We Avoid Reverse Dollar Cost Averaging
Most investors practice “buy and hope” investing. They pick up shares, and root for them to appreciate in price. And that’s it.
These first-level types have no plan on how to generate cash flow from their holdings. They think they’ll sell someday, and hope it’s at a higher price. But they don’t have a set game plan to sell and methodically harvest cash from the portfolio they worked so hard to build.
Many financial advisors step into this void, pitching a “4% withdrawal rate.” These guys (who have not retired successfully themselves, by the way) say that you can safely withdraw 4% or so every year from your portfolio and use this as spending money.
Generally, they’re right. But when they’re wrong, it’s disastrous.
The fatal flaw with the 4% annual withdrawal strategy for retirement is that every few years, you’re faced with a chart like this:
Selling Here is Reverse Dollar Cost Averaging
And the 4% withdrawal “strategy” means you’re forced to take out money at exactly the wrong time. If you don’t have enough dividend income to support your family at the time, you must sell shares for additional income.