Long term plan for my self directed IRA

Discussion in 'Investing' started by gtrudeau88, Mar 23, 2021.

  1. spindr0

    spindr0 Active Member

    Joined:
    Mar 4, 2021
    Messages:
    103
    Likes Received:
    84
    One more thing. What's deceptive and misleading about those two graphs is that it's a comparison of the actual price of the S&P500 with dividends reinvested and the actual price of the index (dividends not reinvested)..

    If one understands that share price is reduced by the amount of the dividend on the ex-dividend date then the orange line underperforms because the dividend is being sucked out and used elsewhere. So reinvesting the dividend will absolutely outperform (the blue line). That then begs the question, if the dividends aren't reinvested in the S&P500 then what was done with them? How come they aren't accounted for?

    It's a specious conclusion by the author.
     
  2. gtrudeau88

    gtrudeau88 Active Member

    Joined:
    Dec 8, 2020
    Messages:
    458
    Likes Received:
    149
    Maybe this can settle the question regarding the value of dividends. Assume $1200 invested in a stock priced at $10 (120 shares), paying 10% dividends ($1 per share), and assume the share price drops 10% thereby negating the dividend according to spindr0. The dividend accounts for the $10 monthly contribution below. You appear to break even assuming a monthly compounding (annual would produce a $37 loss over the 10 years). I went with monthly compounding since some stocks do pay monthly dividends and it made for easier math.

    upload_2021-3-28_21-57-28.png

    However what this doesn't and can't show is the effect of buying additional shares. The 1st year generates a $120 dividend payment which purchases 13 additional shares at $9 with $3 left in cash and our shares are worth $1197. Assuming the dividend payout stays the same, the 2nd year gets a payout of $133 which purchases 16 additional shares at $8.10 each (another 10% drop) and we have $6.40 in cash. We now have 149 shares worth $1206.90. We are ahead of the game after the 2nd year unless the stock drops a % greater than the dividend payout.

    My point is that the drop associated with the ex-dividend date only negates the dividend payment if the dividend payment is not reinvested in additional shares.
     
  3. TomB16

    TomB16 Well-Known Member

    Joined:
    Jun 22, 2018
    Messages:
    2,713
    Likes Received:
    1,523
    One last post in this religious debate, then I will stop pouring fuel on this fire.

    The idea that dividends are good or bad is asinine.

    REITs are required by law to distribute nearly all of their taxable income. When you DRIP a REIT, you are increasing your share of ownership by purchasing more shares. Since REITs are frequently DRIPed, through corporate DRIPs and synthetic, this drives prices up over time. Although, I will point out that corporate DRIPs come in the form of shares directly from the company and are not subject to supply/demand issues so don't affect the spot price.

    REITs also have a nasty habit of diluting their issue, over time. This reduces the ownership ratio of any one share, but it probably doesn't affect how much of the assets individual shares own, as diluting the issue should come with expanding the asset base.

    This has an interesting effect that large enough shareholders will tend to own more of the company over time, as their DRIPs will out-pace the dilution, while small shareholders will tend to own less of the company over time, even if they are DRIPing. Again, this doesn't really matter. All that matters is how much asset value one share represents.

    Meanwhile, growth companies don't generally distribute and they shouldn't. If you consider Tesla's financial position, they can probably get 20% returns on cash invested into their business. We cannot. Even those of us who claim to be able to get 20% returns cannot get them. The point is, Tesla shareholders are better off for Tesla to invest the money than to invest it themselves.

    Distributions are for mature, stable, industries with steady income and cashflow. REITs. Utilities. Etc.

    Many companies should not distribute cash.

    Owning companies that distribute cash is also a multi-faceted decision point. The idea that distributions are good so always hold distributing companies is quite ignorant.

    Let's see.... tax sheltered retirement accounts tend to be very well suited to distributing companies like REITs or utilities. These accounts are also well suited to holding S&P 500 long term. These are entirely different strategies with similar results. Historically, a small edge goes to S&P Index investors but I would suggest distributing companies have advantages rarely calculated, like providing spendable retirement cash during market downturns that are punitive to those who have to sell their indices to live. I've never seen this negative effect calculated in an effort to present retirement dynamics but it is significant, over the course of a long retirement.

