Wednesday, July 15, 2015

The biggest investing sin exposed - part II

In part one, I started talking about the biggest investing sin exposed. This is part two of the series.

My sample of three is not representative at all. These are individuals I have found through my browsing of the internet. If these individuals stick to their new found strategy for the next 20 - 30 years, I believe they will have high odds of succeeding. If they switch strategies however, I would be worried for them.

JLCollins – After reading his investment history, it looks like he jumped from strategy to strategy, selling everything in 1987, getting back in 1989, chasing hot funds like CGM Focus, then admits to chasing dividend stocks. I was surprised how much turnover he had in a single year, when he essentially sold 25% of his portfolio that was in REITs and bought a stock index fund with the proceeds. He is mostly in US stocks, with approximately 20% in fixed income. I think he invested without a clear strategy between 1974 and 2011, before embracing indexing. Since he has only used indexing during a bull market, I wonder whether he will make a switch in strategies again.


Boomer & Echo –This blogger sold all dividend paying stocks in 2014. Didn’t mention how much hit the capital gains taxes were. Seems to switch retirement goals/objectives all the time and extends them further. Latest post shows he expects a 6% withdrawal rate in retirement, which is unsustainable. The reasoning behind using index funds was full of logical flaws and shows he doesn’t’ know how to compare apples to apples. It looks like he chose indexing because he has unreasonable expectations, and thinks that a 3-4% dividend yield is too low for him to live off. The real problem is their savings rate. The sad thing is this person is advising others, so I would be scared if I were his client and he told me to withdraw 6% of my portfolio every year. Besides unreasonable expectations, I think B&E didn’t have a strategy for picking dividend stocks in first place. Hence, he switched to indexing. Hopefully he doesn't abandon it for something else during the next bear market.

Dividend Dynasty – switched to indexing after a few years of dividend investing. One of the reasons for switching is that they couldn’t find good valuations. However, if you can’t find good valuations in stocks, then buying an index funds of stocks that is also overvalued doesn’t make much sense either. If you can’t find good values in individual stocks, then buying a basket of those individual stocks is not a solution.

I think index investing could be a great strategy for 80 – 90% of savers out there.  A busy family person, with a demanding career is better off focusing on that career. I would not want my doctor upset that their stock portfolio did bad in the first quarter, before they are about to operate on me. This is not because indexing is a magic strategy, but because a diversified portfolio businesses will benefit from growth in earnings, dividends and intrinsic values over long-periods of time. If history is any guide, a patient holder of a diversified portfolio of 50 dividend paying stocks will do very well over long periods of time as well. Indexing is a proxy for owning stocks, and holding them for decades. Dividend growth investing is a strategy where you pick stocks and hold on to them for decades.

There are different ways to build a nest egg - either through dividend growth investing or indexing. For example, my sibling has a busy life with 50 – 60 hours of work (both full time and a part-time), work around the house, and work looking after their kids and making sure they grow to be responsible adults. My sibling has invested in their 401K for years, and has been close to maxing it out, as their career progresses. They do not want to bother thinking about investments, track monthly net worth, etc. Of course , they also plan on accumulating a nest egg for 30 years, and are not sold on the FIRE that most here want. This is ok for them.

For my strategy, I want to earn a certain dollar income say after 2018. Dividends are a more stable, and more reliable way of living off a portfolio. Since I receive cold hard cash every 90 days or so, which also increases every year, I am more likely to stick to my strategy. It is easier to ignore stock price fluctuations, when stock prices are flat or low for extended periods of time, when your expenses are covered by dividends. I would not want to be in a position to sell shares when I need the money, and shares are flat or down for extended periods of time. I know I would hate it, and I would end up watching and stressing out over meaningless price fluctuations. However, for some retirees in 1966 – 1982, stock prices went nowhere for 16 years. Between 1929 – 1954, stock prices also went nowhere. If you only rely on capital gains to bail you out, you risk running out of money when stocks are not in favor and their prices do not go up every year. You risk running out of money if you expect to sell 4% of your portfolio each year, it has a low yield, and stock prices are flat for extended periods of time.

I am buying income that increases over time consistently. My total returns are unpredictable but my income is more reliable than capital gains, and that's what matters in my case.

