Hi! I'm new!

[AlpineTR]

Hi Everyone -

I finally joined the forum even though I started reading this blog around 2009.

I had always had the feeling that the emperor had no clothes and Jacob's blog was the first to confirm it. The blog also put me on the path toward financial independence. I continued working, went back to school, worked some more, and ultimately reached FI around 2020 in part thanks to skills I started to develop here.

I didn't read the ERE book until 2019. I had originally demurred because I assumed it was just the ERE blog v2. Of course, I was wrong. The book is a brilliant mode of thinking and systematizing. I'm on my second reading now and it's even better than the first time. Jacob certainly has a gift for thinking broadly, synthesizing knowledge, and developing an integrated approach to a complex topic. I'm incredibly grateful to him for writing it and I hope he will write other books (this is not the first time he's heard me ask; I will not stop .

As for myself, I'm a barely introverted INTJ with lots of different interests. I love investing, for one. I could read 10-ks, investor presentations, trade rags, and do primary diligence all day long (I can't go into a gas station without asking the clerk which products are the most popular - my wife is so embarrassed). My investing approach has evolved a lot of the years. I was originally focused on a SWR, but I couldn’t reconcile it intellectually. I switched to income investing and I’m much happier with an approach that matches my temperament. There is more than one right answer to investing (though there are many wrong answers). I love finding investments that I understand that generate long term cash flow - and will have more earnings and cash flow 10 years from now.

Despite a nice level of passive income, I am still working. It's partly out of fear and partly because I haven't found anything to retire to yet (plz send help). I have three kids, so my working is to support them and give them health insurance.

I look forward to getting to know you all. This seems like a great community.

Thanks!

[mathiverse]

Welcome! I recently decided to switch my portfolio to something that generates cashflow rather than depending on SWR. I'm still in the early stages. Do you have any tips when it comes to how to switch to income investing?

[Seppia]

welcome to the forum!

Do you have any tips when it comes to how to switch to income investing?

In my opinion it is primarily a matter of mindset.
Dividends tend to grow above inflation (long term) so even if owning a global stock index fund, it is sufficient to look at your holding through the lens of
“How much cash is it generating per year? Can I live off of that?”
Vs
“How much can I draw down and still expect to end up with something worth > $0 when I pass away?”

[Seppia]

I would add that another benefit of looking at one’s portfolio thinking “how much cash does it generate?” Is that in some sort of way you automatically adjust for valuations.
Because dividends decrease less than prices in bear markets, dividend yields tend to be higher when prices are low VS high.

One thing I have never understood about the SWR ajatollahs is that 4% SWR at CAPE 35 is clearly very different from 4% SWR at CAPE 15.
IIRC Jacob retired with an SWR if 6% or so, but that was around the worst of the GFC, with expected future returns much higher than say in late 2019

[mathiverse]

Thanks for the input, Seppia!

IIRC Jacob retired with an SWR if 6% or so, but that was around the worst of the GFC, with expected future returns much higher than say in late 2019

Regarding the above... Straight from the horse's mouth below.

@JamesR - See this is exactly why I hate giving out numbers as they tend to be taken/copied out of context(*) Note that I said that I quit exactly at the market bottom (S&P500 was around 700). My NW had previously (in 2008) been close to 200k ... and because the market recovery was so fast, it was back up to 200k shortly after I retired. Note that I also said that $1500 were wants ... and specifying the frivolity/optionality of that want. So in terms of needs, the SWR was 3.66% for a brief period of time in Mar 2009... but a year earlier and a year later, it was under 3%. I also noted that I had an established source of good at-will income that covered my expenses with about 4 hours of work per week, i.e. it wasn't Walmart greeter with a 3 hour bus commute.

(*) It's also why I think blind faith in the 4% rule is super-dangerous. http://forum.earlyretirementextreme.com ... f=3&t=7868

Now compare that to someone who gets the "wrong" (or rather risky idea) that 4.67% is "what jacob did so he approves" and does it in this 2016 economy w/o any side hustles under the optimistic assumption that "something will be found later". Suppose then the market tanks from P/E 24 to P/E 19 and stays there for several years... a reasonable assumption (no QE for this cycle and interest rates can't be dropped further).

21% of NW is lost quickly... and SWR increases to 5.9%. Meanwhile, no at-will income exists and in a tanking economy, it's hard to find any since opportunities are fewer. The market stays flat for 6 years and then becomes normal again. Now 21%+6*4.7%=49.2% of the portfolio is gone. SWR is now at 9.5% with a historic 30 year success rate of just 2.6% failing in 97.4% of the cases. And it's only been 6 years

Result: Serious sequence-of-returns risk. This person will either spend the rest of his life being semi-retired or needing to go back to build up lost nest egg.

[AlpineTR]

Welcome! I recently decided to switch my portfolio to something that generates cashflow rather than depending on SWR. I'm still in the early stages. Do you have any tips when it comes to how to switch to income investing?