    The idea of VOO distributing is OK but I wish it didn't. The 1.5% basically makes it a non-distributing asset. If you hold $1M of VOO, you get $15000 per year. That's $1250 per month. Not much return on $1M. It would make more sense for VOO to plow that money back into the fund as equity. I don't flag this as an issue. It's just that I would prefer a different reinvestment mode.

    Lastly, holding distributing companies in unsheltered accounts during the working years is not a good idea for tax reasons.

    Different investments suit different purposes. There is a reason a good toolbox has several tools. They do different stuff. Not all companies should distribute but I'm glad some do. Further, I wish VOO didn't.
     
    #23 TomB16, Mar 29, 2021
    Last edited: Mar 29, 2021
  4. spindr0

    spindr0 Active Member

    Joined:
    Mar 4, 2021
    Messages:
    103
    Likes Received:
    84
    In terms of the actual event, receiving a dividend provides zero total return. If received in a non sheltered account, that is tax inefficient.

    The benefit of reinvesting dividends depends on what share price does subsequently. Without share price appreciation, as stated above, the dividend is a nothing burger. If share price appreciates, the dividend provides positive compounding.

    However, if share price declines, the dividend provides negative compounding. Here's an example of that for DVN for a 12 year decline from 6/31/08 to 6/01/20. As you can see, reinvesting the dividends resulted in poorer performance.

    Conclusion? Share price performance is the determinant factor in position performance not the fact that you receive a dividend. If only the latter was true, one could simply buy the highest yielding stocks, retire young, and live off the dividends in grand style. However, we all know what's wrong with that picture.


    DVN Growth of $10,000.00
    With Dividends Reinvested

    [​IMG]
    Start date: 06/02/2008
    End date: 06/01/2020
    Start price/share: $118.35
    End price/share: $11.70
    Starting shares: 84.50
    Ending shares: 98.57
    Dividends reinvested/share: $7.39

    Total return: -88.47% <---------
    Average Annual Total Return: -16.47% <---------

    Starting investment: $10,000.00
    Ending investment: $1,152.61
    Years: 12.01

    DVN Growth of $10,000.00
    Without Dividends Reinvested

    [​IMG]
    Start date: 06/02/2008
    End date: 06/01/2020
    Start price/share: $118.35
    End price/share: $11.70
    Dividends collected/share: $7.39

    Total return: -83.87% <---------
    Average Annual Total Return: -14.10% <---------

    Starting investment: $10,000.00
    Ending investment: $1,612.71
    Years: 12.01
     
  5. gtrudeau88

    gtrudeau88 Active Member

    Joined:
    Dec 8, 2020
    Messages:
    458
    Likes Received:
    149
    Wait a minute. You are using as an example a stock that drops 90% and that's fine. If the share price doesn't recover of course the dividends don't add up to a hill of beans! But if the share price were to recover (as they often do) you are way ahead of the starting investment amount because of the additional shares you purchased by reinvesting dividends.

    I stand by my original assertion because it's right most of the time in spite of your example.
     
  6. TomB16

    TomB16 Well-Known Member

    Joined:
    Jun 22, 2018
    Messages:
    2,713
    Likes Received:
    1,523
    I hope we all understand that a poorly run company that distributes is still a poorly run company?

    A good company that distributes may have tax disadvantages in an unsheltered account but you would probably be better off with the tax liability than owning a badly run company.
     
    Rustic1 likes this.
  7. gtrudeau88

    gtrudeau88 Active Member

    Joined:
    Dec 8, 2020
    Messages:
    458
    Likes Received:
    149
    I got most of my mutual funds sold and I'll start buying stock, etf, etc. tomorrow. I settled on a plan and I thank everyone who chimed in above.

    S&P 500 funds
    VOO - 30%
    IVV - 30%

    I split evenly between the 2 as I didn't want to have too much $ with a single company. Vanguard ain't likely going bankrupt but what if it did?

    Growth
    TRTN - 10%
    RIO - 10%

    Other etfs and ctfs
    ARKK - 5%
    GOF - 5%
    PFL - 5%
    GLO - 5%

    I intend to leave this alone with no trades other than reinvesting dividends which I'll probably do automatically. Maybe rebalance if needed every 6 months.
     
