The Yield Illusion (or Delusion?): Another Follow-Up! (SWR Series Part 31)

Welcome to the follow-up to the follow-up post on the “Yield Illusion.” Again, here’s the context: a few weeks ago, I wrote a post (SWR Series Part 29) on why I don’t believe that chasing higher yields is necessarily a good hedge against Sequence of Return Risk. A very well-received post! It was picked up by as one of their Best of the Web in February, it was featured on RockstarFinance on Monday, and we had a great discussion in the comments section. So I wrote a follow-up post on Monday (SWR Part 30) and since that post was running way too long already, here’s some more material that got cut; some more thoughts on my asset class outlook, international vs. U.S. stocks, dividend vs. value stocks, and more. So let’s get rolling…

Some more thoughts on my asset class outlook

In the post two days ago, I certainly conceded that the failure of the Yield Shield doesn’t necessarily translate into failure during future bear markets. Past performance is no guarantee for future results! Because this is such an important issue and there is an important difference between the Yield Shield performance for fixed income vs. equities I like to stress once more how I conceptually think about this issue, see the diagram below.  It’s for illustrative purposes only, this is nothing quantitative. It’s how I think about the prospects of the Yield Shield going forward:

  • The equity recommendations of the Yield Shield are a crapshoot. Sometimes they work (dot com bust) sometimes they don’t (Great Recession). The high-dividend fund VYM (Vanguard) underperformed during 2008/9. But the SDY (State Street/SPDR) outperformed the broad index (more on that one below). I wouldn’t call this a solution to Sequence Risk. Certainly, the out-/under-performance is unrelated to the dividend yield! Note that within the dividend-focused ETFs, the SDY with the lower yield outperformed the VYM with the higher yield.
  • The fixed income recommendations of the Yield Shield are just plain bad. The credit premium that gives you the higher yield will backfire in a bear market because this is essentially backdoor equity beta. Even the midpoint of the distribution is in the “make SoRR Worse” region. And Preferred Shares got hammered particularly badly in the GFC. But even if the next recession is not centered in the financial sector, they will very likely underperform the plain old safe government bonds. Remember, they are called Preferred Stocks, not Preferred Bonds!
Going forward, how likely is it that the Yield Shield will exacerbate or alleviate Sequence Risk? For the fixed income portion, there’s near-certainty that the Yield Shield will backfire again. For equities, it can go either way.

Therefore, neither the equity nor the fixed income portion of the Yield Shield satisfies what I’m actually looking for in a Sequence Risk Shield! For that, I’d have to have a near guarantee of Sequence Risk protection, see below. A cash cushion or a glidepath may provide this, but don’t get your hopes up too high! That would only have a very small impact!

What I would call actual, useful protection against Sequence Risk!

A few more words on Dividend Yield vs. Value vs. Quality

Quite intriguingly, a lot of the discussion in the comments section under the initial post centered on the equity dividend yield approach. As I said before, replacing a broad equity index with a U.S. high-dividend-yield equity ETF is probably one of the more innocent flaws of the Yield Shield method. Even I’ve played around with my own little dividend yield portfolio in my M1 account. But so far, it’s with play money only! Commenter Pat G. pointed out that there are other dividend strategies that look more promising. State Street (SPDR) has an ETF (SDY) that tracks only dividend payers that pay dividends consistently:

“The Index screens for companies that have consistently increased their dividend for at least 20 consecutive years, and weights the stocks by yield. Due to the index screen for 20 years of consecutively raising dividends, stocks included in the Index have both capital growth and dividend income characteristics, as opposed to stocks that are pure yield”

If we look at the return stats, the SDY outperformed the broad indexes (IVV, VTI) and certainly did better than the VYM. It did so by having the lowest VTI beta in the factor models I computed here and a relatively high bond beta (the highest among the non-REIT equity ETFs). It also has a strong Value bias (Fama-French HML factor). Even without the alpha, this would have done pretty well in 2007-09!

Side note: How strong was the value bias? Since the VTI beta was 0.8 and the HML beta is 0.4, we’re about halfway between an equity value portfolio and a neutral portfolio. A growth portfolio would have had a beta of -0.8. This shows, that there is a high but not a perfect correlation between dividend yield and value. Value is tied to the price-to-book ratio, not dividends!

But notice when you try to bring in an element of quality/value, you then have significantly lower dividend yields than the VYM used in the Yield Shield. SDY has a dividend yield of only 2.57%. Roughly half-way in between the IVV (about 2%) and 3.20% in the VYM!

Return stats for some of the ETFs used in the portfolios here. 5/31/2007 to 1/31/2019. All nominal returns, dividends reinvested.

So, just to be clear, I can imagine that consistent dividend payers are of interest from a Sequence Risk perspective. They are more likely to have stable profits, lower volatility, lower market beta, lower payout ratios, low debt ratios, better cash flow ratios, etc., so they may not suffer quite as badly in the next recession. A caveat though is that due to the popularity of ETFs and smart beta investing, some of this advantage will likely be arbitraged away over time! And I’d be a bit afraid of the “fallen angel” issue: What happens if a previously consistent dividend payer drops out of the dividend aristocrats? What if they first try to avoid cutting dividends, then drain their cash flow for years and eventually do cut dividends and get clobbered like GE?