Instead, I try to focus on the dividend income I receive. Dividends are more stable and predictable than capital gains, which make them ideal for my retirement plan. Dividends come from corporate profits. When Coca-Cola (KO) declares and pays a $1.32 dividend, every shareholder receives that cash. Warren Buffett's Berkshire Hathaway receives $132 million in cold hard cash every single quarter. If I were to sell shares of Berkshire Hathaway (BRK.B) or Coca-Cola (KO) to fund my retirement, it is very likely that I will sell at the worst possible time, if I needed the money. Annual Stock market returns are not predictable over short periods of time. As a future hopeful retiree, I need predictability of returns. Therefore, those who tell me they will sell off shares to fund their retirement are essentially telling me that they know the stock market will return at least 4%/year and never have a down year. The reality is that while in the next 25 years average stock market returns could be positive, it is also possible that returns will greatly vary over shorter periods of time. Creating a strategy based on expectations of stock price returns every year, seems very speculative.

I personally would have a hard time sticking to index funds only. I have followed the stock market for 16 - 17 years now. I have looked at historical returns from a variety of countries, regions, sectors spanning four centuries. When stock prices go down, it makes a lot of investors want to question their judgment. If you had to sell during a prolonged bear market like the one we had between 2000 – 2012, you will have suffered psychologically and financially. Selling more shares when prices are low, when your asset base has already shrunk, is something I would try to avoid with my retirement money.

I remember how in 2008, it was tough to watch the value of my 401K fluctuate by 7% per day on the bad days. I had no trouble checking my dividend portfolio however, where I frequently saw cold hard cash deposited in my account. This provided positive reinforcement to stick to my investment, and add more to stocks. Of course, I also added to the 401K, but I found watching only prices, and relying only on prices to achieve goals to be more speculative. I found dividend more comforting, and providing the positive feedback to stick to my strategy and not abandon ship.

Constantly checking prices could create the urge to do something. This is hazardous to long-term compounding of wealth. In addition, constantly checking performance versus a benchmark is counter-productive for a dividend investor like myself. It gives me no actionable insight to know that I have outperformed in one year but underperformed in another. Of course, using my strategy I have done better than S&P 500 since 2007 – 2008. My portfolio has also done better than portfolios that invest in US stocks, International Stocks and/or Fixed income since then.

I am not trying to say indexing is a bad strategy. The point I am trying to make is that investing without a strategy is dangerous. The investor who understands their goals and objectives, and thinks about how to get there, and how long it would take to get there, will have the strength to remain patient when things get tough. An index investor who keeps adding to their funds, and doesn’t panic when things get difficult, will succeed over time. The index investor who gets scared away, and abandons their strategy, will not succeed. The index investor who makes an investment regardless of valuation will also suffer as a result. The index investors who chased returns in 1998 – 2000 and overpaid, didn’t fare too well.

The same is true with dividend investors. Those investors who chase high yielding stocks without understanding whether distributions are sustainable, and without doing any due diligence, will not succeed. The investor who also purchases a dividend growth stock that has not been able to increase earnings for several years, is also making dangerous moves. If you are prone to using too much leverage, buying and selling too often, you are stacking the odds against you. If you are afraid to stick out for 1 – 2 years, you will not succeed in dividend investing. In addition, if you overpay for future growth, your returns will suffer as well. The dividend investor who purchased Coca-Cola or Wal-Mart in 1998 – 2000, didn’t do too well. The investor who pays over 30 times earnings for Brown-Forman (BF.B) or Starbucks (SBUX) today is reducing their odds of success.

20 comments:

  1. People are drawn to JL Collins because he makes everything seem so simple and absolute. "The market always goes up." "Everyone should just do index funds." "If I couldn't beat the market, you can't." There's truth in much of what he writes, too. And he's a great writer. That clarity and simplicity is much better than the noise most people have - they have literally no idea what they even own in their 401(k). So JL Collins' model portfolio and advice is a huge improvement over that. But that confidence and simplicity can be dangerous to many people, too.

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    1. Jim is a great writer, and also seems like a good person. If I had no idea about investing, his stock series would be one of the articles that would be helpful to me. Some people actually believe that a 401 (k) is a specific type of investment. However, the facts speak that he has routinely chased different methods of investing, so the jury is still out whether he is drawn to indexing merely because it has been the latest "hot" investment strategy. I am actively rooting that he sticks to his plan and doesn't make drastic changes in the future. The fact that he sold 25% of his portfolio just like that in 2014 however ( out REITs in VTI), makes me somewhat skeptical. Investment turnover is bad in theory - yet this is so difficult to implement in reality.

