Yes. just sell 0.8% of your portfolio every month. Its that simple. No need to very this % based on market level. This is just opposite of SIP.
You need to know the fair value of each stock in your portfolio. Knowing level of conviction is not enough. Sell stocks that are overvalued or least undervalued. You can sell small lots of each overvalued stock or just 1 or 2 stocks that have given you strong short term returns (as these almost always pull back even if these are undervalued). Either way, use short term returns and fair value to decide which ones to sell.
Having a concentrated portfolio of 5-8 stocks will make this decision easy. Having a diversified portfolio (of more than 20 stocks) will make this decision difficult. Problem with a diversified portfolio is that often you don’t want to sell the stocks because they have gone down or you have high conviction about the stocks that have gone up.
This leads you to a situation where you are unwilling to sell the ones you should sell and unable to sell the ones you want to sell and then end up selling the stocks that you shouldn’t sell. You should try and avoid getting into this kind of situation. One way to do that is to ask yourself if you are likely to question your conviction after a 20% drop in price and sell the stock. If the answer is yes, its better to sell now no matter how much undervalued the stock is (after all your notion of value is greatly influenced by your conviction).
IMO, Month on month is the right way so that your mistakes won’t hurt your portfolio much.
You will always withdraw from your capital. Don’t consider capital and returns as two separate buckets. Your returns become part of your capital. Your expected return is an important assumption. at 15-18% expected return a 10% withdrawal rate is just about sustainable but if you are not sure about expected return, you should scale it down. I noticed that you have been investing for last 6+ years which hasn’t seen a brutal sell-off so your expectations might be on the higher side.
At 15-18% expected return, you are rating yourself in the above average category (12-14% is the average). I am not saying you don’t belong to this category but you should ask yourself what makes you an above average investor. Stock market returns can be anywhere from 6% to 50% so where you stand in the pecking order is something you need to evaluate carefully before deciding the withdrawal rate. Its better to start low and scale up your expectations rather than the other way.
Your withdrawal rate depends mainly on 5 factors
- Your expected return.
- Your (and your spouse’s) remaining life expectancy
- How much corpus you want to leave for your hairs.
- Rate at which your living expenses are rising.
- How you handle a brutal sell off in the market.
At 10% withdrawal rate, your expected return should be around 18%, your remaining life expectancy (in terms of how meany years you are expected to live into retirement) should be less than 40 years, you most likely will not be able to leave much for your hairs (and implications of that on your relationship with them), and your price inflation plus lifestyle inflation cannot exceed 8%. You will also feel anxiety about shortfall in your portfolio during bear markets.
This is assuming equity is your only portfolio. If you have other sources of income, you should consider that while calculating withdrawal rate from equity portfolio.
I am managing my parent’s portfolio with 12% withdrawal rate but please note that circumstances are different so this is not a recommended withdrawal rate.