Either way, I will not judge anyone for constructing a diversified quality-dividend portfolio! Maybe even replicate the constituents in the SDY in an M1 account and save the 0.35% expense ratio in that ETF! But someone too blind and too delusional in their yield-chasing effort might be exposed to the “dividend traps” like CenturyLink, which had one of the highest dividend yields in the S&P500, and got clobbered after announcing a 50% dividend cut. Incidentally, that happened a day after I published my initial post on the Yield Shield. You almost can’t make that up! 🙂 And, by the way, CenturyLink is in the VYM, but not in the SDY!

Some more thoughts on International Stocks

Are non-US investors doomed? Some commenters raised this issue. While it’s certainly true that international stocks underperformed I’m not saying that non-US investors should completely dump their domestic stocks. But there’s ample evidence that foreign investors have more to gain from international diversification than U.S. investors. Vanguard had a nice white paper making exactly this point, look at the chart on page 5. It goes back to the point I made in my 2017 post on diversification:

“When the U.S. economy struggles the whole world will feel the effects. In contrast, smaller countries can have recessions and market crashes without much of an impact on the rest of the world. So if you live outside the U.S., you’d greatly benefit from investing outside your own country!”

Some of the differential performance between U.S. and non-U.S. stocks also goes away when accounting for the FX moves (as discussed on Monday). So, for example, while Australian stocks performed quite poorly post-2008, measured in USD, they did a little bit better in local currency, and that’s what matters for Australian investors who live and consume there. But Australians certainly would have benefitted from holding U.S. stocks. That would have smoothed out the performance over the last two decades: lower returns during the early 2000s (when Aussie stocks went through the roof) and better returns post-2008 when Aussie stocks were struggling. Exactly what they find in the Vanguard White paper!

But, but, but, have you tried X or Y or Z?

OK, so people are throwing suggestions on how to salvage the Yield Shield at me faster than I can run simulations. Let me get one thing really clear here: The inventors of the Yield Shield had a ton of time and the benefit of hindsight to get this right. They didn’t get it right and I showed it. It’s not my job now to disprove every single variation of the Yield Shield that might work slightly better. Indeed, among the gazillion of different ways of tweaking the Yield Shield, I know for sure that some will work. Again, with the benefit of hindsight, maybe someone will finally tweak it so it works beautifully in 2007-2019. It doesn’t disprove my initial claim, which was “How Can a High-Dividend Portfolio Exacerbate Sequence Risk?” The title wasn’t “How every single High-Dividend Portfolio fails every single year in every single asset class.”

So, any additional comments of the type “Have you tried XYZ?” will be answered with this response: “No, I haven’t tried XYZ. Why don’t you try it and show me how it worked between October 2007 and now?” It’s not my job to contradict every single cockamamie Yield Shield variation now!

That said, here’s one idea that was floated before I even wrote the initial Yield Shield and that was again mentioned in the comments section on Monday. Why not invest 100% in a high-yielding equity fund, e.g., EWA, the Australian index ETF from iShares? Or the VEU (non-U.S. equity ETF)?

My response: It may certainly work going forward. But between 2007 and now it didn’t! Here’s the performance of three portfolios 1) IVV (S&P500), 2) EWA (Australia), 3) VEU (non-U.S.) between the May 2007 and Feb 2019 with 4% withdrawals (adjusted for CPI). The chart is generated with PortfolioVisualizer, see here for the permalink with all my parameters:

Performance with 4% p.a. withdrawals. Note the final portfolio values are in nominal terms. Know off another 22% to get the real, CPI-adjusted figure! Source:

Both high-yield portfolios would have lost substantially. And the numbers are all in nominal terms so the 100% EWA portfolio would be down by about 45% in real terms if we deduct the cumulative 22% CPI inflation during this time. The VEU is then down by about 55% after CPI. And the low-yielding IVV? Would be back to the pre-GFC peak, even after inflation! Go figure!

And, to really beat this dead horse a little more, we can also do another little tweak. Live off your dividend income only but never sell any shares. This is what a commenter (“Torch Red”) suggested in Part 30:

“I am suggesting that retiring on a dividends-only strategy on a 100% stock dividend portfolio with initial yield of 4% eliminates sequence risk (as defined as selling shares when prices are low), establishes a clear SWR each year (set equal to dividend income), and eliminates timing the market each quarter (since shares are never sold). The downside to the strategy is that some diversification is lost and the retiree must deal with choppy income from year to year, though the long-term dividend dollar income will grow faster than inflation.”

