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  before the crash; low share values deplete your portfolio faster if your income needs are fixed.
However, by maintaining a diversified portfolio you can withdraw from whichever assets have best preserved their value; e.g. you may sell equities after a period of out performance when you’d need to rebalance back into bonds anyway.
During a market crisis, you withdraw from safer government bonds that are likely to have outperformed equities; or from your gold allocation if you maintain one and it is performing well.
You may also allow your income to vary rather than always withdrawing the same inflation-adjusted amount; a simple way of doing this is to sell a fixed amount of ETF shares.
Don’t sell more shares than you’re comfortable with but your income will vary in line with asset values; this works well if your essential needs are met by other sources of income and your ETF portfolio provides extra spending money on top. If your portfolio is your main source of income then it only works if you can cut consumption too.
Alternatively, you can investigate the various dynamic withdrawal rate strategies that exist. These strategies suggest portfolio management rules that require you to lower your income if your portfolio shrinks below certain thresholds. Happily, they also allow you to raise your income if returns are kind and you experience strong growth.
One way to ensure your portfolio lasts as long as you do is to live off the income only; this strategy requires you to preserve your capital in all but the direst of emergencies. You don’t sell your ETF shares, only your dividends and interest.
The advantage is that you can all but ignore the fluctuating value of your portfolio; you’re not going to sell, so what does it matter if equities crash? If all goes
to plan then you’ll pass on your portfolio as a legacy to your heirs.
The drawback is that you’ll need a much larger portfolio to sustain a given level of income when you don’t intend to spend such a large component of your wealth
Income investing strategies also produce fluctuating levels of income over time because yields change. The trend line for bond yields was down for 30 years from the early 1980s and dividends are often cut during market turmoil. For example, dividends fell by 50% during the Great Depression.
Moreover, income strategies can push investors to concentrate their portfolios in high yielding assets such as:
• High dividend equities • Junk bonds
• Emerging Market bonds • REITs
Those assets can all play a part in highly diversified portfolios, but income investors need to be mindful of over-concentration in assets that can be unexpectedly volatile in comparison to broad market indexes.
If you understand the risks then income strategies can work perfectly well. For example, some global dividend ETFs currently yield 3% to 4% whereas the MSCI World ETF yields around 1.8%. Including price gains, global dividend ETFs have an expected return of 5% to 7% over the long term.
   35 DIY Investor Magazine | Dec 2018

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