Yield Shield by FIREcracker & Wanderer - thoughts?

[dreampreneur]

Two FIRE bloggers, FIREcracker & Wanderer recommend "Yield Shield" when going FIRE.

Yield Shield means replacing "normal" Bonds and Equity with high yield replacements for a limited time. E.g. total bond market ETF with preferred shares ETF and corporate bonds ETF, S&P500 ETF with high dividend ETF and REIT ETF. The downside is higher volatility and lower performance the upside is yield without selling even if market crashes.

Any ideas or criticism? Thanks in advance!

[bacchi]

What does "for a limited time" mean? Only during a/the recession? When do you switch back?

Did their strategy work during 2008/9 when dividends were slashed?

[ChpBstrd]

Here are some thoughts:

https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

https://earlyretirementnow.com/2019/03/04/the-yield-illusion-follow-up-swr-series-part-30/

https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/

[dreampreneur]

What does "for a limited time" mean? Only during a/the recession? When do you switch back?

Did their strategy work during 2008/9 when dividends were slashed?

Limited time = At the beginning of FIRE, to avoid selling falling assets, not longer than a few years (5).
2008 = they were pre-FIRE. It worked during 2015 oil crisis - according to them.

[RainyDay]

Here are some thoughts:

https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

https://earlyretirementnow.com/2019/03/04/the-yield-illusion-follow-up-swr-series-part-30/

https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/

I've read most of the Millennial Revolution Blog and recently read about 75% of the ERN Safe Withdrawal Series.  A lot of the ERN site is heavy reading with a lot of formulas, back-testing, and research--which is why I think he's more credible than the Millennial Revolution site that "maths shit up."  My take-away was that the Yield Shield wouldn't save you if you get unlucky with SORR.  But a more conservative withdrawal rate (3.5-3.75%, depending on your age/length of expected retirement) would.   

[dreampreneur]

Here are some thoughts:

https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

https://earlyretirementnow.com/2019/03/04/the-yield-illusion-follow-up-swr-series-part-30/

https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/

Great reading, exactly what I hoped for. Thanks.

[dreampreneur]

The only good "yield shield" i can think of these days is I-Bonds.

I'm not sure if I can get I-Bonds in Europe.
Edit: That would be probably inflation linked bond ETFs in Europe.

Question: if we want bonds for stability of the portfolio (not yield) and the biggest threat to stability is inflation, we should look kindly at TIPS, I-Bonds (US) and inflation linked bond ETFs (Europe). Am I thinking correctly?

[VanillaGorilla]

Here are some thoughts:

https://earlyretirementnow.com/2019/02/13/yield-illusion-swr-series-part-29/

https://earlyretirementnow.com/2019/03/04/the-yield-illusion-follow-up-swr-series-part-30/

https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/

This. The Yield Shield is trash.

The MR blog is good for inspiration but very, very poor for sophisticated analysis.

[Wolfpack Mustachian]

They do promote the yield shield, but they also comment several times in it that it's a big psychological thing for them. Specifically, FIREcracker, talks about how she would have made rash moves without having it and that it helps her peace of mind. I don't adhere to their yield shield at all, but instead I read it like I read other things - take what I see benefit from and don't stress about the rest.

That being said, the rest of their posts being about traveling on a budget is super cool information, and they're the bloggers I read the most of anyone out there.

[EscapeVelocity2020]

The entertainment value of the blog is fine, but they are breathtakingly biased toward defending their own preferences and decisions.  From a recent blog post -

Other traditional safe havens of wealth haven’t exactly performed as advertised either. Holding cash means you’re guaranteed to lose purchasing power when savings accounts and money market funds are paying less than inflation. Real estate, traditionally useful as a hedge against inflation, is getting hammered with price declines already being felt due to rapidly increasing interest rates. Even gold hasn’t been useful as a safe haven, having retreated 8% from its high in March 2022.

The hate on owning real estate non-stop, but it's been a great asset these last few years, especially in a big city in Canada.  So yeah, I would never use their investing advice if they can't admit when their recommendations were completely wrong.

Hang around MR if you enjoy their style, but don't put your money where their mouth is...

[cool7hand]

Thanks for sharing!

[ChpBstrd]

The entertainment value of the blog is fine, but they are breathtakingly biased toward defending their own preferences and decisions.  From a recent blog post -

Other traditional safe havens of wealth haven’t exactly performed as advertised either. Holding cash means you’re guaranteed to lose purchasing power when savings accounts and money market funds are paying less than inflation. Real estate, traditionally useful as a hedge against inflation, is getting hammered with price declines already being felt due to rapidly increasing interest rates. Even gold hasn’t been useful as a safe haven, having retreated 8% from its high in March 2022.

The hate on owning real estate non-stop, but it's been a great asset these last few years, especially in a big city in Canada.  So yeah, I would never use their investing advice if they can't admit when their recommendations were completely wrong.

Hang around MR if you enjoy their style, but don't put your money where their mouth is...

It's true that they missed out on some big gains, but...