I’m doing this for the Australia ETF (EWA) only. If someone wants to repeat the exercise for VEU, please go ahead. But this is a lot of manual work and given that the VEU with a constant 4% WR underperforms the EWA there isn’t much hope for this to work better. So, imagine on May 31, 2007, you’d bought one share of EWA and never sold it. Just live off the dividends. I pick the 5/31/2007 start date to be consistent with the other simulations in the earlier posts. But the results would look even worse if I had started closer to the market peak (October 2007). See the table below:

  • Your income wasn’t enough to fund a 4% effective withdrawal rate ($1.12=$28.10×0.04) most of the years. But it was close. The dividends bounce around quite a bit but on average they were 17% below the target. But some years 40% below the target! Of course, if you have the flexibility to substantially cut your consumption in retirement, good for you. But notice that with this kind of flexibility, a low-yielding portfolio (either 60/40 or even a 100% S&P500 portfolio) would also make it fine through this Sequence Risk episode! And do much better than the EWA ETF!
  • What’s even worse: that one ETF share you bought in 2007 never recovered. It’s still 23.7% below the initial portfolio value in nominal terms and a whopping 37.6% below the initial value in CPI-adjusted terms (which is really what matters!).
Holding one single share of EWA since 5/31/2007. Never sell it, just live off the dividends. Source: YahooFinance

So, here’s the confusion: people incorrectly assume that dividends are never cut, they always keep up with inflation, and the price return not only recovers but also recovers to the previous peak plus inflation adjustments. None of those held true in the case of EWA. Or VEU, or USRT, or PFF!

But, but, but, the 2008/9 recession was so bad!!!

Some have pointed out that it’s “unfair” to expose the Yield Shield portfolio to the brutal reality of the worst recession is most folks’ lifetime. To which I’d reply: Well, isn’t that the idea? What use is it to propose a “solution” to Sequence Risk if it doesn’t work in the worst recession in most recent history? It’s like health insurance that only covers the common cold but has exclusions for heart attacks, stroke and cancer. If the Yield Shield works only in shallow, garden-variety bear markets, then what’s its use? In that situation, your trusted 60/40 or 70/30 or even an 80/20 portfolio wouldn’t be impacted too much by Sequence Risk either!

Yield Illusion vs. Yield Delusion

People here in the comments section here have been very kind and nice and civilized. Even if we occasionally disagree on certain issues. I’ve also tried to keep up with the attacks and insults directed at my work in the comments section over at that other blog and it got out of hands pretty quickly. It ain’t worth it! I’ve even gotten an anonymous hateful email over this! Then again, if it took three years of blogging for this to happen I must have been just too nice and agreeable before! 🙂

In any case, quite amazingly, despite the overwhelming evidence that the Yield Shield is really quite flawed and problematic there are still tons of folks who insist otherwise. They’ve turned the Yield Illusion into a Yield Delusion, and here are some examples:

  • “But look at the YS portfolio post-2008; it recovered again” No it didn’t! I’ve seen some cheaply-put-together screenshots created with Portfolio Visualizer but the attempts to obfuscate the bad performance were pretty obvious: 1) the portfolio value wasn’t adjusted for inflation, 2) the withdrawals were 3.4%, not 4%, 3) the withdrawals were not adjusted for inflation, 4) the starting point of the simulation was not at the market peak, but in January 2008, leaving out the last few months with bad returns in 2007. So, when I show you that the Yield Shield portfolio is down $250,000 in real terms when applying the 4% Rule and others claim everything is A-OK, we know what explains the discrepancy: They are fudging the numbers.
  • “REITs and International stocks outperformed the broad equity market in the early 2000s!” Yes, and this goes back to my clarification above: on the equity side, the Yield Shield is mostly a crapshoot. Sometimes it will outperform (1982-1987, 2000-2007) and sometimes it will underperform (the 1990s, GFC) and that has nothing to do with the dividend yield. That’s still a far cry from the promise of shielding/protecting you from recessions and bear markets.
  • “The Yield Shield performed better than the passive portfolio when we start the simulation away from the market peak!” Exactly! That’s the definition of Sequence Risk. It can go in your favor as I showed in Part 14 of this series. If you pump up equity beta and equity markets keep going up, then the Yield Shield portfolio will outperform. That actually strengthens my claim that the Yield Shield portfolio exacerbates Sequence Risk (read again what the title of Part 29 was!!!): Both up and down!
  • “I’m daring you and your audience to find a year X to 2019 where a Yield Chasing portfolio underperforms substantially (more than 5%) a 60/40 portfolio.” This is an actual comment from someone who doesn’t understand basic logic. I don’t have the burden of proof to do so. In addition to the bullet point above, recall that the title of the post was “How Can a High-Dividend Portfolio Exacerbate Sequence Risk?” and not “A High-Dividend Portfolio necessarily underperforms 60/40 by x% every single year”
  • “The Yield Shield is only temporary and one can always move back to the passive 60/40!” Arghhh! Research on glidepaths, both here on my blog (Part 19 and Part 20 of this series) and the awesome work by Kitces and Kitces and Pfau points to the benefit of a glidepath from less equity exposure early on to increased equity beta. The Yield Shield does it the other way around: Start with equities “on steroids” and then back to a passive 60/40. Another reason why it’s a bad idea.
  • “The Yield Shield would have worked better in combination with a cash cushion!” I know. I’ve done a whole lot of research on that issue (see Part 12, Part 24, Part 25 of this series). But that cash cushion would have also helped the passive 60/40 portfolio. Comparing apples to apples, the YS with a cash cushion also underperformed a 60/40 with cash cushion since 2007!


