If you invest in US total stock market, how much cash flow will you approximately receive?
Let’s use Vanguard Total Stock Market ETF (VTI) as an example. Assume you invest $10,000 on January 2002, all the dividends are reinvested through the period of 2002-2015. The total return and dividend incomes looks like the following.
The dividend yields are between the lowest 1.19% and 2.48%.
What does this mean?
If you only rely on the cash flow from US Total Stock Market, you need a large capital to meet your cash flow needs. For $50,000 annual dividends, you need between $2 million to $4,2 million. For the retirees who use 4% withdrawal rule, they need to draw down the additional 1%-3% capital. If you happen to retire early without any other income, drawing down capital seems pretty scary when you still have 40-50 years ahead of you.
So why you still invest in the US total stock market? VTI is currently tracking 3682 US companies cross different sectors, and capital sizes. Invest in VTI, you are investing all 3682 US companies with a simple click. You enjoy these business’s growth over long period of time.
During the period of 2002-2015, the average return is 6.9%. The worst is -37% in 2008, and the best is 31% in 2013. This says the importance of staying invested during the down term. For the people sold their shares in 2008 and never got back in the market, the loss is locked and they never enjoy the later gain.
Hence, if you stay in the market, your average total return is 7%. You are probably OK to withdraw 4%. How about when 2009 happens again?
Ask yourself if you have the stomach for 37% net worth depleted in one year? If you don’t, adjust your asset allocation between different investment alternatives, maybe some rentals, or private money lending.
What is your stock allocation percentage in your portfolio?