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Tuesday, June 29, 2010

Are You an Accumulator or a Decumulator?

Accumulators are adding to their nest egg. Many are dollar-cost-averaging (DCA) by investing a fixed number of dollars on a regular basis. As long as they don't plan to start drawing funds within the next 5 years, they should love a market that is dropping because they can lower the average cost of their shares. Young people pay attention! Even in a market that goes nowhere over an extended period, accumulators can come out ahead by continuing to buy as prices drop. DCA is a relatively simple process. Decide on how your investments are to be allocated, and then sit back and watch it take place pretty much automatically.

Decumulators are in an entirely different boat. One that can sink them in a declining market if they aren't careful. They are drawing a paycheck from their nest egg. They are said to be on distribution. They are in the opposite situation of DCA and, therefore, need to be careful. It's not just a matter of reversing the accumulation process and selling a given number of shares of stocks or funds across the board. Doing such would require selling more shares in a declining market to raise the required distribution. Instead, decumulators need to think about a plan whereby they set up a short term fund from which to fund their distribution. Typically this fund is started with at least payments for 9 months and longer. For example, if a retiree requires $3,000/month from his or her nest egg, they would want to put at least $27,000 in the fund. Next, you need to replenish - aggressively in a down market. This requires dividends and interest to go into the fund. If you decide to reduce stock exposure by 5%, it should go into the fund.

This process has enabled decumulators to avoid having to liquidate stocks at fire sale prices and, therefore, keeps positioning structured for the next market upturn.

In the absence of a thought-out plan, it is easy to have emotions come to the forefront and dominate the investment process.

Bottom Line
Accumulators: enjoy the market and buy on the cheap.
Decumulators: proceed in line with your plan.


  1. Ideally, one would reduce their expenses to the point where capital liquidation would not be necessary and dividend/interest income could cover the expenses, but this isn't always possible...

  2. Good point but as you say not always possible. Be prepared in case inflation picks up, dividends are cut, and/or interest payments drop. Retirees today are feeling the pain because bonds are maturing, CDs are maturing etc. and they are being replaced with low interest items.
    I like your thinking. People retire and they figure they'll just sell shares of their stock fund each month and it isn't that easy.
    Thanks for the comment.

  3. I do hope more people will be able to retire with dignity. I agree it is not always possible to leave your investments plugged in, especially if you have a late start or make risky financial decisions. I hope more investors will read sites like this though. Like you said DCA is very simple way for accumulating a nest egg.

  4. @Shawn
    The difficulty with financial blogs, seminars etc. is that the people who know the concepts read and attend. The people that need this message ignore sources that can help them. You and I understand the power of DCA, compounding etc. So many don't. They don't understand that they should be putting away at least a small amount on a regular basis and investing especially in a declining market. They don't understand how this makes the difference whether they will be able to "...retire with dignity".
    The one thing about the blogoshere that excites me is that it is increasing the financial literacy of the country which is very important.
    Thanks for stopping by.

  5. As long as I can stay employed, I intend to be a DCA accumulator.... but staying employed these days is not easy.

  6. Greetings Grouch:
    Actually if you stay employed you're better off because prices are falling in many areas. For example, if you need some home repairs done etc. you can get some really good bids.