Whoah, this was a long post. Almost a manifesto (oh, no, let’s not go there)! Who knew this topic would get so controversial. Especially on the fixed income side, it seems pretty obvious that chasing yields to hedge(!) against the next recession is a bad idea. I showed this idea to some of my fixed income buddies and they got a good laugh out of it! On the equity side, at least you’re not handicapping your portfolio as with your bond portfolio. But crossing your fingers and hoping that the next bear market will look more like 2000-2003 and less like 2007-2009 isn’t a strategy for dealing with Sequence Risk.

So, I think I’ve pretty thoroughly debunked high-yield as a tool to alleviate Sequence Risk. The folks who had reached out to me and asked me to write about my thoughts on the Yield Shield certainly agreed with this. Probably most regular readers here on my blog agree. If there are still some folks out there who don’t agree I wish them good luck. I actually mean it! I hold Preferred Shares myself. I certainly don’t want them to hurt anytime soon. But at least I know about the risks!

Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series, see here for a guide to the different parts so far!

Picture Credit:

76 thoughts on “The Yield Illusion (or Delusion?): Another Follow-Up! (SWR Series Part 31)

  1. Great post again. Yes, that horse is dead and the coyotes ate half of it already. Getting hate mail on this subject is (sadly) expected. Humans don’t like to be wrong. People claim to have the answer to SoRR. They know better. They are smarter that you. Data is quite clear that it is very hard to avoid SoRR with just equities and bonds. Regular reople will argue that index funds are for buffoons and that active stock picking is better. Data shows otherwise over a long time period. Still, they do it because they know better. If you roll into a casino in Vegas expecting to beat the odds, be my guest. Sure you can get lucky and think you have the ultimate system. But in the long run, the casino will (gladly) keep writing you markers.

  2. Wow, Ern. Certainly more controversy in the comments on this topic than any other so far. I think it might simply be a reflection of the success of this blog; i.e., had you had the same # of subscribers back a few years as you do now, I think that your debunking the 6 – 8 month emergency cash cushion shibboleth would have generated at least as much controversy, along with the occasional (but fortunately rare) vitriol.

    Keep on chugging, Karsten, and thanks for all that you do. I think that, somehow, my brain has expanded since you began blogging!

    1. You think this in controversial, Im always telling high school kids to dropout to retire early. lol You should see some of the looks I get from parents. lol ERN is a great writer though, I met him at the Choose fi Portland meet up today and he’s a deep thinking very very smart guy. Great teacher he is.

  3. “The inventors of the Yield Shield had a ton of time and the benefit of hindsight to get this right. They didn’t get it right and I showed it. It’s not my job now to disprove every single variation of the Yield Shield that might work slightly better. ”

    As someone who has done a fair amount of backtesting and analysis of various sttategies, this really irks me.

    People come up with all kinds of ideas and twists and then ask me how it would have worked! It’s your idea! You’re the one who needs to make an effort to show it isn’t garbage. What’s more, if you can’t do the analysis yourself, you’re almost certainly not familiar with the obvious gotchas and mistakes that come with the territory — basing things on how you think the market “ought to” work, meaning your idea is even less likely to work in practice.

    1. Haha, I hear ya! If I had claimed that something will always and everywhere fail then it’s certainly OK to ask me “have you tried X?” but certainly not in this context…
      Thanks for stopping by!

  4. Hey Big ERN,
    I’m such a fan of your blog and and proud that you are a fellow Golden Gopher!
    I am following a glide path right and currently at 40% equities (I’m retired at 57 for three years now).

    However, I am concerned over the next decades that the correlation between stocks and bonds will be more positive than in the past 40 years, and, that developed country bonds low yields will remain low for a long long time, with much more price risk on downside if inflation approaches 2+%. Given this, my bond portfolio duration is quite short 3-5 years, and won’t provide the typical cushion against equities in a downmarket.

    I have wanted to believe real estate provides a deversification hedge, but REITs actual data fails to give me comfort in this category.

    But emerging market debt, both $ denominated and local currency continues to be very intriguing… but little data to track over decades. Have you seen this article by Carmen Reinhart and Christoph Trebesch? Would appreciate your thoughts if you have a chance. The correlation with equities is still there, but not so much, while the country and currency risk premiums seem to be real and durable.

    1. Thanks, Kelly! Wow, another Golden Gopher! I just went back to the U of M last September for a small reunion and had a great time at the U!

      I also find their idea interesting: search for yield abroad.
      They correctly point out that excess yields & returns abroad were more than what was really needed to compensate for risk abroad. They got a big database of historical data to prove that. That still leaves the question: Are the yield spreads going forward still attractive? EM bonds will correlate with U.S. stocks and will the added correlation and lower diversification destroy the benefit of the additional yield?
      And again, if there has been an advantage in the past, will this all be arbitraged away once the big players: ETFs, pensions funds move in and throw billions of $s at this asset class?

