Best way to cash-out for passive income

Question

First, my investing knowledge is very limited (still new to this, still learning). Second, my question is somewhat unfocused, sorry about that but I hope that there is a somewhat concrete answer, maybe after some clarification (I don't know if my example makes sense).

In terms of investment: let's say I know what I'm doing and have a portfolio with 2/5 in Shares, 2/5 in (stock) ETFs (half payout half plowback, hopefully the right terms), 1/5 in Bonds/Metals/alternate stuff etc. How do I go about getting revenue from it? It's not about how to get there but what to do when I'm there.

Let's say we are talking about ~700k and I'd want to get passive income from that. Or rather income in general, cash I can spend on things without losing in the actual sum invested.

In my "ideal" example, let's say due to the high diversification and continuing strong economy we gain +5-7% a year (~2800 a month). This I feel is the part that books, articles and investment gurus never seem to mention, how do you actually get money back when your investments are appreciating?

Bonds and Dividends generate a stream of income on their own and general management (selling assets that go completely south to recover parts of the investment) is clear to me (somewhat).

How do you go about shares that appreciated? Sell "excess" to maintain the original amount of cash in that particular asset? You'd gain money but if the value goes down you'd have to reinvest to keep the money the same. Only the delta of that would be the net gain and you'd need to keep (or know that you will have the money around then) money stored away.

How about shares that you specifically bought just for their dividends, do you just keep them, even when they lose in value (let's say we keep them until they drop by 20%)?

We keep our ETFs for let's say 8-10 years and cash out and ... then? Just keep the gains and reinvest? Reinvesting into the same asset after cashing out makes no sense, so we'd have to find something else, what would that be?

I hope you get my confusion here, let's say I'm saving for a nice car (40k), I save up, reach the goal, cash out, buy my car, done. Simple. Having a big pile of cash and investing it so the invested value stays the same while making money? Very hard.

Answer 1

You've thrown a lot of ideas at the wall and this might have been better if posed as more concise, separate questions. The short overall answer is:

1) A portfolio such as you described increase in value because of interest received and share price appreciation. Dividends do not increase the value of a portfolio.

2) It decreases in value from share price loss, taxes paid on non sheltered dividends, spending your dividends, and withdrawing cash. You "get money back" by spending your dividends and/or withdrawing cash from the sale of investments.

A general rule of investing is that as you age, you reduce your market exposure. Traditionally, advisers have used the “100 minus age” rule, which is the percentage of your assets that you should allocate to equities. The older you get, the more you shift toward fixed income, thereby reducing the volatility and risk of your portfolio.

In recent years, many advisers have suggested that due to increased life expectancy as well as the past decade of low rates, this rule is outdated. In order to avoid running out of assets in one's lifetime, some are now suggesting 110 or even 120 minus your age. This is just a starting point for calculations. Other factors need to be considered:

• portfolio size
• debt current/future expenses
• Social Security, pension or other sources of income
• gender (women live longer)
• risk tolerance

If your risk tolerance is higher, use the 100 number or lower. If your risk tolerance is low, use the 120 number or higher.

Another a rule of thumb is that your retirement assets should last your lifetime if you withdraw 4% to 5% of your savings in the first year of retirement then adjust that amount every year for inflation.

Hopefully, this addresses some of the questions you asked.

Answer 2

how do you actually get money back when your investments are appreciating?

You sell some of your shares.

(This is also why borrowing low-cost money to invest in stocks is... risky: a loan payment is due every month, but increases in stocks are only realized when you sell them.)

How about shares that you specifically bought just for their dividends, do you just keep them, even when they lose in value (let's say we keep them until they fall -20%)?

You've got to ask yourself (specifically, do the research) why did the stock value drop 80%. At some point, you sell.

We keep our ETFs for let's say 8-10 years and cash out and ... then?

Why only 8-10 years? (You've got to pay tax on any increase in value.)

Just keep the gains and reinvest?

Well, yes.

so we'd have to find something else what would that be?

There are a lot of funds out there.

let's say I'm saving for a nice car (40k), I save up, reach the goal, cash out, buy my car, done. Simple.

Unless the stock market is in a "down period" when you want to buy the car. Then you've simply lost money.

Never put "targeted savings" in the stock market!! (Retirement is the only exception.)

The money you're saving for a nice car (good job, by the way!!) goes in a high yield online bank savings account or set of 12 month CDs.

Answer 3

An investor can make themselves rich by investing in dividend paying stocks, spending the dividends, but holding the stocks.

But if predicting recession then government bonds are usually the best investment. (If concerned about government deficits raising long term interest rates even while short term rates are reduced, then consider TIP's.)

However, if the stocks are way-up in value then large capital gain taxes can be avoided by hedging the stocks instead of selling them. Now during the time of the hedge there is no benefit from a further rise in value. (Possibly avoid straddle tax rules by closing out the hedge at year-end.)