Author Topic: Profit taking only post-FIRE?  (Read 1814 times)

Harrisdr

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Profit taking only post-FIRE?
« on: August 09, 2017, 11:08:14 AM »
So I'm clearly no investment maven, but here's an honest query on the following scenario.  We have a balanced portfolio 75/25 equities, with a heavier weight on international stocks than domestic.  Given all the uncertainty politically and economically, I'm looking for a withdrawal strategy that will allow us to leave the portfolio capital alone, and just take the profit opportunistically.

Total portfolio: approx $1m with a 10% profit this year to date, so $1.1m.  Current cash=$275k+ in high interest account.  With other assets (paid off real estate, etc), the net worth is about $2m. 

Ultimately, we will settle into about 60-70k per year in expenses.  I understand I'm losing to inflation and lost opportunity by keeping a large cash reserve, but why couldn't I just ride out the down market, living on the accumulated cash account, while taking profits when the present themselves.  That is taking $75k-$100k of this year's profits off the table now, so I've made the year's income in August.  If the market goes up, we start 2018 with a higher noncash balance.  If the market drops, we wait (even if it takes a few years) before touching it until it is again positive.  Cap out cash account at 5 years of expenses to wait out a major correction.

Easy decision making, sell above $1m balance, and hold at or below.  Where does that fail compared to a 4% withdrawal?

TheAnonOne

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Re: Profit taking only post-FIRE?
« Reply #1 on: August 21, 2017, 11:29:59 AM »
You certainly CAN do that. However, it's highly likely that just investing it will win.

You also are not at 4% yet, as 60,000 a year is 1.5 million INVESTED.

Assuming the you had that $275,000 invested since the election you would be nearly $50,000 richer today, or almost your entire yearly spending. On the CASH PORTION ALONE.

In a general year, you will miss out on $20,000 worth of gains (275k * .07)

Given that the bull market has nearly gone up 4X, you have probably cost yourself more than you care to count. Now, extrapolate these "losses" out for a lifetime.


Basically, "if it helps you sleep at night"
« Last Edit: August 21, 2017, 11:32:00 AM by TheAnonOne »

Financial.Velociraptor

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Re: Profit taking only post-FIRE?
« Reply #2 on: August 21, 2017, 11:38:33 AM »
275k is a lot of cash. 

Clearly you have some risk aversion.  Can I suggest a remarkably safe asset class that yields better than your high yield savings?  Municipal bonds.  I like my munis in closed end funds.  I hold four: IIM, IQI, NEA, NVG, and they yield an average of 5.83% that is tax free*.  Assuming a 25% tax bracket, the equivalent yield is 7.29%.  You could be accumulating 275,000 * 0.0583 = 16,032.50 yearly.  That's 22.9% of your high end target spend in a "sleep at night" asset class.  Something to think about.

Oh yeah, those four all pay distributions monthly so budgeting is super easy.


* A few hundred dollars of my return is potentially subject to AMT.  It's trivial though.   
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CrazyIT

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Re: Profit taking only post-FIRE?
« Reply #3 on: August 22, 2017, 10:31:18 AM »
Iím feel the need to chime in on this post.  I feel myself very much in the same situation as the OP.

Too much cash (thatís only my opinion for my situation).  I plan to FIRE in 2021 and build a house so I have been building my cash reserves and have surpassed $225K.  I have the money in the no penalty 11 month CD with Ally.  1.5% interest and I have reached the 6 days so could withdraw penalty free anytime.  I would like my cash reserve to be close to $400k to build my house so I donít have to think about a mortgage once Iím Fireíd.

Currently I have IRA/401K 70/30 Stock/Bond all in Vanguard and Fidelity Index funds.  I have only ventured out of that a few times to invest in individual stocks and other funds with limited success.

 I have seen other posts with NuVeen Municipal Opportunity Funds mentioned.  I have been on their site but canít seem to understand those funds enough to be comfortable to move moneys into them.

Please help me understand those:
What I understand is they are tax free funds so putting money from an IRA/401K would not be the correct choice rather funding them with taxable money would be the right choice.

What I donít understand is the expense ratio.  Is that factored into the dividend?  What are the risks and is there any penalty for selling the funds?  What the heck is the Premium/Discount?   How risky is this investment if interest rates continue to rise?

3 1/2 years and counting

Financial.Velociraptor

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Re: Profit taking only post-FIRE?
« Reply #4 on: August 22, 2017, 01:11:35 PM »
...

Please help me understand those:
What I understand is they are tax free funds so putting money from an IRA/401K would not be the correct choice rather funding them with taxable money would be the right choice.

What I donít understand is the expense ratio.  Is that factored into the dividend?  What are the risks and is there any penalty for selling the funds?  What the heck is the Premium/Discount?   How risky is this investment if interest rates continue to rise?

CrazyIT - hope this helps...

Municipal bonds in a tax advantaged account make no sense.  You put them in a taxable account.  For federal income tax purposes, interest earned on municipals is exempt from federal taxation.  If the funds sells a holding for a capital gain, that is subject potentially to AMT.  Some of the funds are "AMT free" and take pains to avoid this.  Others do a very limited amount of this.  Last year, I filed the AMT form and had literally 6 dollars of exposure.  I did not have to pay AMT but it would have been a percentage of 6 bucks if I had. 