Be willing to do a lot of work. If you don't enjoy the process, stick with the passive approach. Do not go buy something based on dividend rate alone. Make sure you truly understand what you're doing.

In my opinion, humans tend to approach investing in one of three ways: 1) they outsource it to a "helper" in exchange for a fee, 2) they follow some flavor of the Bogleheads philosophy based on AA and SWRs, or 3) they straight up gamble.

For most of my life, I fell into category #2, but as I said, I could never reconcile intellectually. While I respect the Bogleheads for their many intelligent contributions to the world of personal finance, I think they tend to stretch their logic to point where their conclusions become absurd. They will then do intellectual backflips to avoid confronting their cognitive dissonance. I agree that it can be dangerous to follow the 4% rule blindly, particularly for ER while valuations are stretched.

As I mentioned, I pursue income investing first, but I will certainly take positions in non-income producing investments too. However, some of my largest positions pay no dividend, interest, rents, royalties, etc. I take a bottoms-up approach based on the broader opportunity set available. In general, I'm willing to consider individual stocks, individual bonds, ETFs, real estate funds, physical real estate, cash-secured put options, or other special situations. I have some broad guidelines that I use for risk control to limit permanent capital loss. I know firsthand that there are plenty of opportunities for small investors to pick up nice little morsels that institutional investors have discarded.

If there is a stock out there with high returns on tangible capital that is returning massive amounts of capital to shareholders through dividends and buybacks, I will give it a close look. If I understand the business and I think earnings will be higher in a decade, I might decide to take a position. If not, I might choose to stick money in T-bills and wait for something more interesting to come along.

I would certainly never call myself a "dividend investor" and unlike many of the charlatans on Twitter, I would never sell on course on dividend investing! Investing is an art and it requires a lifetime or education and practice. It is sometimes painful but often rewarding. In general, I find the process to be very enjoyable.

[jacob]

I didn't read the ERE book until 2019. I had originally demurred because I assumed it was just the ERE blog v2.

This seems to be a not entirely uncommon assumption. I wonder why that is?

[chenda]

This seems to be a not entirely uncommon assumption. I wonder why that is?

Maybe less reputable or business orientated bloggers regurgitate the same stuff to sell books for commercial gain ?

[loutfard]

"income investing" and "dividend investing" hardly exist over here, to the extent I feel these are quite artificial categories. This is due to fiscal policy.

Securities investing:
- My 1000000€ stock portfolio has appreciated by 100%. I sell 200k€ of it. I pay 0€ capital gains tax (except for short term speculative transactions). I wrote stocks, but the same holds for accumulating index funds.
- I receive 100000€ in US dividends. I pay 40500€ in tax (15% US withholding tax, plus 30% Belgian withholding tax on the remainder).

Real estate investing:
- I buy a super simple 200k€ house as a rental investment. I pay about 17% or 34k€ in fees on transaction and mortgage. With gross returns before interest, tax, deprecation and amortization on most real estate here typically around 4%, you'd need more than four years to recoup just the transaction fees...
- I sell my primary home. I pay 0% capital gains tax on any appreciation. I move to a 200k€ fixer-upper that I renovate to certified high energy efficiency. I pay about 3% or 6k€ in fees on transaction and mortgage.
- I can't legally rent out a room in my primary home as someone's primary residence. That's just not allowed in most places. Even if it were allowed, this would seriously impact my benefits should I become unemployed or ill. Short term rental might be a way out of that, if I could avoid the many strings attached.

In other words, "income investing" and "dividend investing" are discouraged here to the point they make zero sense. Capital gains harvesting for income on the other hand is encouraged.

[AlpineTR]

This seems to be a not entirely uncommon assumption. I wonder why that is?

In my case, I think it was a combination of three reasons 1) inertia, 2) perception of the book as a collection of tips and tools rather than a framework and principles, and 3) my initial impression that the blog's methods were "too extreme".

Together this resulted in my poorly thought-out (and incorrect) conclusion of -> "why take the time to learn more tactics to get to where I don't want to go?"

Additionally, I'm normally wary of any blogger who builds a community and tries to monetize it through a crappy book that adds nothing of value. However, your writings are genuine enough that I didn't think that was your motivation at all (it seemed clear you didn't want/need the money).

Either way, it's a shame that I waited so long to read it. There are very few books I'll read twice, so that shows what an impression it made. It was also valuable in that it helped my wife see the world through my eyes. After reading it, she told me that she understood me better and she also made an effort (of her own volition) to change many of her habits. Her primary motivation was environmental, while I'll admit that mine was to gain control over my time (economic). Either way, it certainly had a lasting impact on both of our lives.

As I said, it's a brilliant synthesis of knowledge from a wide range of disciplines. It's similar to another book I love and re-read, which is Poor Charlie's Almanack. That's why I bug you for book recommendations - there are so few like this!