51% of returns in the ASX during the decade between 2012 and 2022 came from dividends. Since 1940, 34% of the returns for the S&P 500 came from dividends being reinvested.

Investors considering whether to take their income as cash instead of reinvesting may be interested to hear about the trade-offs, and why Mark made his decision to start taking his income in cash.

Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs. You recently had a pizza party.

Mark LaMonica: What? Okay.

Jayamanne: Tell us about it.

LaMonica: You act like I'm eight years old and I had some people over for pizza.

Jayamanne: You kind of did.

LaMonica: I actually have two pizza stories. But the pizza story you're referring to is I joined this squash.

Jayamanne: Tournament.

LaMonica: Well, it's more than a -- like I've done that stuff before, but it's very casual. But now I'm like registered with New South Wales Squash. I have some sort of ranking.

Jayamanne: Okay. What's your ranking?

LaMonica: I haven't checked, but it can't be good because I played one match and I got just killed in it. But you're part of a team. So I have three teammates and I never met any of them, showed up at the University of Sydney to play the University of Sydney like affiliated team. And yeah, so I lost like really bad. And then afterwards you have like a little pizza party.

Jayamanne: That's very cute. My favorite part of this story is that afterwards at the pizza party, the guy who beat you was trying to give you tips. And then he said to you, I really should have taken it easier on you towards the end.

LaMonica: Yeah, he seemed to be worried that I was somehow like luring…

Jayamanne: Sandbagging.

LaMonica: Luring him into this trap. And all of a sudden, like after failing to return 50% of the serves he hit me, like I was going to become this amazing squash player, but yeah, there we go.

Jayamanne: Well, let's see how you go. We'll keep up to date with your rankings.

LaMonica: Big match next week. We're going out to Bondi.

Jayamanne: Wow. Okay.

LaMonica: Watch out Bondi squash club or whatever this is.

Jayamanne: Maybe they're all listening to this.

LaMonica: That would be great.

Jayamanne: To get some tips.

LaMonica: That would be great. I told they asked me where I worked afterwards. They were all in tech, all the other squash players. Then like where do you work? And I was like Morningstar and they're like, oh, we've heard of that. And then went on and talked about tech. Didn't ask me anything else.

Jayamanne: We're not very interesting.

LaMonica: No, no, they wouldn't know because they didn't ask. All right. We're going to talk about tradeoffs today, Shani. And of course, nobody wants to make a tradeoff.

Jayamanne: No, everybody wants it all.

LaMonica: Exactly. I know I do. And I don't think this is all. We're eating Domino's Pizza at the University of Sydney squash court. But we're going to talk about tradeoff. So we do these episodes where one of us is featured. And today, unfortunately for listeners, it's me. And we're going to talk about the tradeoffs that I make with my portfolio. And even though I know that I'm doing the right thing for me and what I want out of life, I still have these nagging doubts and fears.

Jayamanne: All right. Let's dim the lights. You lay back on the couch, Mark. Tell me your problems.

LaMonica: Do they turn the lights off in therapy?

Jayamanne: I don't know, I think they do. I don't know. You can't really have bright lights in therapy. Maybe.

LaMonica: Well, there we go. But we need to start with some facts about returns, Shani. So then we can get into my nagging doubts and we can turn off the lights, although that will hurt the video quality.

Jayamanne: Maybe that'll be better, to be honest.

LaMonica: It'll definitely be better for me. Once again, face for radio here. But we hear about market returns a lot. And we hear about the returns from individual investments, so like a fund or an ETF.

Jayamanne: We do, Mark. Well, one thing that people may not realize about all these returns is that they all assume that the dividends are reinvested.

LaMonica: Yes. So not only are the dividends reinvested in all these returns or the assumption that they are, it's a big part of the return. So 51% of the returns in the ASX in the decade leading up to 2022 came from dividends being reinvested.

Jayamanne: And since 1940, 34% of the returns of the S&P 500, came from dividends being reinvested.

LaMonica: Okay. Unfortunately, that brings us back to me. And I've talked about it before, but at least in some of my accounts, I am not reinvesting my dividends anymore. I am spending them.

Jayamanne: And I know the answer to this, but why don't you explain why you made this decision? For years, you've reinvested dividends and I know you saved diligently and then you changed your approach.