1) Those real estate gains were at risk, were only apparent in hindsight, and are currently only paper gains unless the homeowner has sold their house. The gains could still easily evaporate due to higher interest rates, because their housing market is utterly unaffordable.

2) It would not have been financially possible for them to both retire in their 30s to travel the world AND to buy a $750k Toronto condo or house. They'd have been working another decade if that was a goal, so in terms of maximizing the amount of time retired, their strategy is optimal for their area and for this market. That's IF your goal is to retire in your 30s and travel the world. If the goal is to build a RE empire, or own the perfect personal McMansion, another direction would be recommended.

[EscapeVelocity2020]

The entertainment value of the blog is fine, but they are breathtakingly biased toward defending their own preferences and decisions.  From a recent blog post -

Other traditional safe havens of wealth haven’t exactly performed as advertised either. Holding cash means you’re guaranteed to lose purchasing power when savings accounts and money market funds are paying less than inflation. Real estate, traditionally useful as a hedge against inflation, is getting hammered with price declines already being felt due to rapidly increasing interest rates. Even gold hasn’t been useful as a safe haven, having retreated 8% from its high in March 2022.

The hate on owning real estate non-stop, but it's been a great asset these last few years, especially in a big city in Canada.  So yeah, I would never use their investing advice if they can't admit when their recommendations were completely wrong.

Hang around MR if you enjoy their style, but don't put your money where their mouth is...

It's true that they missed out on some big gains, but...

1) Those real estate gains were at risk, were only apparent in hindsight, and are currently only paper gains unless the homeowner has sold their house. The gains could still easily evaporate due to higher interest rates, because their housing market is utterly unaffordable.

2) It would not have been financially possible for them to both retire in their 30s to travel the world AND to buy a $750k Toronto condo or house. They'd have been working another decade if that was a goal, so in terms of maximizing the amount of time retired, their strategy is optimal for their area and for this market. That's IF your goal is to retire in your 30s and travel the world. If the goal is to build a RE empire, or own the perfect personal McMansion, another direction would be recommended.

Owning real estate in most markets has been a fantastic hedge against inflation thus far, even if you haven’t sold.  What I bolded was to point out MR’s bias, but I’m not an expert in Toronto real estate.

And the majority of FIRE bloggers own homes - MMM owns lots of real estate, RebelSpy retired at 29 on real estate…. Certainly not a hinderance to ER, especially if it is appreciating faster than inflation.  If anything, MR’s retirement is endangered by being renters and not owners…

But we’re going off topic from the yield shield topic.  Dividends being taxable annually vs. gains from companies using that money to grow or buy their own shares gives the owner the flexibility to manage taxable income better.  Also, if companies cut dividends, their share price typically falls as well, which compounds the risk during a downturn.

[ChpBstrd]

The entertainment value of the blog is fine, but they are breathtakingly biased toward defending their own preferences and decisions.  From a recent blog post -

Other traditional safe havens of wealth haven’t exactly performed as advertised either. Holding cash means you’re guaranteed to lose purchasing power when savings accounts and money market funds are paying less than inflation. Real estate, traditionally useful as a hedge against inflation, is getting hammered with price declines already being felt due to rapidly increasing interest rates. Even gold hasn’t been useful as a safe haven, having retreated 8% from its high in March 2022.

The hate on owning real estate non-stop, but it's been a great asset these last few years, especially in a big city in Canada.  So yeah, I would never use their investing advice if they can't admit when their recommendations were completely wrong.

Hang around MR if you enjoy their style, but don't put your money where their mouth is...

It's true that they missed out on some big gains, but...

1) Those real estate gains were at risk, were only apparent in hindsight, and are currently only paper gains unless the homeowner has sold their house. The gains could still easily evaporate due to higher interest rates, because their housing market is utterly unaffordable.

2) It would not have been financially possible for them to both retire in their 30s to travel the world AND to buy a $750k Toronto condo or house. They'd have been working another decade if that was a goal, so in terms of maximizing the amount of time retired, their strategy is optimal for their area and for this market. That's IF your goal is to retire in your 30s and travel the world. If the goal is to build a RE empire, or own the perfect personal McMansion, another direction would be recommended.

Really confused about your comments.  First off, owning real estate has been a fantastic hedge against inflation thus far, even if you haven’t sold.  What I bolded was to point out MR’s bias, maybe someone can cite data that Toronto real estate is crashing this year?

And the majority of FIRE bloggers own homes - MMM owns lots of real estate, RebelSpy retired at 29 on real estate…. Certainly not a hinderance to ER, especially if it is appreciating faster than inflation.  If anything, MR’s retirement is endangered by being renters and not owners…

But we’re going off topic from the yield shield topic.  Dividends being taxable annually vs. gains from companies using that money to grow or buy their own shares gives the owner the flexibility to manage taxable income better.  Also, if companies cut dividends, their share price typically falls as well, which compounds the risk during a downturn.

The point of MR is that a lifestyle of living in vacation resort areas and flying all around the world is cheaper than home ownership in VHCOL places like Toronto. Given the choice of working many more years to pay for a home in a fixed location (near the work they would have to do to afford such a home), they decided to make their life a never-ending vacation on about a $1M nut and about $40k annual spending IIRC.

