Total Return: Never Invest for Income

Total Return means: Income received plus gain (realized or unrealized) added together and treated as one.

It is absolutely futile to try to get results except by speculating for anticipated large gains.

Looked at in this light, a gain of 100% in a year with no income versus a dividend yield of 4% with no appreciation is equal to 25 years of dividends.

This means that, after realizing a large gain, one can stay invested in Treasury bills or money market funds and withdraw income as needed until the next capital gains opportunity comes along.

This "Total Return" approach is far superior to being continuously "invested" just for "income". In fact, it is really vital. This one point, in my opinion, is the main difference between the successful professional and the unsuccessful amateur.

By this rule alone, one is kept out of dangerous markets.

Possibilities of loss must be continuously weighed and positions taken only when it appears that the odds are in ones' favor by a factor of, at least, 3 to 1.

Income needed for living expenses, calculated annually at 6% of year-end capital, can be transferred to a separate "Living Expense Reserve" account and 1/12 of that sum transferred each month to a separate checking account as your "living expense" budget.

In the same way, one can also set up a "Tax Reserve" account to segregate taxes owed on gains as realized and paid over in quarterly estimates. In the event of realized losses, sums can be transferred back to your trading account.

With your income needs for the year thus stabilized, taken care of, and out of the way, your mind is free to concentrate on the business at hand, namely, to maximize total return on capital.

This has the added benefit of automatically raising ones' standard of living in line with ones' success. It also automatically scales back after a "loss" year.

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