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    2. Agreed on all points.

      Joshua Kennon makes the point about the recovering alcoholic or gambler being the most fervent, and I think that is true in many cases with index investors as well. But they may relapse, too.

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  2. Hey DGI, to answer your capital gains question - I live in Canada and the stocks were held inside my RRSP so there were no tax consequences for making the switch. Don't get caught up in the 6% withdrawal rate, that is certainly not my intention. I was trying (poorly) to make the point that I could theoretically get the same $90k/year from selling $1.45M in ETFs over 30 years rather than living off dividends from a much larger portfolio (and therefore not having to save as much and for as long).

    It is not my intention to withdraw that much for my own use - it was just an example. Here's the real reason why I switched to indexing:

    1. I am the busy person you described above who simply no longer has the time to dedicate to picking individual stocks and maintaining the portfolio.
    2. I have a defined benefit pension which will provide the core of my retirement income (for life). So there's no need to build in the added "protection" that many investors want from living off the dividends only.
    3. Despite the fact that the personal rate of return of my dividend portfolio beat an equivalent ETF benchmark over the last five years, I'm betting that won't last. The easier (and smarter) play is to build a more diversified portfolio and accept market returns, minus a very tiny fee.

    Finally, I'll just say that I'm not against dividend growth investing. In fact, I think it could perform just as well as a low cost indexing strategy over the long term. I just found out that I'm not particularly good at it (my returns were more due to luck and timing than skill) and so I'd rather invest passively and then focus my efforts on building up my online business and multiple income streams.

    I hope that helps bring some clarity to my decision. I don't want to get into the dividend vs. indexing war that perpetuates on the internet. It just wasn't working for me personally, and that's the reason why I switched.

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    1. Hi Robb,

      Thanks for stopping by and leaving a comment. I was not aware that the portfolio was not taxable.

      I do not have a problem that you are an index investor now (or whether someone indexes or not). You have to do what you believe is right for you. What works for me, would not necessarily work for you – and vice versa. My issue as I mentioned is that frequently changing strategies could be costly down the road. That was the main reason behind the series. Unreasonable expectations could be costly as well.

      The way the comparison was written, the article was stating that one will A) either have a $1.2M dividend portfolio in the future or B) a mutual fund portfolio worth $1.45M. It was then stated that the retiree will be withdrawing $90k/year from the portfolio of mutual funds, and expressing concern that a $90K dividend check will be difficult to generate from a $1.2M dividend portfolio. There is a 40% chance of failure ( running out of money), when you withdraw a 6% from your portfolio every year. You need to rewrite the article, because based on what is in it today, it looks like the $90K figure from investments is the important figure. I do not believe pensions were mentioned in the post.

      If you rewrite the article however, the argument you have against living off dividends no longer seems valid.

      To be perfectly honest, if you have a portfolio worth $1M, you can possibly create a dividend portfolio generating $35K - $40K/year. Or if you really want to go the conventional way, you can sell 3.50% - 4% of the portfolio/year. A diversified stock portfolio should get “market returns” over a long period of time anyways, whether individually selected or through an index ( or at least will be pretty close). So to be really honest with you, I am not sure what the purpose of the article I quoted is then.

      Either way, I hope you succeed in your investing, and reach your goals.

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  3. Hey DGI, I have read the two articles with great attention.

    After some running after strategies for years, doing nothing for a while, I picked up investing again. To be honest, I hesitate between index investing and DGI investing. Here is my current view.
    It assumes that you stick to the strategy long enough to benefit from the underlying assumptions

    Index investing:
    Easy to implement, no special knowledge needed besides asset allocation
    Downside: in a severe bear market, you dont want to sell at a price too low compared to the value. you need other resources to life of. But this can be mitigated with holding a good part of you portfolio in bonds or cash.
    What I miss in the article: ETFs also benefit from the dividend. This is either paid out or used to accumulate. If it is paid out, it approaches DGI, albeit with on average a lower yield.

    DGI:
    Dividends are likely to be paid, even in a bear market. as such, your income is not impacted by the market drop.
    But, you need the skill and time to select the right stocks. Not a given for everyone
    What seems to be missing: what if a dividend stock stops paying or cuts the dividend in a bear market? Will you seel at the lower price then?