The expense ratio includes the administration fee to the managing company and any interest charged for providing leverage (most CEF use about 35% leverage).  The distribution is paid after any expense ratio.  So if it notes it is yielding 5.84%, the expense ratio has already been taken out and you get the full 5.84%. 

Premium/discount is a big difference between a CEF and an ETF. The closed end fund has a finite number of shares that does not grow or decrease with interest in the fund.  Thus, like a company with limited share count, it can sell for more or less than the value of the underlying assets.  You want to buy closed end funds when they are trading at a discount.  That is literally the discount you are paying for the book value of the underlying assets.  You can control a dollar for ninety cents in many cases. 

You have interest rate risk similar to a bond fund but different in some respects.  First thing to consider is the "duration" of the bonds in the holdings.  A short duration means the bonds mature "soon" and are less influenced by increasing interest rate.  If you hold a bond to maturity, the duration risk falls to zero.  That is, you get par back rather than a discounted rate from the buyer.  The beauty of a closed end fund for bonds is since share count is static, there can be no forced redemptions if investors pull out money.  The fund can hold bonds to maturity and let the duration risk expire.  This is the normal course of action for a closed end bond fund.  So a closed end fund has interest rate risk but it is mitigated if you intend to hold as a permanent allocation and never sell, instead just taking the distributions.  For this reason, I keep my entire bond allocation both muni and corporate entirely in closed end funds.

I missed one.  There is no lock up period or penalty for selling the fund.  You will realize a capital gain or loss when the fund is held in taxable accounts.  For me, these are 'forever' holdings.
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Gus_Smedstad

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Re: Profit taking only post-FIRE?
« Reply #5 on: August 27, 2017, 08:15:15 PM »
I feel understand stocks pretty well, but a brief glance at IIM left me feeling lost in the woods. The financial statements don't look anything like what I'm used to. Substantial net negative income, yet significant cash flow from operations due to depreciation? No statements more recent than 9 years ago? What?

I hold a good chunk - about 17% - of my investments in short duration ETF bond funds right now. I tend to view this as holding areas until I find a particularly attractive stock, which has been difficult lately. Hence I've bought funds with durations around 1-3 years, with overall ROI being about 1.5% or so. I've aimed for short duration to avoid interest rate risk, since I keep feeling that our interest rates are at an unsustainable low. When I grew up 5% was pretty common for savings accounts, not 0.01% from big banks and 1% from Internet banks.

Beyond that, I've gone for low expense ratios. Not a very sophisticated way of picking bond funds, but it's not an area I understand well.

I'd certainly like to do better than that, but I feel I don't understand what I'd be buying or the risks with a brief glance at these. For example, presumably they have some default risk in addition to interest rate risk. If I look at Invesco Value Municipal Income Trust's page, it looks that while their 5 and 10 year NAV performance has been decent for this kind of asset class (around 6%), the TTM NAV return is -2%. While 2% isn't much of a loss, I'd still like to understand it better before approaching this sort of fund.

CanuckExpat

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Re: Profit taking only post-FIRE?
« Reply #6 on: August 28, 2017, 07:35:38 PM »
Have you seen this: https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

It will vary your withdrawal annually, based on market performance, but increasing the percentage as you age. If you spend less than the model suggests you can, nothing stops you from putting the rest of your "spending allotment" into cash if you'd so like.
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soccerluvof4

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Re: Profit taking only post-FIRE?
« Reply #7 on: August 31, 2017, 11:14:41 AM »
My model is similar to the OP's I believe if I read it right.  What i do is keep in vested what gives me the predetermined withdrawal I went into fire needing. So basically 80k. As the market goes up or has I take the profits over the 80k and move to a cash account and use a portion of that to address things that I know I want to do. alot of remodeling in the house etc.. as kids leave this number will fall but I will do this to sleep nights and continue to but I wont exceed more than 4 years of cash to do so.  Thas exactly where I have been the last couple months so I have made no more withdrawals this year. If we get a dip of 10% or more I will start to add back up to 50%. If i get myself in trouble than I will look for some side gig to limit taking funds out. We are all different and depending on your tolerence doing what helps you sleep at night despite what you may or may not of earned as long as you have the basics covered and a good plan is the way I think people should go.
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Hargrove

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Re: Profit taking only post-FIRE?
« Reply #8 on: September 03, 2017, 10:09:27 AM »
I missed one.  There is no lock up period or penalty for selling the fund.  You will realize a capital gain or loss when the fund is held in taxable accounts.  For me, these are 'forever' holdings.

I am more interested in this lately because I am saving to buy a house, and as that becomes more real (and the possible dates get closer) I would happily slice off a couple percent from the projected VTSAX gains to make sure a recession delivers a shorter hit to my down-payment fund if it comes in the near-term.

I was looking at
VWEHX (3-8%)
VWAHX (0-5%, tax free)
VCLT (steady >4%)

Your municipals look better to me long-term except for commissions and expenses >1%. I'm investing between 1k-4k a month right now, so despite the better performance of your listed munis, I think the advantages with no-commission and less volatility in any of the above may be wiser for someone like me, who's thinking a 2-3 year window to buy property. Thoughts?

jim555

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Re: Profit taking only post-FIRE?
« Reply #9 on: September 03, 2017, 10:46:04 AM »
$275k sitting on the side earning peanuts doesn't seem like a good plan.