  5. A general comment … not pointed specifically at ERN’s or other’s work.

    There is a book that changed my perspective on problems called “General Systems Thinking”. I find most of the book unreadable but the takeaway for me is that there are three categories of systems and how to understand/analyse them:
    1) Systems that can be understood via models. Planetary motion as initially defined by Newton is an example
    2) Systems that can be understood via statistics. “Gas law” is an example. At least initially, there was too much data to pull a model from so statistics created the “gas laws”
    3) Systems that fall into general systems thinking … neither models or statistics work to help us fully understand the general systems thinking questions. And many many problems fall into this category… including SWR, retirement financial planning and the like.

    Now you can understand the dialog that results when someone proposes a model or statistical analysis that defines the solution and others don’t agree. Especially if it falls between these two approaches.

    Throwing civility out in these discussions is unacceptable! No ifs, ands or buts about it!

    Solutions are improved upon when open discussion occurs even though some ideas are flawed … note that I’m subject to being wrong without notice 🙂 Science is a process of disproving theories as much as proposing theories.

    ERN, Thank You for putting your effort into this. I appreciate it, I respect it. I may follow it, And I may “stress test” it occasionally.

          1. It’s been my experience that arguments with most people are won on an emotional level, not through logic. Those of us who prefer logic are the outliers.

  6. Great post have really enjoyed all of the SWR series. One question have you looked at long term treasuries like TLT vs mid term IEF? I believe they would be beneficial since longer term bonds should have less correlation to the stock market than mid term.

    1. Excellent point! 60/40 with TLT (20+y bonds) instead of IEF would indeed outperform. So, here’s one way of increasing yield and getting more downside protection:

      But don’t get your hopes up too high. The TLT has only marginally higher yield than the IEF today. But again, it’s not about the yield. The longer duration gives you more of a boost when the Fed lowers interst rates.

        1. Agreed 60% Bond 40% VTI did better during the last recession. However if you look back to 1972 farthest back that Portfolio Visualizer goes you give up ~1% of CAGR. Sharp Ration however is the same between 60/40 bond/VTI ad 40/60 VTI/bond

        2. Yeah, what I like about 40/60 is that it tends to be close to the tangency portfolio, i.e., the highest risk-adjusted return along the efficient frontier. See this post from 2016:

          Especially this chart:


          The disadvantage is that the expected return of that portfolio might be a tad bit low. One would have to lever up that portfolio to the desired expected return level. Not everybody’s cup of tea, though. 🙂

  7. Well I appreciate your work FWIW. This is one of the most fascinating and helpful blogs on the internet. Ignore the peanut gallery, don’t feed trolls, and stay in the realm of talking about ideas instead of people.

  8. Thanks for doing part 31. Where I was left wanting from parts 29-30, you addressed in part 31. This post is a fair assessment of the isolated equity portion of the Yield Shield.

    I replicated the dividend-only exercise you did for EWA (May 2007 to present) with SDY and VYM using portfolio visualizer and your CPI factors. Using a 4% income target, SDY was ~6% short each year on average with dividends only, much better than EWA. If I set the annual income target equal to the first year of actual dividends paid, SDY delivered ~1% more than the income target on average. This meant 5 years of income below target followed by 5 years of income above target to get to about even. Not an ideal setup. The retiree in May 2007 would have expected the trailing 12-month dividend payments, but the above assumes the May 2007 forward 12-month actual dividends to be an acceptable level of income. I realize that assumption could be aggressive.

    A couple of new take-aways for me (feel free to clarify where I might be wrong):
    1) The extent of dividend cuts can be more severe than some bloggers elsewhere will have you believe. EWA is a good example and even VYM surprised me with how much the net dividends varied from year to year. But with almost 400 companies in a passively managed fund, by nature VYM is going to have some low-quality, high-yield “dividend traps” in the make-up. To be fair, some dividend investors are actively managing a portfolio of individual stocks and probably don’t see cuts to the extent VYM can have.

    2) I have been thinking of sequence of return risk as if the worse-case scenario is always a few years BEYOND the retirement date. I guess in a practical manner, I wouldn’t expect one to retire at the exact peak of the market and then not doing anything about it. With some hindsight after a year or so, the retire would recognize how poor the timing was and have amble time and ability to stop withdrawing funds, go back to work for a little and start retirement over at a later date. This post is evaluating strategies as if one retires at the worst possible time and I can appreciate the purity in that stance. This is something I should consider as well. For instance, sometimes retirees have to retire due to physical limitations and don’t have extended employment as an option.

    3) Sequence of return risk still exists even if you don’t sell shares. Sequence of return risk (as defined as having to sell shares when prices are low) may not necessarily apply to a “withdraw dividends only” strategy where no shares are actually sold. But the variability of dividend dollars distributed from year-to-year can still be severe enough to derail the retirement income stream. As dividends are part of total return, sequence of dividend risk is still “sequence of return risk”.

    4) All withdraw strategies have trade-offs. I hypothesized that never selling shares would eliminate sequence of return risk from depleting the portfolio to $0 before death. But to make a “withdraw dividends only” strategy work, the cash cushion and consumption flexibility might have to be so large, that the “cost” of implementing exceeds the “risk” of depleting shares under a traditional drawdown approach.

    I really appreciate the math and calculations behind the conclusions on this blog. You present more than just conjectures. I’m often stuck with conjectures that I can’t model. Keep up the great work.