    Conclusion for me personally (I am in build up phase and my country has high dividend taxes and no capital gain tax)
    1- build up an index portfolio to have a well diversified asset collection
    2- with a minor part of my portfolio, discover if DGI is something for me. Will I have the time and skill to evaluate stocks myself?

    At the time that I will start to live of my portfolio, I will have to see what I do at that time. It might be that I end up with both strategies in parallel


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    1. Ambertreeleaves,

      Thanks for stopping by and leaving a thoughtful comment. The purpose of this article is to showcase that investors should pick a method, and stick to it through thick and thin.

      The truth is that index investing is just a fancy way of saying that you own a diversified portfolio of say US stocks through a mutual fund that follows the criteria for picking stocks established by Standard and Poor’s, CRSP, Dow Jones, etc. You don’t spend time, but you pay for that privilege every year.

      Dividend growth investing is a fancy way of saying that you create your own index of individually picked stocks which have certain characteristics. You spend time on that portfolio, but you learn about business, and your investment cost could be much lower.

      As for your comments you have summarized things pretty well. The point on the indexing part I will make is that if you want to include fixed income holdings to your portfolio, you will drag down its expected returns over time. Plus you will be generating more income which is taxed at ordinary tax rates, which is more tax inefficient (assuming taxable, not tax-deferred accounts).

      Yields are lower at 2% with indexes vs say 3 – 3.50% for a dividend growth portfolio. Not all companies pay a dividend, so the hope is that growth is higher with an index. But be sure to not overpay for either index or div stock. So if the true yield should have been 3% , then it seems like the index is overvalued – entry price matters. Just throwing this out, since many investors I have observed ignore valuation when they purchase.

      In the US, dividends and capital gains are taxed equally. With dividend stocks, you need some time and “skill”. Knowledge compounds over time. But I would argue that you need knowledge with index funds as well – if you have absolutely no knowledge on investing, there is a chance that you could panic when you hear a talking head on the nightly news proclaiming that stocks have crashed and will fall down further, and that the economy is about to enter a depression, which is why you would sell to make sure you don’t lose everything. What if they change the formula on indexing –if you don’t keep up with what you are buying, your results might be worse than your expectations.

      Personally, it doesn’t take me much time to manage my portfolio, but I also love analyzing companies, learning about business, and reading. I have also followed the stock market for 16 – 17 years, and read countless books on investing, trading, speculating, business. It is somewhat of a second nature at times – similar to learning a new language, and then after years of practice knowing how to apply it.
      You should do what is right for you. After all, it is your money, so you are the one whose actions will affect your retirement in the future. I would encourage you to buy your index funds in a tax-deferred account like 401(k), IRA etc.. It might be a good idea to check how DGI works for you. I would be curious to hear back from you in an year, and see how it went. Could you please promise to stop by again and let us know how it went?

      Btw I have talked about what I will do when dividends get cut before – I would allocate money elsewhere. The trick is buying businesses whose earnings streams would not be too affected by the economic cycle. Either way, I would encourage you to go through the archives and check out to see if you can find anything useful.

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    2. I will for sure look around and i will be back later!

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  4. Bankruptcy AttorneyJuly 15, 2015 at 11:12 AM

    "Instead, I try to focus on the dividend income I receive. Dividends are more stable and predictable than capital gains, which make them ideal for my retirement plan. Dividends come from corporate profits. When Coca-Cola (KO) declares and pays a $1.32 dividend, every shareholder receives that cash. Warren Buffett's Berkshire Hathaway receives $132 million in cold hard cash every single quarter. If I were to sell shares of Berkshire Hathaway (BRK.B) or Coca-Cola (KO) to fund my retirement, it is very likely that I will sell at the worst possible time, if I needed the money. Annual Stock market returns are not predictable over short periods of time. As a future hopeful retiree, I need predictability of returns. "

    I can relate to this here!

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  5. I've dabbled with and studied many different investing strategies before settling with dividend growth investing in mid 2008. As you indicated it was tough to watch my portfolio value fluctuate wildly and drop 29% in my first 8 months of DGI. The saving grace was my dividend income grew during and after the vicious downturn despite having to endure two separate dividend cuts with ING and GE. As for capital gains the market recovery had me back in the black by year end 2009. I've exceeded markets returns over the long term.

