The Next Big Crash - Are You Prepared?

(17-10-2013, 10:20 PM)Clement Wrote: As Keynes said "the market can stay irrational longer than you can stay solvent."

This is what I fear most....

I think if the investment portfolio is of decent size and has say an cagr of ave 10%, this can continue to compound using dividends. With a standby backup funds of 6mth usage as saparate, this investment portfolio can one day be used to derive income, using 4% withdrawal rule, once that 4% of the portfolio exceeds the annual income of that person.
This can go on for life.
Of course, one needs the relevant insur coverage, maintain his health properly apart from money matters.

If every year there is high growth (>4%) , it should be fine. What happen if there is a long period of low or no growth? Say, 5-10yrs of (-10 to 3%) growth? Will the withdrawal diminish the funds faster than it should?

What withdrawn is unable to compound further.

Fair enough concern.
For investm portfolio cagr % it shd be at least a decade or two to be meaningingful n reflective.
I think at 10-20yrs, the likelihoods of downs or recession throughout is v slim.
At most a 3-6yrs decline, in which time absolute value of portfolio may decline but since one is using div to rebuy stocks, one's stockholding actually goes up.
So if the portfolio is large enough, less than 4% should be enough to support his living expenses.
But small portfolio, i agree, cannot or hard to use 4% rule.

I am trying to use a more stress situation to understand how I can manage my money and yet still able to last me my lifetime.

Say, for 6yrs, the market is losing 5% of initial value, and withdrawing 4% of initial value per year, the value of the portfolio will left with 46% of value. If subsequent years average return is 10%, should be still ok. Anything less than 8%pa will means trouble...

One approach would be to live only within your dividend income and plow all capital gains, capital reduction and share buy backs and takeovers back into a "capital" account for reinvestment into the market:

Some example numbers:

Dividend last year - $100K
Expenses last year - $75K
"Surplus" last year - $25K

Current "Savings" - $60K (> 6 months of expenses)

Long term capital growth rate > +6% (out runs +4% inflation)

Worse case drop in dividend from one year to another (experienced in 2008 - 2009) = -33%
(complete recovery of dividend above 2008 level took two years i.e. 2011)

This should cater for most contingencies e.g. a great recession lasting up to 3 years or a major medical emergency (beyond the limits of the shield plan).

Will also require a "index-style" rather than a "concentrated" portfolio i.e. > 30+ stocks and of course a sizable "nest-egg" of around $2 million.

Actually, my ideal is i can have a "Total Portfolio" which can generate enough cash and then some for my family's yearly expenses. But then no portfolio is static even if i have such a large portfolio i still have to manage it carefully.
Anyway, it's really only in my dream.

Classic retirement portfolio management is withdrawing annual % of cash from portfolio according to how the portfolio performs. Some good years maybe more than 4 %, some bad years may be 2 or 3%. This is to try to ensure you don't run out of money before you run out of breath.

We have no active income for coming to 2 years already.
i think we have to take a new look at how we spend our money. And whether our portfolio can sustain us another 20 years if it happens GOD permit us to live that long. My wife doesn't wish to live that long. She is afraid of poor health in old age. i told her it's not up to us. If only i know how long we live. Then money doesn't matters anymore. Amen.

But i can tell you in practice it's not like in theory.

May I jump in here.

The cost of a portfolio is $1 million and no further investments made over 10 years.
With annual dividends averaging 5%, would that not be "viable" to live on?

5% is just sufficient to cover inflation and to retire on.( no mortage, no loans etc)

This is investing for dividend income.

Is this not the purpose?

In theory, it looks O. K. . In practice no. For your $1 million portfolio may increase or decrease. Nobody knows what is the inflation rate for the next ten years. And many more unpredictable good or bad happenings that may need you to touch your portfolio.

I chose to post the article here. Does it mean no more fiscal cliff issue in the future, after Republicans knew the tactic was damaging to both the party and the country?

Republicans struggle to make sense of loss

WASHINGTON — For the Republicans who despise President Barack Obama’s healthcare law, the last few weeks should have been a singular moment to turn its problem-plagued roll-out into an argument against it.

Instead, in a futile campaign to strip the law of federal money, the party focused harsh scrutiny on its own divisions, hurt its national standing and undermined its ability to win concessions from Democrats. Then, they surrendered almost unconditionally.

“If you look back in time and evaluate the last couple of weeks, it should be titled ‘The Time of Great Lost Opportunity’,” said Senator Lindsey Graham, among the many Republicans who argued that support for the healthcare law would collapse once the public saw how disastrous it really was.

“It has been the best two weeks for the Democratic Party in recent times, because they were out of the spotlight and didn’t have to showcase their ideas,” he added.

Many Republicans could not comprehend how they failed to prevent such avoidable, self-inflicted wounds. Others could not explain why it took so much damage, to their party and the millions of people inconvenienced and worse by the shutdown, to end up right where so many of them expected.
...
http://www.todayonline.com/world/america...sense-loss