This advantage of the DGI investing approach may be a bit nerdy; it is certainly fair to say that it is most relevant to those of us approaching the disbursement phase and retirement.
Sequence risk is the risk that the market (and with it your portfolio value) enter a recession or deep downturn – just when you are starting your disbursement phase from the portfolio. This will basically mean that your sell-off of shares from you portfolio will happen at (much) lower share prices and that you then need to sell a higher number of shares to produce the monthly / quarterly income, which you have planned for. Vanguard has studied this and concludes that disbursement levels are quite sensitive to early drawdowns (in the disbursement phase) and that an dividend-focused SGI investment approach can mitigate this sensivity (Vanguard / February 2024 )
This obviously is really bad and will jeopardize the degree to which you will be able to sustain the planned monthly / quarterly disbursements from the portfolio. It is an old truth that after a 50% drop in portfolio value you need a 100% increase to get back to even.
But with (some of) your monthly / quarterly disbursements covered by more stable and less fluctuating dividend payments, the need to sell off at discounted share prices becomes smaller and possibly a lot less acute. In this sense, think of the “recurring dividend” share of your disbursements as the cash buffer – but still invested.
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