    DGI is very much a hands-on strategy of buy and monitor that can take up a lot of your free time. My wife certainly would not want to continue with DGI when I'm gone or lose my cognitive skills. I somewhat agree with your statement "I think index investing could be a great strategy for 80 – 90% of savers out there." It would be suitable for many investors but if you want an even easier option with historically better returns than the equivalent index portfolio I suggest these "one-stop" mutual funds:
    For U.S. investors - Vanguard Wellington Income Fund (VWELX)
    For Canadian Investors - Mawer Balanced Fund A (MAW104)
    Both of these mutual funds have lifetime annual total returns exceeding 8%.

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    1. Hi Bernie,

      Thanks for stopping by. It’s tough to ignore fluctuations, though the “mind trick” of focusing on fundamentals and dividend income instead, works for me.

      The dividend income deposited in my account was one of the reasons I kept being invested and adding to my dividend portfolios when things were difficult in 2008 – 2009 and subsequently in 2011.

      To be honest, I would have a hard time paying 0.26% annually from my portfolio value for management fees. That’s like a 10% tax on annual dividend income each year.

      I think that time management is of importance with DGI. There isn’t much that is changing about many of the dividend growth companies from year to year however. Most of the learning happens up-front – then annually you get factual updates. In fact, an argument could be made that a well-diversified portfolio of at least 50 – 60 dividend growth stocks could be designed and not really touched for a while. It is interesting that index investors are fine into blindly purchasing a portfolio that has a certain number of stocks that they never look at it at all, but on the other hand have reservations that monitoring their own hand selected portfolio will take all the time in the world. This doesn’t reconcile much.

      Where many investors waste time is on online forums, listening to the “opinions” of everyone. I see that on Seeking Alpha all the time. If you have already analyzed a company well, you will not benefit much by reading the 30 articles and their respective comments on Seeking Alpha about that company. On the other hand, I love reading about business, investing, economics, so I may be biased in that I do not count that time as work.

      What helps me is that I have time saving devices, such as notifications about quarterly results and dividend payments from Interactive Brokers, as well as annual reports sent to my door step by USPS. I do a lot of skimming as well and focus on what I think is important in each company.

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    2. Seeking Alpha can be brutal for cognitive bias. I have to catch myself sometimes because I will feel like I'm reinforcing my own thoughts with similar articles there, when I should be looking it over better objectively. But for updates it can't be beat. I enjoy the alerts to my email on my companies. Just got one a few hours ago that KMI increased the dividend to $0.49 - so it makes it easy to follow up and keep track of stuff.

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  6. I think you're spot on, DGI.

    Consistency/focus--like in so many areas of life--is an incredibly powerful tool for investing. One person may disagree with another on what the best policy is at any given moment. But, in general, depending on the individual once you have settled on the best policy for you sticking to it is the most important thing. Not blindly or unthinkingly, of course, but being aware that other strategies may tempt you away. But eventually, if you start following the fashion of the day (or your own personal whim) you just end up yoyo-ing around.

    Your life situation may change. At that moment it may be time to reassess your strategy. But in general, evolutionary rather than revolutionary changes to strategy are better for the long-term!

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    1. Good points DD. I believe a lot of people switch strategies because they are tempted away by easy riches.

      For example, during a raging bull market, the temptation is to chase hot growth stocks. An investor who switched from one method to the next, ends up chasing fads, "capitulating" at the worst times possible ( those investors are more likely to switch their strategy because it has temporary slump), and incurring significant turnover.

      I am happy with Dividend Growth Investing, and sticking to it. I do not think it makes sense for me to switch strategies for the foreseeable future.

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  7. @Ambertreeleaves + DGI

    Being also from Canada. I don't feel that it would be a bad strategy to simply pick an ETF like XIU. It's total cost is a measly 0.18% It has a 3% distribution and it invests in the 60 top stocks in the TSX. Plus they have programs to DRIP for free and purchase without incurring a fee each time, and also selling costs. Especially if you are first starting out these features can be very helpful. (see link)

    https://www.blackrock.com/ca/intermediaries/en/drip-pacc-swp-investment-programs

    Again I like a hybrid approach to investing, just for arguments sake and its familiar ring, a "core and explore" strategy. I also think there is not really a point to beat the Dividend vs. Indexing argument to death. Lets face it, if you researched a stock that had no dividend and you were relatively sure that it could double or triple over 5 years - why not take that opportunity? It could compliment your dividend portfolio and boost it.