LaMonica: Yeah. So couple of technical aspects of my finances that I guess I'll go through. I had three main brokerage accounts. And the two larger ones, as you said, Shani, I reinvested dividends. I saved more money in them, but I had one that I spent dividends on. So it's a strange story how I got here. But there's this tax advantaged account in the US called a 529 plan. And you can use it to save for education. And I started saving for my future kids' education.

Jayamanne: That's so sweet, Mark.

LaMonica: Yeah. No, it was...

Jayamanne: For your children that don't exist.

LaMonica: So it was partially responsible and partially crazy because I didn't have any kids...

Jayamanne: Back to the couch.

LaMonica: At the time. Yeah. But right now, I guess, I think of this as my one and only act of parenthood. Because as you know, my wife and I ultimately decided not to have children.

Jayamanne: Which makes the education spending less useful.

LaMonica: Yes, that's true. You know what? If it was you, you could have spent it to go to floristry school.

Jayamanne: It's not very expensive.

LaMonica: Okay. Well, that's good for you. Well, so what I ended up doing when my wife and I decided we weren't going to have kids is I took that money, I put it into a brokerage account, and I decided to spend the income for that, so the dividend income on travel, because I like to travel. And it wasn't a lot of money. So I think at the time, there was about $10,000 that was in this account. And I believe I made something around $300 a year in dividend income.

Jayamanne: You could have flown the Concorde around the world, Mark.

LaMonica: Yes. If I would have chipped in a lot more extra money to the 300. But I mean, it paid for something like one domestic flight. I was living in the US at the time, like one domestic flight a year. But you know, it was something. And I will say that it felt good because I felt like the savings I was doing was actually paying off.

Jayamanne: And I do think that we underestimate how difficult it is to sustain the discipline to save for decades. And it is easy for us to talk about it on this podcast, like it is nothing but it is hard. And it sounds like this encouraged you.

LaMonica: Yeah, I mean, it did. And, you know, I think it gave me this sense of accomplishment in my early 30s, which was probably the first sense of accomplishment in my life. So if we move from my early 30s into my late 30s, so I had been saving, my salary had increased, which of course increased the amount that I was saving. And I was doing okay in growing my passive income. But I had this feeling and Shani will probably describe this as a midlife crisis. But I had this feeling that my life was just sort of passing me by.

Jayamanne: And you went and bought a Porsche.

LaMonica: I did not. Yes, that's the end of the episode. I took all my money. I bought a Porsche. And here I am today still working. But I just wanted to, I guess I wanted to live the type of lifestyle that I wanted to live. And I kind of wanted it now, you know, like your generation, Shani, you know, just wants everything now. So I wanted to travel more. And I thought I was in the financial position where I could start thinking about what I gain from continually compounding my portfolio with some other things that I wanted to do. And, there's this saying, of course, and one of the problems I think is every time, you know, every time you reach a mountain peak, you look up and there's more, right, we sort of get in this cycle, where we just want more and more and more. And I think people can do that. They could just get focused on growing their money. And I know that I'm really fortunate, obviously, to be in this position. I know there's a lot of people struggling to get by, but I got to a point where I think I was comfortable in thinking like, what else can I do with these financial resources?

Jayamanne: And I do think this is an important point, because we hear so much about compounding, we talk about it a lot. And we celebrate people like Buffett for making himself into a compounding machine. Some people even create Buffett drinking games.

LaMonica: I don't know who those people are.

Jayamanne: No. But if you do read the book Snowball on Buffett, it is fairly obvious that he has a bit of an unhealthy obsession with money. Not really in the traditional sense, because he never really spends it, but that's part of the point. He has this unhealthy obsession with compounding.

LaMonica: Yeah. And, I came to this crossroads, of course, Shani, where I could have either become the next Warren Buffett, or travel a little more and sat by a pool a couple more times a year.

Jayamanne: Yeah. Instead of the Buffett drinking game, it would be the Mark LaMonica drinking game. I think played the Mark LaMonica drinking game, to be honest.

LaMonica: Yeah. It's mostly sitting in the dark drinking by myself. So, thank you for participating a couple of times. But I had this thought, obviously, that I was missing out on things. And, each year that passed, of course, I was missing these opportunities to see places and experience things. And so I decided, I'd say somewhat impulsively, that I was going to start spending the dividends from another one of these accounts on travel.

Jayamanne: Okay, so now we're going to get into a tradeoff part of the podcast.

LaMonica: Yeah, absolutely. And, I think it's what we've been talking about that the tradeoff is that I'm giving up compounding, at least to a certain extent.

