Building your “Forever Money” Portfolio

One of my “money philosophies” is to focus on nurturing the goose that lays the golden eggs.  In this parable, a farmer had a goose who laid a golden egg on a daily basis.  The eggs were valuable and allowed the farmer to live a modest, but fullfilling, lifestyle. Even though life was good, the farmer turned greedy and assumed that there was much more gold inside of the goose.  Sadly, upon killing the goose the farmer discovered that it was just like any other goose, destroying their passive income, and lifestyle, in the process.

How does this story apply to personal finance?  It’s follows the strategy of preserving capital (the goose) while at the same time, spending the interest (the golden eggs).  If you build a diversified portfolio big enough so that it distributes sustainable (preferably increasing) dividends, or interest, to pay monthly expenses, then that portfolio is distributing what I call “forever money”.  Providing that the portfolio is full of companies that have a long history of paying uninterrupted dividends, and the holdings are not sold off to pay for stuff (killing the goose), the golden eggs will likely last you for the rest of your life.

While this money philosophy may not be for everyone, it’s a safe bet for those who are aggressive savers, considering early retirement, and comfortable with leaving a financial legacy. This strategy provides a steady source of income even during times of market volatility and encourages investing over the long term.  Perhaps most importantly, this strategy does not require the selling of assets to fund retirement during a bear market which can potentially cripple a retirement portfolio.

The upside of this strategy is that the money will last forever.  The challenge is also that the money will last forever.  The portfolio will continue to grow over time but will be passed on eventually.  The challenge is determining what to do with a large lump sum in your estate plan.  Some will pass it onto their kids, while others have committed their wealth to charitable organizations.  But that issue is for another article.

Between my RRSP, TFSA and a non-registered dividend portfolio,  I’ve managed to build a modest dividend portfolio yielding about 4%.  We’ve recently created a corporate portfolio which will also pay distributions.  The overarching goal is to build a portfolio (dividend stocks and other assets) that will distribute enough income (golden eggs) to pay our monthly expenses.  As it stands right now, that would require a portfolio value of around $1.5M with an annual distribution yield of 4%.  We have a long way to go before reaching that portfolio value, but it is something to work towards.

What is your plan?  Do you plan on building a portfolio (or assets) that will last forever?

 

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Grant
6 years ago

Hi Paula,

I’d suggest you talk to a fee only financial planner http://www.moneysmartsblog.com/how-to-find-a-fee-only-financial-advisor/

who can put together a financial plan and help you with what to invest in, using low cost products. Don’t go to bank – they will just sell you their high cost propriety mutual funds.

PaulaBt
6 years ago

Hello,

This is my first post as I just discovered this blog and I am so pleased to find that there is a ‘wealth’ of information available here. I recently sold my investment condo in Toronto as I had a feeling that it was time to do so and I now have 100k and I am trying to decide what to do with it.

I don’t pay income taxes as I do not make enough money (bartender for years = low income/cash) so an RRSP doesn’t make sense for me. I own a duplex and a townhouse and the income is modest so my annual income is still below a taxable rate. The only other investment that I have is a small mutual fund. I purchased the townhouse with money that I had in my HELOC on the condo so I was able to claim the interest.

I was looking into buying a 4plex but as I always have to pay 35% down because I don’t make enough money to buy it, that means that all of my 100k plus another 19k would be in the property. The annual income (including the principal portion paid off) would be approx $33,393.20 (including all exp’s vacancy, r&m, interest, etc.).

I am also considering the TFSA and putting in the full $31,000 but I wouldn’t have a clue what to buy to put into it.

Any opinions and suggestions would be most welcome. The general response will most likely be talk to a tax specialist or a financial planner but they (most that I have spoken to) don’t think outside of the box and are unfamiliar dealing with someone with my situation.

My financial knowledge is rudimentary at best but I realize that money is needed for the future and that is my goal and the earlier the better.

