Are You Cannibalizing Your Assets?

October 28, 2017

If you currently receive monthly distributions from an equities portfolio or fund through an automatic withdrawal plan, chances are you're doing just that!  By today's standards 4% annual distributions seems to be the limit for sustainability of a portfolio. The dividend yield on the SP500 is 1% leaving a 3% annual cash shortfall.  That shortfall is made up through monthly share liquidations regardless of performance.  

 

Look at it this way, automatic withdrawal plans liquidate shares after they've declined and when you'd normally hold for recovery,  and they liquidate shares after they have  increased taking the growth out of growth stocks but not the risk.  Distributions typically are in a fixed dollar amount, so if prices decline, a greater number of shares need to be liquidated to support the distributions, shares no longer available to grow.  Share positions erode almost imperceptibly every month regardless of market direction.  Over time distributions become unsustainable, the starting point for much investor litigation.

 

Automatic withdrawal plans are one-way street to disaster for many.  Every investor, retired or not, should control the timing and amount of portfolio liquidations as well as the specific investments to sell. Take distributions quarterly at most and semi annually at best.  I cannot count the number of times I heard investors tell me that "as long as they were getting their monthly check they were not alarmed and were in fact well assured that market gains would restore principal even with the distributions."  It wasn't true. Unfortunately, there were insufficient shares remaining to restore principal balances once the markets recovered a few years hence, leaving these investors at the top of the market with half the shares and substantially reduced distributions. 

 

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Frederick W Rosenberg JD

973-761-8866

27 Village Green Ct
South Orange, NJ 07079
USA

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