Jayamanne: Yes. And let's use an example here. Let's say you start with $100,000 and save $10,000 over the next 20 years and get an 8% return. You end up with $923,000. If you get half of that return, you end up with $516,000.

LaMonica: Yeah, so that's obviously a really big difference. But you do get one other thing. Of course, you get to spend that money. So the dividends that you get, you get to spend. So this is maybe a good lesson in compounding. So the money that isn't compounding, right, is reducing that return from 8% to 4%. Now, you don't get to spend that whole difference, right? The difference between $923,000 and $516,000. If your portfolio yields 4%, over 20 years, you would have $225,000 to spend.

Jayamanne: And that's a tradeoff. Effectively, you have $225,000 to spend and your return is reduced by $407,000. And that's the impact of compounding. And your return on a return. In this example, 4% of the return comes from price appreciation and 4% comes from dividends. There is a gap between the amount you could spend if you took the dividends and the returns you receive if you reinvest the dividends. That's the difference between $407,000 and $225,000.

LaMonica: Yes, lots of numbers. But basically, that is what I'm giving up. And really, that is the whole notion of saving money. So, right, saving money, you're sacrificing consumption. If you invest that money, it will grow. And if you grow it faster than inflation, you can consume more in the future than you could in the present. Now, I think about things a little differently because I've always been focused on income growth, but it's the same concept. When you reinvest dividends, you buy more shares. Since you own more shares, your income is higher, which means there's more to reinvest and so on and so on. But either way, what I'm doing is I'm breaking that chain of compounding and growth. And some days, I'd say it's a little bit hard to wrap my head around that.

Jayamanne: Not to get too deep, but where do you think that comes from?

LaMonica: We haven't even dimmed the lights yet. I think it's one of those things, right? You spend 20 years trying to do something which was saving money and trying to invest as much as possible. And it's a little bit hard to break that habit. And I will say a lot of people I talk to that retire, they have that problem that they've been on this mission for so long and used to living a certain way and now, all of a sudden, they're spending money. I'm just experiencing that early. And, Shani, knowing you, I think that you would have a lot of stress and anxiety about doing this.

Jayamanne: I definitely would, yeah. But the question is, what would you do about it? How do you get over it?

LaMonica: Yeah, I mean, I think it's focusing on that tradeoff. And life, of course, it's a little bit of a cliche, but life is about tradeoffs. And I do like what I'm spending the money on. And that gives me a sense of fulfillment. I get to experience new things. I get to learn new things. I think it kind of fulfills my desire to have a life like you said before we recorded this, that my life is just getting up and going to work and going home. But it makes me feel like that isn't my whole life. And I don't know, I just have this nagging sense that we've obviously been talking about that I'm doing something wrong. But I don't know. A couple other things help, I guess. I'm still saving money. And of course, I'm not spending any of the principal. I'm just spending income in these accounts.

Jayamanne: So I think there's a natural question that comes from this, and that is, why you're still saving money even while spending the income from your portfolio? Wouldn't it make more sense to just not save money and reinvest the income from your portfolio?

LaMonica: I mean, probably. But no, there's this notion called mental accounting. And basically, just the concept is that money is fungible, right? So a dollar is worth the same no matter where you earned it from, or how it's spent. And so as humans, what we tend to do is we tend to earmark money for certain things. And in theory, this is the wrong thing to do. We shouldn't treat money differently. We shouldn't have travel funds or fun money, or any of the other ways we mentally account for money. And I certainly understand that. I understand that this is an inherent bias we all have, this mental accounting. But I guess I also just don't really care. You know, it's hard to save money, as you said earlier, Shani. And it's hard to sacrifice over long periods of time.

So I think if there's mental tricks to keep going, it isn't really hurting anybody as long as you understand this concept of mental accounting. So yes, I save money. I of course save money in super since that's mandatory, but I'm also saving and investing money outside of super. And I'm doing that because each five years of my life, I have a different brokerage account that I start spending the dividends on. So that's my motivation to kind of keep me going. So I save and invest this money and try and grow it as much as possible. And my next five year milestone, if I survive, Shani, is 50. So you famously said that I would die at 45. And I am six weeks away from 46.

Jayamanne: You are almost there.

LaMonica: So at this point, it's hard to see an illness killing me unless it's very sudden. So you're going to have to hope for…

Jayamanne: You could go really hard at the Mark LaMonica drinking game.

LaMonica: I could, but I could probably survive six weeks. So you better hope for some sort of natural disaster or like a bus hits me.

