24 April 2015

Size Matters - How Much Is Enough? [updated]

Size matters. No sleazy thought please. Rather, Singapore Man of Leisure had an interesting article on Size Does Matter for Income Plays where he blogged about an investment approach to reap a $50,000 per annum income. The question he posed was, just how much capital would be needed to do this?


He offered a few possibilities and discussed the implications of: (a) $1 million at 5% yield; or (b) $500K at 10% yield. His conclusion however was to go with (c) $2 million at 5% yield. Why? Because the earlier options all hinged on the assumption that the portfolio do not diminish due to a fall in market value. So doubling up the portfolio provides a buffer in case the portfolio should collapse by 50%.

I thought maybe there's a solution to this involving less capital. I'm making an assumption from historical past that any collapse of that magnitude would likely see a recovery within 5 years. With that assumption, I could keep 5 years worth of cash at half of $50,000 (i.e. $25,000) per year, and add that to $1 million at 5% yield. So that way, even if the portfolio collapse by 50%, it would still generate $25,000, and can be topped up by another $25,000 from the safety buffer. Hence, the total portfolio needed is simply $1 million at 5% yield plus $250,000 in cash.

What say?

As an after thought ... come to think of it, with $2 million at an expenditure of $50,000 a year, that's 40 years worth of retirement budget! If one is already at age 55, I guess there's no need to invest or do anything hairy with it? The only risk is living too long, specifically, beyond age 95.

4 comments:

Createwealth8888 said...

Workable. Now we can start thinking how to reach $1.25m. :-)

Singapore Man of Leisure said...

Lizardo,

It's just playing with numbers :)

Let's say we do what reader B has decoded from my post:

Take $1 million and invest right here right now for 5% yield.

Lock up the other $1 million as dry powder. Let it rot in the bank earning almost no interest.

If market drops to 50%, $1 million dry powder can pick up some serious yield!

You may receive more than $50,000 per annuum!!! (Just back test to 2009 what income stocks were yielding)

And if current $1 million portfolio goes to ZERO, well, $1 m
can last 20 years if we withdraw $50,000 per annum ;) (How's that for stress test?)

What if market goes up or sideways? If we should be so lucky, we still get the %50,000 per annum no? And if interest rates goes up isn't it good? And finally we can put that $1 million at a fixed deposit earning 2% (or more) to complement that $50,000 per year?

If we substitute fixed deposit for Singapore bonds even better!

Tops we win; bottoms we also win :)


Size matters; and if matched with proper risk management, that's why the rich gets richer :)

Lizardo said...

Createwealth8888,

Step by step. *heh*

Lizardo said...

SMoL,

Can can can. Takes a bit more work to get there though.