The Taxable Investor's Manifesto

CHAPTER SIXControl Cash Flow to Perpetuate Purchasing Power

Spending less or saving more adds resilience and power to your personal financial picture. In Chapter 4, you observed the power of compounding. In Figure 4.1, you saw that stocks grew a hundred times or more than bonds on an after-tax basis, over a simulated 30-year period. In Figure 4.2, you noticed how consistent the long-term outperformance of stocks has been and how much more stable equity returns became as you moved from 5-year to 20-year rolling measurement periods. Both these charts were cash flow neutral, which, in reality, almost no one is. Cash flow is a major risk factor. It adds to or undercuts the power of compounding, especially in the face of the notorious shorter-term volatility of stocks.

You may have heard the story of the six-foot-tall cowboy who drowned trying to ford a river that was, on average, three feet deep. The average may have been three feet, but midstream, where the current ran fastest, the depth was seven feet and the cowboy couldn't swim. Start to finish averages, like those explored in Chapter 4, are only useful if we can get across the river. In our world of taxable investing, the biggest factor that impacts whether we get across the proverbial river is cash flow. Having to sell assets to fund a 4%, 5%, or higher spending rate when your portfolio is suffering amidst a bear market can be devastating, especially if you have to pay capital gains tax to support your spending. In contrast, ...