Jayamanne: But I definitely do this mental accounting.

LaMonica: I know you do. More so than most people.

Jayamanne: I have several different accounts that I've talked about more on this podcast. And, you know, I understand in theory that I should just have one account because money for travel or my weekly grocery shop is basically just all the same money. And it comes from the same source that has the same value. But I find it really motivating.

LaMonica: Yeah, including your account that is saving for the death of your dog.

Jayamanne: Yes.

LaMonica: All right.

Jayamanne: I mean, it's not for the death of my dog. It's to deal with the death of my dog.

LaMonica: Well, there we go. Much like the Mark LaMonica drinking game to deal with my day to day existence of going to work and going home.

Jayamanne: Exactly. So is there anything else that worries you about the approach that you're taking?

LaMonica: Yeah, I mean, I think like most people and I know this worries you is you worry what happens if something's going wrong, right? Something goes wrong in your life. So you lose your job. You have an illness like I was talking about. Or just like the 800 other things that could go wrong in your life. So in any bad situation, it's obviously better to have more resources than less resources. But you know, I have what I consider an adequate emergency fund. I don't know. I think this whole thing goes both ways, right? If something goes wrong, I think I'll also hopefully be happy that I've had more experiences in my life. And this is once again, another tradeoff like you could take that to an extreme where you are, you have no money. You're in a ton of credit card debt all to keep having all these experiences.

I think we both think that that's pretty dumb. If you are worried about running out of money, I think that that is not a great thing to do. But I think I should be fine. I came to determination. I should be fine if I can stay employed for a while. But you know that…

Jayamanne: Questionable.

LaMonica: Questionable especially after this podcast. But yeah, I mean, I think just the uncertainty in life means we need to take advantage of opportunities when it's prudent for us to do that.

Jayamanne: And I find it quite hard to balance these two notions as well.

LaMonica: As I said.

Jayamanne: Yes, I've got a savings mindset and I find it hard to spend money on myself. But I hear about other people's financial situations as well. And it gives me anxiety that they don't have a safety net and they aren't really saving for the future either. And I hear about people who retire early with levels of savings that I find really low. And all of that makes me really anxious. But I also know myself and know I'll naturally over save and be overly cautious and I do need to balance that.

LaMonica: Yeah, I mean, that's the challenge of life, right? Shani, this whole tradeoff concept. So we're always trying to make these tradeoffs every day in everything we do. And it's hard because like we can obviously take advice from others, try to learn from others. But we all just have to pick what we think is best for us in our circumstances.

Jayamanne: So we talk a lot about goals on this podcast, Mark. So how does this impact your goals?

LaMonica: Yeah, I mean, I think the first thing is that it was really helpful for me making this decision that I had to find my goals. And I think it allowed me to understand what that tradeoff was that I was making. So I think the problem with tradeoffs is, many people make that tradeoff and they don't know what they're giving up. So almost everybody knows what they get, right? Because that's the obvious one. But too few people know what they're giving up, which makes it really difficult to make that decision. So my goals are a little bit different now. You know, and those accounts where I'm spending dividends, I still have a goal of growing my income by 5% a year. And that comes from dividend increases, right? Because I'm not reinvesting, I'm not saving directly into those accounts. And really, if I can get 5% a year that comfortably beats inflation in most years. And then I've got a goal of growing my passive income faster in accounts where I'm reinvesting those dividends and I'm saving money into that. So basically that's how I've arranged my goals.

Jayamanne: And one good piece of advice for anyone going down this path and doing any mental accounting is to make sure when you're looking at your finances, you still need to view things holistically and aggregate all your accounts when you're looking at things like diversification.

LaMonica: That must take you hours to add up all these accounts you have.

Jayamanne: I use Sharesight, there's a plug.

LaMonica: There you go. Hopefully, Doug, if you're listening or Prashant, you know, I don't know what we get out of this, but nothing. Because obviously we can't accept anything. But that's the Sharesight plug. But yeah, I think it's really good advice, Shani. So I certainly do that as well. So even if you're taking a bit of an unconventional approach, you still have to get those basics right, like diversification.

Jayamanne: I feel like getting the basics right is a good place to leave this Mark.

LaMonica: Yeah, Shani is tired of listening to me talk about my nagging thoughts and feelings. So there we go. Thank you guys very much for listening. We really appreciate it. And of course, my email address is in the show notes. If you have questions or suggestions, like don't ever do one of these episodes, focused on Mark again. Just send those along to me.

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