    Rustic1 likes this.
  8. spindr0

    spindr0 Active Member

    Joined:
    Mar 4, 2021
    Messages:
    103
    Likes Received:
    84
    What you are missing from my example is that reinvesting dividends provides negative total return if share price drops.

    What you are also missing is that you are not accounting for the dividends when comparing a position with its dividends reinvested with a position in the same equity without the dividends reinvested. It's specious logic and will require too much effort to break down the bad math. No problem here. Stand by your original assertion.
     
  9. financial junkyard

    financial junkyard New Member

    Joined:
    Mar 23, 2021
    Messages:
    13
    Likes Received:
    4
    Damn,you may need some exposure to emergent markets as well as a bit of leverage using options for achieving that in just 7 years

    The easiest way would be just buying an SP500 ETF and let it stand there for 20+ years
     
    #29 financial junkyard, Apr 1, 2021
    Last edited: Apr 1, 2021
  10. gtrudeau88

    gtrudeau88 Active Member

    Joined:
    Dec 8, 2020
    Messages:
    458
    Likes Received:
    149
    The S&P funds (VOO, IVV) have returned 13% (per TD Ameritrade) or 11% (per prospectus) on average for the last 10 years. I've put 60% of the IRA into those funds. I put 20% into 2 value stocks (TRTN, RIO) which also have decent dividends. I put 15% into high dividend (9%) ctfs (GOF, GLO, PFL) which exposes me to bonds, corporate and municipal debt, and some equities. 5% is slated for ARKK but is still stuck in a bond based mutual fund. For some reason my orders to sell the position aren't getting acted on. Still working that out. Dividends will be reinvested in either the S&P etfs or the 2 value stocks.

    8% return over 7 years with $300 in reinvested dividends was the plan to double my money. Assuming 8% share price gain (decent chance it will be more) and with $275 a month in dividends the account should double in 7 years time per an online investment calculator.

    I hadn't been considering options. I'm still new and options make me nervous, although I'm sure my understanding of options leaves something to be desired.
     
  11. Rustic1

    Rustic1 Well-Known Member

    Joined:
    Jan 3, 2021
    Messages:
    1,143
    Likes Received:
    442
    This is the perfect example of what NOT to do if you are new to the markets. Find a plan and stay with it, INDEX FUNDS have a strong history of being the ideal growth vehicle for the unexperienced people that jump in willy nilly and have to cut loss after loss. Retirement money is nothing to play with. A lot can be learned by reading this thread and the wakeup call that finally pointed the poor lil feller in the right direction for the most part. Read,study,learn,listen before doing foolish things.
    I highly recommend this book for our young friend, he has lots to learn. You can learn by his mistakes and have a headstart in the right direction. :D
    Screenshot_20210401-070213_Google Play Store.jpg
     
    financial junkyard likes this.
  12. financial junkyard

    financial junkyard New Member

    Joined:
    Mar 23, 2021
    Messages:
    13
    Likes Received:
    4
    past performance is not garantee of future results....
    The SP500 may not go as good as expected and you will have to wait an aditional time
     
    Rustic1 likes this.
  13. gtrudeau88

    gtrudeau88 Active Member

    Joined:
    Dec 8, 2020
    Messages:
    458
    Likes Received:
    149
    A little late now but I do wonder if I did the right thing by exiting all of my mutual fund positions (ditching the financial advisor was a good idea, not questioning that). Maybe was a little knee jerk. PRJQX for example has returned 72.53% over the last year. Take away the .84% in management fees and you still have a gain of 71.92% which is greater than the 60.81% return of the S&P 500 which is where I've put 60% of the IRA. Bad decision?

    Not all the MFs were beating the S&P 500 but some were.

    Maybe this is time to warn of letting emotions get in the way of things. PRJQX is down 1.15% on the year while the S&P 500 is up 5.77% on the year. My thinking was "the fund is underperforming and my FA isn't responding to it." Previous performance ain't a promise of continued performance but perhaps I should have slowed down a bit before junking the MF.

