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The Folly of Buy-and-Hold Retirement Portfolios
| To understand why growth portfolios CANNOT be your only retirement portfolio strategy, we’ll need to understand working capital, total return, and realized return. Only income investing can preserve your working capital.
There are two schools of thought in investing:
Growth where you buy shares and hope that they grow in value over time. When you retire, you sell off shares to cash out and use that cash to live on. Though your market return on the shares may increase beyond the % taken out, you are still left with fewer and fewer shares. At some point, you may be left with just a few shares of very high value. Then, selling off those very high value shares closer to the end of your life span, will result in very high capital gains taxes.
The other is Income investing, where you buy shares that pay out dividends or distributions, but do not sell the actual shares that are generating the income. You preserve your “working capital” — the money that is generating more money, and can live off the dividend or distribution income indefinitely.
It’s not surprising, then, that the traditional retirement portfolio has a large allocation to bonds, which are conservative growth that pay out 4–6% annual income in dividends. In other words, even in the ‘older’ philosophy of growth portfolios, there…