Everyday life in Toronto would cost them at least twice as much, require them to work several more years, and that's not even including any vacations.

Would they be wealthier if they had chosen to work the last several years and put most of their assets as a down payment on a VHCOL area condo just prior to the pandemic-era interest rate cuts and double-digit price boom? Yes, so far that would have been a winning bet financially. But we'd all be wealthier if we never retired. That's one of the main critiques of FIRE, actually - that you don't get to buy as much fancy stuff or build up as much wealth if you don't work until elderly. MR's priorities are something different - fewer meetings and more time on the beach.

I disagree with their "yield shield" portfolio approach for the reasons ERN illustrated, but the strategy of avoiding home ownership in VHCOL areas in order to retire is not bad if your priorities are to maximize retired time. I'll add that the strategy of fleeing HCOL areas is also doable for less-nomadic types who are willing to be homeowners in small midwestern or southern U.S. towns where everybody lives on $20k-$50k/year.

[dreampreneur]

I see their biggest earning & saving potential in being DINK and not in the absent real estate ownership.

[EscapeVelocity2020]

They also published a book that made a nice bit of income (typically what people would consider as a full time job writing, publishing, and promoting...).

[Freedomin5]

I think the concept of the yield shield make sense within a Canadian context (which is where Kristy and Bruce from MR hold their citizenship), especially during the first 3-5 years when you're mitigating against SORR. Is it the ONLY thing I would use to mitigate SORR? Probably not, but using dividends to generate cashflow would be one of the strategies I would consider. Especially in Canada, when VCN's (like VTSAX but for Canada) top five holdings consist of three of our largest banks and two of our largest energy providers, VCN tends to generate higher dividends than, say, VUN, with the trade-off of less volatility/slower gains. Using those dividends to provide a bit of a "shield" does make sense.

I think the idea of having multiple diverse (ideally uncorrelated) streams of income is a sound idea, whether it's from a rental unit, REITs, bonds, dividends, etc. I mean, after all, the research says that the wealthiest people have around seven streams of income, though most normal people will do well with only three to four streams of income.

[bacchi]

I think the concept of the yield shield make sense within a Canadian context (which is where Kristy and Bruce from MR hold their citizenship), especially during the first 3-5 years when you're mitigating against SORR. Is it the ONLY thing I would use to mitigate SORR? Probably not, but using dividends to generate cashflow would be one of the strategies I would consider. Especially in Canada, when VCN's (like VTSAX but for Canada) top five holdings consist of three of our largest banks and two of our largest energy providers, VCN tends to generate higher dividends than, say, VUN, with the trade-off of less volatility/slower gains. Using those dividends to provide a bit of a "shield" does make sense.

I think the idea of having multiple diverse (ideally uncorrelated) streams of income is a sound idea, whether it's from a rental unit, REITs, bonds, dividends, etc. I mean, after all, the research says that the wealthiest people have around seven streams of income, though most normal people will do well with only three to four streams of income.

Dividend paying stocks are slow growth companies that pay out some of their cash flow each quarter. That's not at all unrelated to the general stock market since, as you point out, the top 5 holdings in Canada are some of the largest banks and largest utilities.

To consider dividend stocks as a diverse stream of income is just as risky as considering small cap value or large growth a diverse stream of income. They're all equities.

[vand]

Yes, the ERN SWR series parts 29-31 basically blows the yield shield argument out of the water. There is also a good discussion of it with Big ERN on the Hackyourwealth podcast:

https://hackyourwealth.com/yield-shield-critique

All that said, it is easy to construct a scenario where high yield plays do better than a total return/growth strategy, just as we have seen in the last 6 months, and it is not inconceivable that a couple of years from now the high yield strategy will have held up solidly amid carnage elsewhere. There is no single strategy that does well in all situations, which is why diversification between different strategies is also important.

[dreampreneur]

Yes, the ERN SWR series parts 29-31 basically blows the yield shield argument out of the water. There is also a good discussion of it with Big ERN on the Hackyourwealth podcast:

https://hackyourwealth.com/yield-shield-critique

All that said, it is easy to construct a scenario where high yield plays do better than a total return/growth strategy, just as we have seen in the last 6 months, and it is not inconceivable that a couple of years from now the high yield strategy will have held up solidly amid carnage elsewhere. There is no single strategy that does well in all situations, which is why diversification between different strategies is also important.

ERN says that as long as the dividend strategy is applied to the equity part of the portfolio (and not e.g. bonds) it's OK-ish. Dividends are used by MR in connection with the "cash cushion" and help to reduce its size. So instead of taking S&P500 you could take SPDR S&P US Dividend Aristocrats and double the dividends without sacrificing the growth of your portfolio entirely. Now, doubled dividends mean that you only need a half of the cash cushion, so you could put more cash into equity.

However the whole discussion seems to be somehow academic now, at least here in Europe. With bonds bringing negative interest keeping cash instead of bonds got mainstream. If you keep your low-risk part of the portfolio in cash anyway, you don't need a separate cash cushion.