Does a “yield shield” really protect against sequence of returns risk?
#69: Last time we talked about using a “bond tent” strategy to reduce sequence risk in the years just before and just after retirement.In FIRE communities, an alternate strategy that has become popular is the “yield shield.”A yield shield strategy involves holding primarily investments that pay a high dividend yield.The theory is: if the investment pays a dividend yield of 3-4% that might be all you need to cover your safe withdrawal rate. If you don’t ever have to touch the principal, sequence risk might disappear entirely.But is it really that simple?This week, in part 2 of our 3-part series on asset allocation, we continue our discussion with Karsten Jeske, CFA, about the pros and cons of a yield shield strategy. We start by wrapping up our glide path discussion from last week, then dive into a critique of the yield shield.We discuss:How early retirees with kids should plan for key expense milestones during retirement that traditional retirees have already dealt with (college, buying a home, etc)Pros and cons of a yield shield strategyWhether investing in dividend kings or dividend aristocrats helps to address the consThe importance of looking at total return when analyzing the yield shield, and why a high dividend doesn’t translate into higher total returnReasons why the yield shield can fall short (and examples where it did)The right way to define success of a yield shield strategyWhy Karsten doesn’t fundamentally believe the yield shield does better than a plain vanilla stock indexCheck it out here:https://hackyourwealth.com/yield-shield-critiqueThis yield shield critique has been very controversial in FIRE communities. Are you persuaded by it? Or do you believe the yield shield performs better? Why or why not? Let me know by leaving a comment.Don't miss an episode, hit that subscribe button...If you liked this episode, be sure to subscribe so you don’t miss any upcoming episodes!Apple PodcastsOvercastSpotifyStitcherI need your help, please leave a listener review :)If you liked this episode, would you please leave a quick review on Apple Podcasts? It’d mean the world to me and your review also helps others find my podcast, too!Links mentioned in this episode:Dividend ETFs: VYM, NOBL, SDY, DVYERN's Yield Shield critiqueERN's critique of the dividends-only approachAsset allocation: How to use a bond tent to reduce sequence of returns risk (HYW068)The shockingly un-simple math behind retirement safe withdrawal rates (Part 1) (HYW035)The shockingly un-simple math behind retirement safe withdrawal rates (Part 2) (HYW036)Schedule a private 1:1 consultation with meHYW private Facebook community Intro/Outro: Old Bossa by Twin Musicom.