Long term plan for my self directed IRA

Your plan is to double your money in 7 years. I have a great proposal for you.......JUST put your entire IRA in the SP500 Index and let it ride for the rest of your life. You WILL achieve your goal or better according to ALL the data.

AND.....since your non retirement money is being actively invested by YOU in stocks and funds...this will give you a SAFE and SECURE....alternative to your own active management and your investing BIAS.

Your plan above seems extremely complex and unwieldy when a single Index will probably end up doing better anyway.

 

Just go with the PROVEN SP500. Over the long term 10-11% total return per year average. Safety with the focus on the greatest and LARGEST 500 companies in the USA....and.....in the world. Pick any basic SP500 Index Fund or ETF....whatever is cheaper for you where you have your account.

Of course.....I do NOT give investing advice....this is what I would do if it was me.....you have to decide for yourself.

 

If it was me I would use VOO since it is the lowest cost by a slight amount.

"iShares Core S&P 500 ETF (IVV)
IVV is the second-largest S&P 500 ETF, with over $153 billion in assets as of March 2020. The expense ratio is 0.04% per year, making it slightly cheaper than SPY.

Vanguard S&P 500 ETF (VOO)
Vanguard is the largest provider of index funds in the world. However, for S&P 500 ETFs, they only have the third-largest ETF. As of March 2020, VOO manages over $110 billion in assets. The expense ratio is 0.03% per year, making it cheaper to own than IVV or SPY."

 

You will be able to compare your active management results against your IRA if it is all in the SP500. You will know you are doing really well if you are able to beat the IRA since most professionals can not beat the SP500.

 

I don't know if you're aware of it or not but reinvesting dividends provides no benefit unless the company's share price rises. Receiving a dividend provides zero total return.

Yes, they lower cost basis but if received in a non sheltered account, they're tax inefficient (not applicable to you since this is your IRA).

 

What you are probably unaware of is that on the ex-dividend date, the stock exchanges reduce share price by the exact amount of the dividend. That results in a capital loss equal to the dividend. It's a wash. The dividend provides zero Total Return.

If it's a non sheltered account, the dividend is taxed as income even though it isn't income to you (actual profit). You are penalized for receiving the dividend. If you reinvest the dividend, you end up owning more shares at a lower cost basis per share.

In order for that dividend to be actual income, share price must recover by the amount of the dividend.

To see this, all you have to do is note the closing price before the ex-div date and then note what it is the next day (the ex-div date) before trading resumes. If your broker doesn't provide adjusted closing prices on the ex-div date then compare the close to close values along with the daily change and you'll see that the dividend is missing.

Read this: https://investor.vanguard.com/investing/taxes/buying-dividend

 

You are conflating 3 different events.

What share price does before the stock goes ex-div has nothing to do with the ex-div process.

What share price does after the stock goes ex-div has nothing to do with the ex-div process.

The ex-div process creates zero total return, just as a stock split does not.

 

The REITs we own generally under-correct for the dividend. It would seem there is an opportunity for arbitrage with ex-date valuations.

I bought my first REIT during the global financial crisis. To be fair, it was in a huge slump. Still, that REIT more than doubled over a decade when it was purchased by a larger REIT. During that decade, it left a nice lump of cash in my account each month. The first six of those years, forum members on my forum of that moment told me what a moron I was for investing in real estate. To be fair, they weren't as vitriolic as the anti-Tesla people in 2016~2020.

When I first bought, it was distributing 11.25% with a P/E of 2. Yeah, it was pretty sweet. There were two increases to the distribution in 10 years. Neither distribution compensated for the gradual equity appreciation. Also, it was diluted several times over the decade. Consequently, it was distributing at 6.7% at the time of dissolution and the PE was around 7.

This brings us to a philosophical cross-road.

You could consider the first tranche of this REIT to pay 11.25% when purchased, increasing twice from this level.

Or, you could consider the distribution based on the spot price.

Since I look at these REITs similar to bonds, I chose the former. It was like a bond that paid over 11.5~15,5% while doubling in value over the course of 10 years.

Most of the REIT's equity appreciation happened in 2012 and 2016~2019. It stayed in a relatively narrow market cap window, most of the decade we owned it.

If you consider that we DRIPed the REIT for the vast majority of our ownership, it was a nice return. Consider that buying an extra few hundred shares each month means you will have dividends from an extra few hundred shares next month. In other words, the REIT is compounding monthly. If you consider the monthly compounding effect that happens from a DRIP, this adds between 0.5~1% of additional dividend yield depending on the monthly spot price.

Please keep in mind that I cited one of our best performing REITs. Also, keep in mind the tax implications of the monthly income. If you are a salaried worker and hold a distributing company in an unsheltered account, you are almost certain to be much better off to take your income from capital gains.

Some people despise companies that pay a dividend. I have no idea why. Some are crap. Some are fantastic. They are just like any other company with regard to quality of management having a direct impact on the performance of the company. I would encourage you to consider regulatory implications of the corporate charter as a minor factor, when assessing the value of a company.

 

Receiving a dividend doesn't provide any immediate benefit. It's the long term growth of the underlying that provides the gains (more so if the dividend is reinvested). Conversely, if the underlying drops, reinvesting the dividend will lead to greater loss (see the 2008 GFC).

 

DRIP activity during price dips increases the yield, as the equity buys more of itself during these periods, leading to greater gain.

In my view, the primary immediate benefit is the holder of a distributing stock can elect to reinvest, redeploy the money to other equities (perhaps something showing greater value), or take the cash.

Because we had such strong cashflow from REITs, we had no (or nearly) emergency cash for several years. We could have just lived off the distributions.

It's when the market cap goes way up and the PE goes down, you want to stop reinvesting the dividend. Dips in market cap are a God send.