly Prescott Wayne and Connecticut Wayne)
BillM, if i may paraphrase "take little bits of process from many sources to create your own process?" NICE
Phantom Ranch Wayne? welcome back! First and foremost agreed on Deadwood. Secondly, exactly it is a very narrow bet, it should work out but the behavior and devotion is no different than anything else.
Good post.
I once told by someone I respect that one should always ask himself "what if I'm wrong?" when making big decisions.
if one dimensional investing is wrong, I don't want to be right (humor attempt)
Roger, perhaps you've covered this detail in the past and if so, I apologize for asking the question. The question is regarding the 4% withdrawal rate. Two fellows I know. One is 70 and will be starting withdrawal for the first time with about 2 million in tax deferred accounts. Is 4% appropriate for him? The other fellow is 58 with 600,000 in a tax deferred acount. Is 4% appropriate for him?
In other words, is 4% a guide for the average bloke and if so, what describes the average bloke?
Thanks.
4% is about sustainability of the nest egg, that is all. at 4% there is something like a 92% chance of not outliving your money. it is of course better if someone can get by on less than 4%. the further you go above 4% the greater the risk of outliving your money
I find dividends VERY appealing for a retirement portfolio, but you convinced me a long time ago you were right. Peoples first reaction is to argue. But there second reaction is to consider your comments and may eventually come around. Do not give up you are right and may help some of these people
thank you
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