    1. Very well said! We think very much alike!
      Especially #3: SoRR is creeping back in when doing the dividend-only approach, through variablility of withdrawals.
      Thanks for your comments! 🙂

  9. I was hoping that somewhere in these posts would be a discussion of the reason that many chose to go with higher-yielding portfolio: to live of the yield alone and not touch the principal. (Did I miss it?)

    It is obvious that moving from simple S&P500 + treasuries to a mix of high-div stocks, REITs, and high-yield corporate bonds isn’t a silver bullet to make the 4% rule safe. But what about weighting your portfolio toward some higher-yielding funds and letting your withdrawals fluctuate up and down with yields? It’s “safe” in the sense that you’ll never run out of money, but your withdrawal amounts might drop so low that you can’t live on them.

    1. “to live of the yield alone and not touch the principal. (Did I miss it?)”

      Yes, you missed it; guess you only skimmed the article.

      “And, to really beat this dead horse a little more, we can also do another little tweak. Live off your dividend income only but never sell any shares. This is what a commenter (“Torch Red”) suggested in Part 30”

  10. Karsten, boy am I glad that you are FIRE’d. You are on fire with these articles. I am loving it when you take off your gloves show how flawed some of these plans are. It’s really dangerous when people peddle these flawed plans and you’re basically doing us all a public service by debunking them.

    I am also glad that there seems to be an increase in post frequency after your world tour. It’s selfish of me but I hope you keep it up. 🙂

  11. Love these posts! I had been looking at building yield shield as well and now I think not. Thanks for all you’re doing for the FIRE community. When is YOUR book coming out????

      1. I hope you do put together a book. A couple of constructive criticisms though? (1) simple sells and solutions sell. I’ve now binge read the entire SWR series and the more technical aspects left my head spinning in truth. And I’m a reasonably well educated person in financial matters with a real interest in this stuff. Contrast that with how JL Collins approaches it. Agree with him or not (I often don’t), he tells a compelling story and has a simple solution.

        (2) there is a fair sized universe of what I call “cash cowards” (I’m one) who are unimpressed by the current prices of equities and are generally sitting on the sidelines as a result. Few FI people are really addressing this more conservative part of the community other than using very simplistic slogans like “buy 100% VTSAX as it always goes up over time.” The perspective of we cash cowards is likely to be different than others; how do those folks make the transition from accumulation to retirement? I find your glide path work very intriguing and fairly neatly fits with a naturally more conservative “cash coward” perspective.

        Thanks for the outstanding and contrarian work!

        1. Yeah that would be nice to write a book. If I find time!
          If I write that book I can’t promise though that this will be as “simple” as Jim’s work. Notice how he works completely in a qualitative dimension. Nothing quantitative. Well, finance and also personal finance is very quantitative. Especially withdrawal strategies, which are not as simple as saving for retirement (see SWR Series Part 27). We won’t be able to use purely feel-good, simple recipes.

  12. I’ve been going back and reading up on this whole back-and-forth; wow, are the opinions expressed over at MR precious. They seem to think that because the magical 5-year window is about to pass that they are soon-to-be over SoRR! Sorry, no, if the real value of your portfolio hasn’t changed (and it hasn’t according to their numbers), then you you are still subject to SoRR, you are in the exact same position. You are only out of (relative) danger when your portfolio has outstripped your withdrawals, or when the time past has moved you significantly closer to death (not the case for 30-40 year-olds).

    There is a moral responsibility when giving advice to others, especially publicly (and presumably getting income from it); you have to know when you are right, and when you are out of your depths. They don’t seem to know that.

    On a totally unrelated note, what are your thoughts on using PCE vs CPI inflation for these calculations? I’m pretty convinced that CPI overstates inflation.

    1. Yeah, very true! There is no magical 5-year window. Between 1965 and 1973 it took 8 years for people to realize that they were in trouble. And another 10+ years for the market to recover.
      The scary thing about the bad advice is also that they probably don’t have to worry about this plan going wrong: they got income from their blog. That goes back to SWR Series Part 26, Ten things the makers of the 4% Rule don’t want you to know #9: “We won’t have to rely on the 4% Rule ourselves”

      PCE vs CPI: If you think that CPI overstates rue inflation, then you can certainly adjust your “real withdrawals” downward by that gap between the two. It would be about 0.2% p.a. As a Rule of Thumb, that would increase your SWR by about 0.2 percentage points.
      Personally, I will probably stick with the CPI becasue I’m also concerned about health expenditures which will be a higher share in my consumption basket than in the CPI.
      Thanks for stopping by, Trent!

      1. Thanks for a great post again.
        Regarding inflation, I noticed many people don’t believe the CPI numbers. They think that the actual inflation is much higher. Some of the claim are:
        – Since the government has to pay for inflation protected bonds less if CPI is lower then it pressures CPI downward.
        – There have been changes in the way CPI had been calculated in the past and if we take the older measurements style the CPI would be higher.
        What is your take on the subject?

