Great article Denis. Cash flow is more important than savings. Savings depreciate while investments providing an income preserve your capital from inflation.
I’m retired. I set the goal first: generate a monthly cash flow that at a minimum meets my spending goals and that won’t expire before I do. From there, I designed the plan and investment strategy. Index funds were great for the accumulation stage but not so much for the withdrawal stage. Always remember, investing is a tool, not a plan.
Especially if you wish to retire before the traditional retirement age, unless you plan to die young, you’ll be invested for decades. The average annual return on bonds pales in comparison with that of equities. Look at total returns, i.e. dividends plus capital appreciation, to decide what’s a better investment. Your buddy Tom might not be so happy in 10 years when his bonds are worth the same they are today, inflation has halved their value, and his patient friend Denis more then doubled his net worth by holding an Index fund.
In short, invest for your expected life, not for your desired early retirement date.
I hear you, James. Tom's focus is predictability. Perhaps there's no one-size-fits-all in investing for retirement. My point is that predictability makes sense when you stop getting regular income.
Yes it does, Denis. Interestingly, dividend income across a basket of stocks is quite predictable (much more so than the underlying equity prices). Income from a portfolio of bonds is subject to interest rate risk. If one is happy with the specific interest rate, holding individual bonds to maturity gives quite good predictability on the income that will be received. But only for that specific bond. Thus, people often buy bonds every year (so-called laddering), meaning one becomes subject to interest rate risk again. It is hard to overcome the lower risk, lower return paradigm.
Great article Denis. Cash flow is more important than savings. Savings depreciate while investments providing an income preserve your capital from inflation.
Glad you agree, Akim.
I’m retired. I set the goal first: generate a monthly cash flow that at a minimum meets my spending goals and that won’t expire before I do. From there, I designed the plan and investment strategy. Index funds were great for the accumulation stage but not so much for the withdrawal stage. Always remember, investing is a tool, not a plan.
Thanks Cosmo, I’ll remember.
Especially if you wish to retire before the traditional retirement age, unless you plan to die young, you’ll be invested for decades. The average annual return on bonds pales in comparison with that of equities. Look at total returns, i.e. dividends plus capital appreciation, to decide what’s a better investment. Your buddy Tom might not be so happy in 10 years when his bonds are worth the same they are today, inflation has halved their value, and his patient friend Denis more then doubled his net worth by holding an Index fund.
In short, invest for your expected life, not for your desired early retirement date.
I hear you, James. Tom's focus is predictability. Perhaps there's no one-size-fits-all in investing for retirement. My point is that predictability makes sense when you stop getting regular income.
Yes it does, Denis. Interestingly, dividend income across a basket of stocks is quite predictable (much more so than the underlying equity prices). Income from a portfolio of bonds is subject to interest rate risk. If one is happy with the specific interest rate, holding individual bonds to maturity gives quite good predictability on the income that will be received. But only for that specific bond. Thus, people often buy bonds every year (so-called laddering), meaning one becomes subject to interest rate risk again. It is hard to overcome the lower risk, lower return paradigm.
James, I understand. Thanks for telling me about laddering, I didn’t know that.