Thoughts on Wealth and Reaching the Crossover Point

11 Responses to “Thoughts on Wealth and Reaching the Crossover Point”

1. 1
   BG Says:
   March 23rd, 2011 at 10:46 am

   I played with the tool you linked “What’s My Crossover”. Just changing the assumed inflation by 1% has massive repercussions — it doesn’t instill much confidence for me to ever reach the cross-over point.

2. 2
   Evan Says:
   March 23rd, 2011 at 11:02 am

   What I never understood about those calculations is that assets growing at 6% or 8% aren’t throwing off the same of income.

   FCN, I think this brings it back to our discussions about dividend investing. To actually yield that 2 to 5% and then still have growth.

3. 3
   Nickel Says:
   March 23rd, 2011 at 11:12 am

   Evan: If your portfolio grows (say) 6%, it doesn’t matter if it’s b/c of capital gains or dividends. You still have 6% more money than you used to. You either spend the dividends or sell a few shares. The net effect is the same.

   Consider two $1M portfolios. For the first, the price appreciates 5% to give you a total value of $1.05M with no dividends. In contrast, the second pays out 5% dividends, so now you have $1M + 0.05M = $1.05M. The total return is identical, they just differ in how you access the gains (one requires selling shares, the other is already in cash). And yes, I realize that I’m oversimplifying. I’m just trying to illustrate that it doesn’t matter how you achieve the gain in value.

   I would also argue that it’s invalid to assume that a stock paying (say) 5% dividends will appreciate the exact same amount as one with no dividend. In the former case, you are effectively taking money out of the business. In the latter case, the business is reinvesting those profits to spur future growth.

4. 4
   Evan Says:
   March 23rd, 2011 at 11:17 am

   FCN,

   I think dividend investing offers you the option of using cash (the dividend pay out) OR selling shares.

   “I would also argue that it’s invalid to assume that a stock paying (say) 5% dividends will appreciate the exact same amount as one with no dividend. In the former case, you are effectively taking money out of the business. In the latter case, the business is reinvesting those profits to spur future growth.”

   From what I have read, it just doesn’t seem to work that way. Every time a dividend is paid out, the company (in the real world, not on paper) doesn’t go down exactly by that amount, and more often than not it trades back at the same rate within a few days.

   I didn’t mean to take it back to that old discussion lol

5. 5
   Steve Says:
   March 23rd, 2011 at 11:52 am

   According to the calculator I should retire today. I think I might wait a couple decades yet.

6. 6
   BG Says:
   March 23rd, 2011 at 1:03 pm

   “Every time a dividend is paid out, the company (in the real world, not on paper) doesn’t go down exactly by that amount,”

   Evan, it is supposed to. If a company pays a dividend after market closing (say at 6pm), the opening share price, futures markets, and indexes are all adjusted to make it a “wash”.

   If the stock then goes up, well that’s just gravy — however the dividend itself shouldn’t have any affect at all (like Nickle describes).

   Now, the reasons why (in the real world) that a company’s share price would go up after a dividend payout (especially if it _increases_ it’s normal dividend) is because investors see that as confidence in the management to continue to deliver strong returns — people jump on that. Dividends also ward of bear-investors, who love to short stock, so a big dividend will squeeze the shorts (so they have to _buy_ to cover their shorts — their buying will inevitable raise the price).

7. 7
   Shoeby Says:
   March 23rd, 2011 at 1:07 pm

   This is pretty awesome. I bookmarked that site, great motivation for keeping up with the investments.

   @Steve Ummm. If the income that you’re making solely based on investments is > expenses… Why not retire? Unless you love what you do.

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   Craig Says:
   March 23rd, 2011 at 11:16 pm

   I’m still young and a long way off from retiring…but I realize that it’s never too early to start investing. It seems that sometimes it’s just all so confusing people decide to do nothing, and then suddenly it’s too late. Thanks for motivating me.

9. 9
   Steve Says:
   March 29th, 2011 at 11:05 am

   @Shoeby: That’s kinda my point. What the calculator tells me differs from what I know of reality. I know what I need to live off my investments, and I don’t have enough yet. I think the calculator is assuming you can withdraw a full 9% (or whatever investment income number you give it) per year, after inflation, which is a ridiculous assumption. Even assuming a 4% safe withdrawal rate (which is too risky for someone retiring in their mid 30’s) I would need at least twice what I currently have saved up. And on top of that I’d have to pay for individual health insurance (or move to a country that would give it to me.)

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    dunkelblau Says:
    March 30th, 2011 at 12:22 pm

    A few years ago I reached the point where Schedule B covers living expenses, but I’ve never taken this to mean financial independence because I know that unlike wage income which tends to be “sticky”, financial market returns most assuredly are not. The past few years shows us that the extra buffer you need to achieve financial security is huge. This is why most people we would regard as wealthy do not feel secure– most of their assets are paper and they know what can happen to these.

11. 11
    Ginger Says:
    April 19th, 2011 at 4:50 pm

    The link only works for investments in stocks/bonds, not real estate but other than that, I think it is great. At this point my real estate in producing more income than my stock/bonds but I would love to have it so either was causing me to be at my crossover point. I think I have quite a few years to go before I get there, but I think I have a good start with almost $10000 in investments and a duplex that provides $525/month in rent.