Post by oldman on Oct 19, 2013 8:08:45 GMT 7
When you are retired, it is not easy to invest for a living. This is because investment returns from fundamental investing are usually lumpy. In good years, one can double or even triple one's money but in bad years, one can potentially suffer losses.
If investment returns are lumpy, it is certainly difficult to count on capital appreciation even on a year to year basis.... let alone month to month. As for dividends, even if one were to have a 5% return every year, this will mean that one has to set aside 20 times the amount of dividends that one needs to sustain himself if one is depending solely on dividends to fund his living expenses. He is also at risk of his capital shrinking as stock prices go up and down all the time.
Moreover, one must always remember that dividend yields are not guaranteed. Neither is there a guarantee that the company that you have invested will not collapse. When we are investing, we are taking risks.... and the main risk is on our capital. I for one, will not invest in any company solely for its dividend yield as dividends are best viewed as a subset of profits. Without profits, a company cannot continue its dividend policy indefinitely. As profits cannot be guaranteed, dividends too cannot be guaranteed.
Hence, it is difficult to count on fundamental investing as a means of sustaining one's living expenses. Before one considers living on fundamental investing, one should ideally have a sufficiently large nest egg that will sustain oneself for at least 10 years as this frankly, is the shortest amount of time that I will give for each one of my fundamental stocks to perform. This nest egg is essentially cash in the bank. In other words, to survive and thrive as a fundamental investor with no other sources of income, one should have at least 10 years of cash reserves.
This is why I always recommend a retirement fund separate from an investment fund for those of us who are keen to invest during our retirement years. The retirement fund is simply cash in the bank that will take care of all our daily needs. Ideally, the capital in this retirement fund will be sufficient to last us our entire lifespan. With this retirement fund in place, you will take the pressure off the investment fund to perform. Like it or not, no one can predict how quickly our investments will mature and putting pressure on yourself for something totally out of your control can be certainly detrimental not only to your personal health, but also to your financial health as one cannot time when our investments will flourish.
Interestingly, I think that systematic trading is a lot more predictable in terms of returns on capital than fundamental investing. Please note that the emphasis is on systematic.... almost robotic like trading. Once you have identified a trading stock and decided on the trading strategy, you have to stick to this winning strategy and usually, the returns though small, can be a lot more predictable than fundamental investing.
No, I am not encouraging trading, whether systematic or not. This requires a totally different mindset. Very few people are good at trading as the majority of us succumb to greed and fear as this is the way we humans are wired.
I still very much encourage fundamental investing. However, I like to point out that it is a lot more difficult making a living from fundamental investing, unless one has already got sufficient capital not only for investments but also to sustain one's living standards regardless of how one's investments are faring.
Yes, I am well blessed to be able to make good money from the markets. However, I wrote this article to caution others that investing for a living is not easy especially when you are retired without any other source of income. Those of us who are successful investing for a living have ample capital available and do not have to depend on our investment returns for our daily living. This is why we can be so patient.
This is also why we should encourage our children to take up fundamental investing as a hobby as early as possible. This way, they will have sufficient time to build up their nest egg before they retire. If they start young, chances of building a substantial investment portfolio before they retire, will be much higher. It is also easier to learn fundamental investing when you are drawing a salary from your job.... you will not be under pressure for your investments to mature as your monthly salary should be able to sustained your lifestyle without the need for your investments to flourish.
If we can instill fundamental investing as a hobby much like stamp collecting in my early years, I think our young will be better prepared than us when they reach retirement age.
If investment returns are lumpy, it is certainly difficult to count on capital appreciation even on a year to year basis.... let alone month to month. As for dividends, even if one were to have a 5% return every year, this will mean that one has to set aside 20 times the amount of dividends that one needs to sustain himself if one is depending solely on dividends to fund his living expenses. He is also at risk of his capital shrinking as stock prices go up and down all the time.
Moreover, one must always remember that dividend yields are not guaranteed. Neither is there a guarantee that the company that you have invested will not collapse. When we are investing, we are taking risks.... and the main risk is on our capital. I for one, will not invest in any company solely for its dividend yield as dividends are best viewed as a subset of profits. Without profits, a company cannot continue its dividend policy indefinitely. As profits cannot be guaranteed, dividends too cannot be guaranteed.
Hence, it is difficult to count on fundamental investing as a means of sustaining one's living expenses. Before one considers living on fundamental investing, one should ideally have a sufficiently large nest egg that will sustain oneself for at least 10 years as this frankly, is the shortest amount of time that I will give for each one of my fundamental stocks to perform. This nest egg is essentially cash in the bank. In other words, to survive and thrive as a fundamental investor with no other sources of income, one should have at least 10 years of cash reserves.
This is why I always recommend a retirement fund separate from an investment fund for those of us who are keen to invest during our retirement years. The retirement fund is simply cash in the bank that will take care of all our daily needs. Ideally, the capital in this retirement fund will be sufficient to last us our entire lifespan. With this retirement fund in place, you will take the pressure off the investment fund to perform. Like it or not, no one can predict how quickly our investments will mature and putting pressure on yourself for something totally out of your control can be certainly detrimental not only to your personal health, but also to your financial health as one cannot time when our investments will flourish.
Interestingly, I think that systematic trading is a lot more predictable in terms of returns on capital than fundamental investing. Please note that the emphasis is on systematic.... almost robotic like trading. Once you have identified a trading stock and decided on the trading strategy, you have to stick to this winning strategy and usually, the returns though small, can be a lot more predictable than fundamental investing.
No, I am not encouraging trading, whether systematic or not. This requires a totally different mindset. Very few people are good at trading as the majority of us succumb to greed and fear as this is the way we humans are wired.
I still very much encourage fundamental investing. However, I like to point out that it is a lot more difficult making a living from fundamental investing, unless one has already got sufficient capital not only for investments but also to sustain one's living standards regardless of how one's investments are faring.
Yes, I am well blessed to be able to make good money from the markets. However, I wrote this article to caution others that investing for a living is not easy especially when you are retired without any other source of income. Those of us who are successful investing for a living have ample capital available and do not have to depend on our investment returns for our daily living. This is why we can be so patient.
This is also why we should encourage our children to take up fundamental investing as a hobby as early as possible. This way, they will have sufficient time to build up their nest egg before they retire. If they start young, chances of building a substantial investment portfolio before they retire, will be much higher. It is also easier to learn fundamental investing when you are drawing a salary from your job.... you will not be under pressure for your investments to mature as your monthly salary should be able to sustained your lifestyle without the need for your investments to flourish.
If we can instill fundamental investing as a hobby much like stamp collecting in my early years, I think our young will be better prepared than us when they reach retirement age.