    Changing from a FA to a self directed IRA wasn't a bad idea. I'm saving the 1.35% of my balance which was my fee to him.

    Nothing says I can't buy back into the MF but I am kicking myself a bit.
     
  14. Rustic1

    Rustic1 Well-Known Member

    Joined:
    Jan 3, 2021
    Messages:
    1,143
    Likes Received:
    442
    Very true, to the newbies out there its safer to point them to index funds while they learn the ropes of how the markets work. Agree?
     
    financial junkyard likes this.
  15. financial junkyard

    financial junkyard New Member

    Joined:
    Mar 23, 2021
    Messages:
    13
    Likes Received:
    4
    that guy it's so right....
    your best bet would be a portfolio of just an SP500 ETF if you wanna be agressive
     
    Rustic1 likes this.
  16. gtrudeau88

    gtrudeau88 Active Member

    Joined:
    Dec 8, 2020
    Messages:
    458
    Likes Received:
    149
    So true. Nothing in life but death, taxes, and God's love is a sure thing. But I do expect that the S&P 500 will probably have a few good years in that 7 and nothing says I can't switch to a more active management mode if need be to take advantage of a down turn. For example, I could sell IVV when the price drops deeply and use the money to buy VOO once VOO drops even further and the price is cheap. I would never leave the market, just sell one thing to buy something else at the cheap. I demonstrated mathematically in another post that doing so always produces an increase in capital once the market rebounds.
     
    Rustic1 likes this.
  17. financial junkyard

    financial junkyard New Member

    Joined:
    Mar 23, 2021
    Messages:
    13
    Likes Received:
    4
    I 100 % agree with you mate
     
    Rustic1 likes this.
  18. Rustic1

    Rustic1 Well-Known Member

    Joined:
    Jan 3, 2021
    Messages:
    1,143
    Likes Received:
    442
    The whole point is to help point people in the right direction,obviously some learn faster than others.
    Depends on how the eagle chooses to fly. Others can learn from threads like this and have a headstart. :cool2: Retirement money is nothing to play with.
    Screenshot_20210401-073924.jpg
     
    financial junkyard likes this.
  19. TomB16

    TomB16 Well-Known Member

    Joined:
    Jun 22, 2018
    Messages:
    2,713
    Likes Received:
    1,523
    That is not why I'm here. While I admire the altruistic sentiment, I believe it is a fools errand. Additionally, I don't believe it is particularly helpful.

    This site, like all of investing, is full of people who think they have extreme intellect and the ability to handle complexity and risk as well as anyone in the world. Even those who have repeatedly proven they cannot outsmart the markets, believe they either can or eventually will.

    I'm here for conflicting points of view. WXYZ and spindr0 clearly have far more overlap with my perspective than difference but I disregard our common perspectives and focus on where I differ with these gentlemen. This is how I attempt to grow my intellectual domain. People who agree with me add nothing to my life.

    Traders, who have points of view diametrically opposed to my own, improve my focus and perspective more than the people with whom I broadly share portfolio strategy.

    So, please, disagree with me. I will do the same. As long as we remain somewhat respectful, we will all grow.

    Get yourself a second mortgage and a Robinhood account. Start trading; the more frequently, the better. Also, consider getting a face tattoo to prove to the world they have been wrong about face tattoos being a form of self mutilation.

    Meanwhile, I will be over here boring myself to death by doing nothing almost every market day.
     
    #39 TomB16, Apr 1, 2021
    Last edited: Apr 1, 2021
  20. gtrudeau88

    gtrudeau88 Active Member

    Joined:
    Dec 8, 2020
    Messages:
    458
    Likes Received:
    149
    Just noticed that Ally Invest, where I have my IRA, is apparently 15 min behind in its quotes. Might not be a good trading platform if you are trying to make snap decisions.
    I like your attitude. I don't mind being challenged as long it is done respectfully and we can go out for a brew afterwards. As for trading, I don't think I have the mentality for it nor the time to learn it well and do it justice. My brain is much more suited to a medium to long term mentality, mostly long term.

    Research the fundamentals, research macro trends, and make the best decision I can. Sometimes it works out and sometimes it doesn't. Mostly been working out, especially the last couple months.
     

Share This Page