Recently, i replied to a reader who asked me if i hold so many counters, might as well i go buy index?
At one glance and perhaps to a lot of people, it might make sense.
However, in reality, its not quite the same.
In index, we only get dividend 2x a year. this makes compounding a lot (and i say it again) a lot slower.
The bigger difference and actually dangerous difference is when one takes out a fixed amount say 4% from this portfolio. In bull times, it can be done without much fear as there's a lot to take out anyway and we are only removing 4%. However, in cases of bear, and here were are talking about prolonged bear of perhaps 10year or longer, market drops, and we are still liquidating 4% pa. As we go into the bear years, with inflation doing its job, now we might find ourselves in a fix, in a bigger fix as the bear continues its attack. The dollar cost averaging which we put in in the construction of this STindex portfoilio now faces its evil twin- dollar LOSS averaging. Never say never, but if it happens, those who spend decades buying stidex and just sitting on the sidelines, using its twice a year dividend to add more, now might have even to seek alternative sources of income.
Now this dividend portfolio
compoundation is fast, much faster in effect due to the syngistic effect of the individual counters churning out dividends and feeding the other counters.
in times of bear and bull, during retirement, the dividends coming at various times can simply be used as income. There is hardly any fear of outliving the portfolio as the average dividend yield of the entire portfolio is in excess of 5. In fact, there is still surplus to reinvest if one wishes so.
Be careful when one takes out a fixed sum say 4% from the portfolio. And it depends on what sort of portfolio we are talking about. Index buying and growth stocks, all run the risk of dollar LOSS averaging when we are talking about withdrawal in prolonged bear.
So to say that just buy index, means one havent thought about these things, to say the least. I have seen people, some so called experts dispensing advice to others that index investing should replace what they are doing. And in reality, its those people who have been through these times, who will really know the difference in these investment modalities.
At one glance and perhaps to a lot of people, it might make sense.
However, in reality, its not quite the same.
In index, we only get dividend 2x a year. this makes compounding a lot (and i say it again) a lot slower.
The bigger difference and actually dangerous difference is when one takes out a fixed amount say 4% from this portfolio. In bull times, it can be done without much fear as there's a lot to take out anyway and we are only removing 4%. However, in cases of bear, and here were are talking about prolonged bear of perhaps 10year or longer, market drops, and we are still liquidating 4% pa. As we go into the bear years, with inflation doing its job, now we might find ourselves in a fix, in a bigger fix as the bear continues its attack. The dollar cost averaging which we put in in the construction of this STindex portfoilio now faces its evil twin- dollar LOSS averaging. Never say never, but if it happens, those who spend decades buying stidex and just sitting on the sidelines, using its twice a year dividend to add more, now might have even to seek alternative sources of income.
Now this dividend portfolio
compoundation is fast, much faster in effect due to the syngistic effect of the individual counters churning out dividends and feeding the other counters.
in times of bear and bull, during retirement, the dividends coming at various times can simply be used as income. There is hardly any fear of outliving the portfolio as the average dividend yield of the entire portfolio is in excess of 5. In fact, there is still surplus to reinvest if one wishes so.
Be careful when one takes out a fixed sum say 4% from the portfolio. And it depends on what sort of portfolio we are talking about. Index buying and growth stocks, all run the risk of dollar LOSS averaging when we are talking about withdrawal in prolonged bear.
So to say that just buy index, means one havent thought about these things, to say the least. I have seen people, some so called experts dispensing advice to others that index investing should replace what they are doing. And in reality, its those people who have been through these times, who will really know the difference in these investment modalities.