        1. I use the CPI numbers because it’s the best continuous time series we have.
          I personally believe that CPI might under-report true inflation because of two issues:
          1: quality adjustments. You may get a 5-year-old computer/camera/TV/phone, etc. at a lower price due to quality improvements. But you’d still buy the most recent (one previous generation) model, so the quality adjustments are not that useful to me as the average consumer.
          2: inflation is likely higher than the CPI for retirees because your health care share in your basket will be higher.

          So, you see, I don’t have to go to the government conspiracy route. I would find it hard to believe that the BLS has pressure to underreport the CPI.

  13. A high-yielding equity portfolio coupled with writing covered calls is a sound strategy that offers a higher yield (option premium collected) and the calls written do offer a partial downside hedge during market sell offs.

    1. Very good point! I like that strategy! In a choppy market this could underperform, though. But over the long-haul, this will do really well!
      Are you planning this with individual stocks or on the index? So far, I’m doing this only with SPX options. (though through naked put writing)

  14. Hi Big ERN, I’m a long time reader, first time commenter. I’m a big fan of your work and have been writing about similar topics, in particular sequencing risk and to a lesser extent safe withdrawal rates for Australia. You’ve obviously been a massive inspiration for me so thanks very much for that!

    Australia does have the advantage of higher dividend yields over US stocks which definitely helps in allowing for a higher safe withdrawal rate, but it’s still not a guaranteed 4% based on historical events as per this post (please delete if you don’t allow links) And as you say if you’d gone into Aussie stocks back in 2007 you’d still be underwater assuming a 4% drawdown based on initial portfolio size.

    1. Thanks for confirming my numbers from the Aussie perspective!
      And no problem: links are allowed and welcome (even two external links per comment!). Very good post on the SWR issue using Australian data! I just subscribed! Keep up the great work!

  15. Hi Karsten, thanks for all your great work. I really hope folks who have adopted the Yield Shield approach at least review what you have written.

    It’s scary to me that those that came up with the Yield Shield regularly act as if they were financial advisors, and many following them are not financially savvy. Will they be around to guide folks out of trouble when/if the Yield Shield fails? Dangerous footing…

  16. I can only echo the other commentators and thank you for some excellent posts on this.

    I am based in the UK and some people have recommended just owning the FTSE 100. Had you have done this in 1999, the nominal value would be broadly unchanged and the dividend payments would have grown by around 6% nominal per year.

    All good then…SoR avoided? Not quite. The dividend payment has kept in line with inflation (and grown) but your real value of your capital has been cut in half.

    For those who say, why choose 1999, well the whole point of the SWR is to stress test….and coincidentally, I did start investing in 1999!

    That’s a pretty good example of the Yield Shield not working.

    Mind you, the FTSE 100 is now trading on a CAPE of 16 and is one of the cheapest developed markets globally with a dividend yield of 4.5%. Just a plug for the UK!

    However, I do think psychologically the so called ‘yield shield’ can help you stay the course.

    I read one of your excellent posts a few months ago regarding whether you were worried about the market falls (at the time) as a recent ‘retiree’ given SoR is greatest in the earliest stages of retirement to which you said you were not.

    But that reminded me of a comment that Wade Pfau wrote stating that the SoR risk for early ‘retirees’ is applicable 6 – 7 years into the drawdown period…… have barely started yet….

    My point is that I think the most important component is managing yourself in market volatility. I guess, if the ‘yield shield’ and by that I mean a tilt towards equity dividend paying stocks (definitely not preferred!) helps a little then maybe it’s not such a terrible idea.

    As for all those bloggers to breezily claim people shouldn’t worry about the next 30 years whilst casually pulling in enough money to manage their monthly living expenses from blogging……well I take my hat off to them for their success but don’t tell me you understand the psychological challenges someone will go through who has a lump sum and no other income for 40 years or more.

    1. Thanks for sharing the UK perspective! Very much agree with everything. And again, if the dividend tilt is through the VYM or SDY or the like, the potential damage to the portfolio is probably limited. If this helps folks with the psychology of investing, go for it. I still can’t endorse the fixed income portion of their strategy, though! 🙂

      1. Awesome article! Thanks.

        I am also from the UK and have – mainly via my ignorance of finance matters and accident of birth – an overweight FTSE 100 holding. The other things to note from Seeking Fire comment is

        1) The dividend yield in the UK index was much lower in 1999 – around 2.5% so at a 4% withdrawal rate you would have been eating the capital too thereby making things even worse. There may be a warning lesson for US investors somewhere in there with the current low dividend yield on the S&P.

        2) The UK performance since 1999 is worse in US$ terms as the £ has fallen against the $ in that period. I also wondered how the Aussie withdrawals in your example looked in local currency.

        But I really do want to ask you about CAPE. S&P CAPE is 30ish and UK FTSE is 16ish. It is the main reason I have maintained my overweight UK position – I do own some S&P and other international index funds. My thinking is – all other things being equal – the UK index looks the better bet vs S&P. Of course things are never equal and UK has been in spectacular own goal model for a few years now which probably helps explain the lower CAPE!

        I would be really interested in your thoughts.

