@edsam asked me to review @piiverse latest video, and I also reached out to Perry about some of the things I thought could be expanded on. The thing is, income investing is not new, which is something he attempts to point out in the video. Covered-call ETFs themselves have a relatively short history, going back to around 2007, but covered-call strategies are much older than that. And while covered-call ETFs have really exploded in popularity over the past five years, income investing itself goes back much further than covered-call funds. The biggest issue I had with Perryâs video was the math and the assumptions being used to get to the numbers he displayed. His calculation/model does not appear to account for the total return already including distributions. That doesnât change because the yield is 2% or 20%. The way an investment pays you cash is separate from how the investment actually earns its return. A distribution can come from dividends, interest, option premiums, realized gains from the sale of securities, return of capital or some combination of those things. The distribution rate itself does not tell you what the investment actually earned. That is why fund managers and investment companies tell investors to look at total return. Total return captures both the cash distributions received and the increase or decrease in the value of the investment. It gives you a much more complete picture of what the portfolio actually earned. If you consistently withdraw more than the portfolio generates in total return, you are consuming capital over time. It does not really matter whether that cash came from selling or from distributions. The mechanics are different, but economically the portfolio still has to generate enough return to support what is being taken out. There are DIY investors who argue that income investing allows you to sustainably spend more simply because you are not selling. But that is not supported by the underlying math, and it is not how the companies that create, manage and market these products explain them. A smaller portfolio could support the same withdrawals as a larger portfolio if it actually generated a sufficiently higher total return. But if you think a smaller portfolio can sustainably support a larger withdrawal simply by increasing the distribution rate, the math does not support it, and major fund providers themselves emphasize total return rather than treating distribution yield as return. In the video he dismissed those with formal education or experience in finance by saying they simply do not understand income investing. I find that argument strange when many of the professionals being criticized are the same people creating, managing the products he along with other income investors use. Income investing, portfolio withdrawals, options, dividends, bonds and total return are standard concepts covered in financial education and professional designation programs. To say these people do not understand income investing simply because they disagree with your view is a weak argument, especially when the math supports what they are saying. Perryâs own portfolio withdrawal rate is around 5.8%, based on the numbers he presented. He attempts to make it appear higher by looking only at the amount being withdrawn relative to the portion of the portfolio generating income, but that is not the same thing as the withdrawal rate of the overall portfolio. A portfolio withdrawal rate is normally calculated by comparing the amount being withdrawn with the value of the portfolio supporting those withdrawals. Quoting a higher percentage based on only one portion of the portfolio does not change the actual withdrawal rate of the total portfolio. It also does not become a different withdrawal rate simply because the cash arrived as a distribution instead of through the sale of securities. Income investing has a long history. It has advantages and disadvantages, and there are absolutely valid reasons someone might prefer receiving regular cash distributions. Cash-flow management is important especially for retirees, and different investment strategies can produce very different return and risk profiles. But none of that changes the underlying math. A higher distribution yield changes how much cash the investment distributes to you. It does not, by itself, create a higher total return or make the portfolio capable of supporting a higher level of spending. Iâve said this before: you donât have to take my word for it, or anyone elseâs on this platform. Listen to the portfolio managers running the very funds you are investing in. If you trust them with your money and trust them to make the investment decisions, it probably makes sense to also listen when they explain how those products actually work. There is a saying: âI can explain it to you, but I canât understand it for you.â At some point, the math is the math.
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17 Comments
Michael Conroy@conroy119 ¡ 5h
Id love to see a video of any PII influencer engaged in an actual debate. I dont think ive ever seen a single video for this. Please link me if you have one. Its just posts responding to posts or videos. Or comment threads. Heck, id gladly debate any of these PII folks. I kinda miss the comment threads I had with @piiverse before he blocked me.
Clantosa @clantosa ¡ 6h
Ya ok let's listen and praise Perry along with his clan of others and totally ignore the fund providers and the professionals with proper credentials. Somehow the clan knows something no one else does. Not even the people who created the fund know
Dashnor Hasku@cankos ¡ 6h
He is the last one who should dismiss anybody let alone the ones with education. The worst of the worst for investing and giving advice. We live in a world where somebodyâs portfolio is down 25% and thousands of people follow him. Go figure!
George @jaaj_ii ¡ 3h
Are you guys too busy writing paragraphs about Monte Carlo models and distribution yields to notice a musical joke?
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