Now that I have my portfolio set up and cash set aside, the next thing to plan is how to draw down on my portfolio to fund my expenses annually. When to sell and what to sell?

When to sell?

My target is to achieve at least an average return of 10% including dividend from my portfolio. Based on current projection, the minimal average return so that I don’t run out of money is 6%. Using the two numbers as markers, this is what I will do:

  • Sell the intended amount once portfolio crosses the 10% mark along the year.
  • Sell the intended amount in December if portfolio does not cross the 10% but is above 6%.
  • Do not sell if portfolio return is less than 6%.
  • Sell the intended amount in the subsequent years once it hits compounded return of about 6%. In another word, 12% at 2nd year and 19% at 3rd year.

In a nutshell, I am working on a 3-year cycle and each time a sell occurs, the cycle is reset. Each year of missed performance would make the subsequent year harder to achieve. However, the nature of stock market is volatility and portfolio performance does swing between two ends of the pendulum but average out over a longer period. So I do fancy my chance, especially my current portfolio’s dividend yield is already north of 3%.

What if for whatever reason, the portfolio underperforms? The model is “invest, cashflow and work”, so if by mid of second year such situation arises, I guess I would need to work more? Not ideal but that’s the maximum amount of cash I would like to put aside for the moment. When I have access to my CPF, I will increase it to a 5-year cycle.

What to sell?

My current thinking is to sell a portion of every counter to fund the intended amount. For example, if the intended amount is 10% of portfolio, then I would sell about 10% of each counter. This would preserve the portfolio make up and would not affect my original intent of buying a particular counter. It does increase trading cost annually but since it’s less than that 0.1% of the portfolio, I think it’s manageable.

A plan remains a plan until it is executed. I am sure I will tweak it once I roll out the plan next year. In the mean time, I do think that it is workable.