        1. Thanks!
          The withdrawal exercise for the EWA fund was done from the US/USD perspective. It would have looked better (not much better) when calculated in AUD. But it wouldn’t have saved your behind.

          The CAPE ratio is a concern to me, too. The US CAPE should look significantly better in a few years when we roll out the 2009-2010 numbers. I’m also more hopeful that earnings growth can be better in the US for the next few years. So, other countries are cheaper (measured by CAPE) but they are cheaper for a reason. Does it justify such a big gap in the CAPE? Who knows?!

  17. Its impossible to be sure about any strategy because its impossible to tell the future. We may not have a 2008-9 scenario for 20 years, or the next 3 recessions could end up quite similar. I don’t any strategy is guaranteed, and I think the best option is to try to be flexible with our options while doing, or benefiting from research like this. Its all still a bit of a gamble.

  18. Thanks for the analysis here. It appears the high dividend strategy is just moving the low expected returns of stocks & bonds between dividends & cap gains. With a liquid and efficient market you would not expect less. Another approach is to use less liquid underlying assets that have high underlying returns and enough cash returns (dividends) for withdraw but have growing underlying asset value. You also want a first lien on the assets (bond like) so you are first in-line if a problem occurs. There a few assets that have these characteristics. Some of these include NNN real estate (STOR), specialty lending (TSLX), mobile home parks, infrastructure assets (BIP) or leased assets (aircraft (AL) or equipment (AHT.L). The private assets are only available to accredited investors but there are also a number publicly traded assets to put together a nice alternative group of investments that can be used in combination with bond & equity to increase the SWR. NNN lease firms have a decent record (look at NNN or O) as well as leased assets. I personally know the TSLX team and have worked with them for over 10 years (2001 to 2011) so I know of there underwriting before there current BDC record.


  19. Hello, thank you very much for this guide!
    I want to ask you a question.
    Supposition: I have ptf 70/30 (I use 3.25/3.5% safe withdraw) and in my first years of retirment I face with bear market.
    What you think if during bear market I sell only goverment bonds and any stocks?
    (Then in next bull market I replace my quote of bonds selling stocks?)

    1. Great question!
      It would have “worked” in every bear market in history. But make no mistake, even at SWR=3.25% it would have been a scary ride in the 1970s.. The portfolio would have enventuall recovered but only after going through some pretty deep drawdowns.

  20. It didn’t take too long, just a year later you were proven right about dividends being cut in tough times. The dividend for VYM was cut by 15% in March YoY and it has not been declared yet for June but it looks like it’s going to be cut by ~30% for June YoY based on some of the dividend predicting sites. So much for a yield “shield”!

  21. Thank you for these great posts on yield vs total return and their effect on sequence risk.

    I’ve been binge reading many of your great posts since discovering your site and this rebuttal to the YS portfolio’s claiming liberation from SoRR captured my interest.

    While I can see why the Yield Shield portfolio does not eliminate sequence risk, I only recognize your “Problem #4: Dividends can be cut!” as a true underlying reason as to why risk is not eliminated in practice with a YS strategy. As others have pointed out if dividend per share were not to change then the price variation of the portfolio is largely irrelevant to the retiree himself IFF he keeps the portfolio as a Yield Shield portfolio (more on that later). Of course as you mentioned concern #4 is the Achilles heel and except for minor corrections when a big correction hits and most likely corporate profits tank then past a certain point dividends per share must also decrease, eg. Covid19 shock. Hence, as you very wisely point out YS provides a minor shield for minor market variations and little shield for big crises where the shield is actually most needed.

    Now, when it comes to the inferior terminal portfolio price, it DOES matter to your heirs. Your heirs, being young, would be wise to re-convert their inherited portfolio to a total return maximizing portfolio, eg the ERN 60/40 portfolio. It is in that conversion that the Yield Shield portfolio underperformance will be realized. That would be one main reason for me not using the Yield Shield portfolio. With a 55x portfolio my focus is on providing the most to my heirs, not avoiding running out of money myself in retirement. So I see my portfolio through the long life expectancy of my heirs rather than my lifespan, hence I stay mostly in equities with a current (as of last 2 years) gradual shift into lower CAPE ratio segments (in other words I admit I engage in CAPE ratio gently modulated long term market timing indeed).

    BTW, I had to work for an additional decade and a somewhat leaner retirement to get to this more comfortable 55x level, so nothing is free, as we already know. I want to believe that I can be SoRR worry free though I do worry about this deviantly successful globally synchronized central bank financial repression into negative interest rates now becoming a permanent policy and creating a bubble in everything like nothing ever seen before in history, and ending up very very badly. Some sort of Modern Monetary Theory becoming the modern version of the Weimar Republic… with similar outcomes…

    Thanks for your great work. It is truly intellectually stimulating to read.

    1. Yeah, I think we very much agree on the YS issue. If corporations never cut dividends and always grow them in line with inflation, there’s no problem. Though, in the literal implementation of YS, there’s still the problem that your bond portfolio doesn’t offer you 4% yield plus CPI adjustment.
      But if times get tough, companies WILL cut dividends.

      And also good to know that we’re on the same page with Modern Monetary “Theory”. I take a very, very dim view on this one.

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