The House Money Myth
If you have been on here or follow income investing on YouTube you will inevitably see the argument of house money.
The idea is that a person invests $100,000 and three years later says they are now playing with house money because the fund has paid them $100,000 in distributions.
They look at it as getting 100% of their original capital back and now every distribution going forward is basically extra.
It does look like that is a fact but you have to look at what the investment is currently worth.
If they started with $100,000, received $100,000 in distributions over three years but the investment is now only worth $20,000, they didn't make a 100% return.
The $100,000 in distributions received plus the value of the current investment = $120,000 of total value from the original $100,000 investment.
So the total return is 20% over the three years and we simplify the calculation and treat it as $100,000 growing to $120,000 over three years, that works out to roughly 6.3% annualized.
The yield and distributions might look impressive but the distribution rate is not the return.
What matters is the distributions you received plus what happened to the value of your investment.
When you hear people saying a fund with a 30% yield lets them safely spend more than a traditional 4% withdrawal strategy, you have to understand that the distribution rate alone does not tell you how much the investment is actually earning. A 30% distribution does not mean the portfolio is generating a 30% total return.
If over time you spend more than the portfolio generates in total return you are consuming your portfolio, no different than the person selling shares to fund part of their spending.
Consuming a portfolio by selling shares or consuming a portfolio by spending more than the fund earns both result in less capital in the portfolio over time. Saying “I don't want to sell shares to fund retirement” doesn't mean you aren't still consuming the portfolio.
The method of withdrawal may be different, but the math of consuming capital is the same.
