“How To Generate $XX Per Month From Your Portfolio”

Occasionally there will be blogposts and social media videos teaching how to generate an amount of income per month (or year) from one’s portfolio, which I find it a good thing as they give expectations on the approximate sizing of portfolio and yield required.

Picture generated by ChatGPT

While it is a relatively simple theoretical exercise involving percentage mathematics, it works when everything else is static, i.e., on a ceteris paribus basis (assume all other things are equal). However, executing it would be slightly difficult as market conditions do not really listen to what the theory was supposed to espouse. For instance, the yield or yields from the various asset classes and securities do not remain at that fixed number throughout, and so does the portfolio size that the yield(s) is based on.

Admittedly we do come out with such calculations for retirement/step-down planning for our portfolios, but we would also take in variables that may boost or hinder this model of determining monthly income. Of course, the first thing to do would be to derive the overall annual yield across the asset classes using the asset class allocations and their average yields, which goes something like this as an example (Figure 1):

 

Asset Class	Allocation (%)	Average Annual Yield (%)	Weighted Yield (Allocation x Average Yield)  (%)
Equities	35	5	1.75
Real Estate Investment Trusts	35	6.5	2.275
Bonds	20	2.5	0.5
Commodities	5	0	0
Cash	5	1	0.05
Overall Annual Yield			4.575

 

Fig.1: Overall annual yield of the balanced Bedokian Portfolio using assumed average yield per asset class.

The average yield could be obtained from a few sources, like from one’s own portfolio numbers, figures from finance sites showing the current yield, etc. Do note that the term "average" is used; yield figures have been sourced from multiple references and consolidated to present a mean value. The advantages of using the average are two-fold: the result gives a benchmark value if the actual portfolio is below it, or a buffer if the actual portfolio is above it.

If one is still not comfortable with the average number, a margin of safety can be introduced, corresponding to an imagined portfolio value drop; if one is prepared for a 30% drop of capital, he/she could adjust the expected yield number by 30% to 3.2%, and then plan the spend on the reduced income amount. This conservative approach would have the psychological effect of viewing amounts above the yield to be “windfall” and thus using them as savings and/or further capital to invest (and grow more yield).