Thank you

Al
6 years ago

If you had bought the Vanguard Index Fund at inception, Aug 31 1976, your yield on cost would be a about 89%. The current yield is 1.64%.

Had you invested invest $1,470 in Aug 1976, you would have about $80,000 today (11.09% compounded annual growth over 38 years (the stats are all on vanguard’s websitre). There may have been very high fees on this back in the 1970s but I can’t be asked to go and check. The $80,000 today yields $1,312 in income today or 89% yield on cost. VOO did not exist back then, only the bog standard mutual fund.

*US dollars, I can’t bother to go and recaluculate in C$

Grant
6 years ago

I’m not sure what you mean by “S&P currently paying $37 per “share” dividend’ but if you own $80000 of VOO, an ETF that tracks the S&P, which has a yield actually of 1.76%, you would get an annual yield of $14000. It doesn’t matter if the initial investment was $12000, what matters is today’s yield of $14000 on today’s value, $800,000, of that initial investment. The current yield is 1.76%, not 7.6%.

SST
6 years ago

Now that the capital intensity issue has been addressed, I’d like to bring up another point:

“If you build a diversified portfolio big enough…”

Doesn’t matter how big your portfolio is, if it’s all in stocks it is not diversified at all.

What needs to be diversified are the “drivers”, strategies, markets, and lastly product.

But then that brings us right back to many Buffettisms.

Grant
6 years ago

I think I follow you…. How many shares do you own now?

SST
6 years ago

If the current S&P is paying a $37 per “share” dividend, that works out to (37×485) = $18,000 per year.

However, the initial 485 “shares” would have grown in number due to 40 years of reinvesting dividends — think DRIP.

The initial and ONLY capital outlay was $12,000, so the years of compounding are not being ignored.

70% of the now $800,000 portfolio is the result of dividend reinvestment.

I’m far too lazy and disinterested to figure out what the average cost & yield of forty years of reinvesting would be, but I’m pretty sure it’s going to be closer to 7.6% than 1.9%.

Grant
6 years ago

@SST. I think what you are talking about is yield on cost, but that’s a misleading concept because it ignores all the years of compounding in between. If you own 485 shares of VOO it pays you an annual yield of $15000, not $60,000. It’s what it yields in today’s $s that matter. If you spent 7.6% of your $800k each year the money would not likely last the average 30 year retirement, especially if you suffered early poor equity markets.

It’s true that Buffet is one if the very few people who can beat the market. Seeing most people can’t beat the market, that’s the beauty of index investing. You don’t need to understand stocks. You just buy the market index and rebalancing according to the plan. As Buffet also said “if you look in the mirror and do not see Warren Buffet, buy the index.”

SST
6 years ago

@Grant — the S&P “shares” bought in 1974 would now provide a yield of 7.6% (37 per 485 share) vs. 3.4% (16.5 per 485 share) when first purchased = $60,000 on $800k.

re: “…indexing has been shown in many studies to be the most efficient way of building wealth.”
Yes, without a doubt it does just that. But as I stated, building of that wealth via dividends requires either a whole lotta capital or a whole lotta time, and since Time = Money — it’s capital intensive either way.

As Buffett has said, “Wide diversification is only required when investors do not understand what they are doing.” Thus perhaps the popularity of index investing is the result of too many people with money in the stock market who do not understand what they are doing. A rather frightening scenario if you ask me.

Each to their own.

Jon Evan
6 years ago

Required rate of return is but one risk profile factor to consider. The other is capacity for risk. The “golden egg” is more analogous to an annuity in retirement then it is to a 4% dividend return. Minimum living expenses in retirement need to come from a true “golden egg” i.e.: pensions, annuities, and other risk free fixed income assets. A 1929 or worse world calamity is very possible. In one’s retirement risk profile: capacity for risk is primary which it isn’t so much in younger years of investment accumulation. Ask yourself if during a financial calamity if companies suspend or reduce dividend payments will you be able to meet your minimum living expenses if all your investment is in equities?