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    1. Hi Paul,

      The point of this article was not to compare indexing vs dividend investing. Please review my comments to Ambertreeleaves.

      A fee of 0.18% sounds like a lot, unless you are just starting out and can buy this ETF commission free. This is a 6% tax on your dividend income you will be paying no matter what. On a $1M portfolio, this amounts to a cool $1,800/year, forever.

      If the investor has sufficient assets, say over $50K, they can easily make 60 buys, pay a couple hundred in commissions as a one time expense, and then reinvest their dividends for free.

      As for buying stocks that will go up a lot over the next 5 years - I don't buy this argument since noone knows the stocks that will double or triple in 5 years for sure. I focus on dividend growth investing, because I know this strategy well, it has served me well, and it perfectly complements my goals and objectives. I also talk about the companies I am reviewing on this site publicly. I know a lot of people who claim that they pick amazing growth stocks, but have only shared those success stories in hindsight.

      So please share with me a stock/stocks that will double or triple in the next 5 years, and let's track it. I would be happy if you prove me wrong on that.



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    2. I picked something similar for my brother who isn't into investments. He just had to plunk money into it. Works for him. I love business. I love reading about them, following them, watching them compete. I love seeing their products on the shelf. I love eating a Hershey Pull&Peel knowing I own a little chunk of them. I like seeing a dividend increase knowing it will help me beat my goal of 6% organic growth. And I love finding ways to save cash to invest. I don't want the latest iPhone, I want to spend that money on AAPL instead. Fun times!

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    3. Hi Paul,

      I don't believe Ambertreeleaves is from Canada because of her "my country has high dividend taxes and no capital gain tax" comment. In Canada we have the Dividend Tax Credit which results in very low taxes on dividend income. Also only 50% of capital gains are taxable.

      The ETF you mention (XIU.TO) does have a very low MER, by Canadian standards, but it's performance has been less than stellar because of the high mining and energy content in the TSX index. For the Jun 30, 2008 to Jun 30, 2015 period I computed these total return results:
      XIU.TO = 19.60% (all equities - 100% Cdn)
      SPY = 86.45% (all equities - 100% U.S.)
      My DGI portfolio = 118.89% (all equities - 60% Cdn, 36% U.S., 4% Int'l)
      Mawer Balanced Fund = 81.22% (70% Global equities, 30% fixed income)

      Needless to say, I'll stick with my dividend growth investing strategy.

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  8. DGI, I understand what you mean about opportunity cost of bonds, but some people cannot tolerate the volatility of a 100% equity portfolio so buy bonds to lower the volatility. That's better than panic selling in a crash. Bonds help them stay the course. Some people don't need the return they'd get from an all stock portfolio to reach their goals, so why put up with the volatility if they don' like it? It's not about he who dies with most money wins.

    Of course all asset allocation decisions are active, unless you choose the global market portfolio for all assets. But that's because it's about choosing your level of risk based on your ability, willingness and need to take risk to get to your goals. Nothing surprising about that.

    If an active manger chooses to hold some cash, that is his active decision. If it's supposed to be an equity fund, then of course his performance should be compared to an equity index.

    The fact that 90% of people can not beat the market means that it is therefore a loser's game. The best way to wins a loser's game is not to play.

    I'm certainly not trying to change your mind. Just read the evidence in the literature. Investment decisions should be based on evidence not opinions or beliefs. It's a science, not a religion.

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    1. Physics is a science.

      Investing is not a science. When someone approaches investing and asks for precision, they have a lot to learn.

      Indexing is sold as a religion, and has countless followers who obey it without question. This is dangerous. It clouds the judgment of participants. And for your record, there is not a comprehensive study that proves that indexing beats 90% of ALL market participants. The study you are mentioning is the one with the mutual funds, but they are not ALL participants, just a part of them.

      I will post the three examples again. You have failed to refute them with your examples – you cannot because your logic is flawed.

      When the “studies” show how bad supposedly individual investor returns are, they are not accounting for the fact that investors have fixed income or cash in portfolios. Therefore, these “studies” look at overall performance of active portfolios and compare them to what return could have been had the person simply purchased S&P 500 index fund. I have a brokerage account where I mostly held certificates of deposit for the past 5 – 6 years, and made a couple of equity investments. If this account was part of a “study”, I would have been used as an example that ordinary investors should not be picking stocks.

      Using those studies for “inspiration”, on active vs passive, and on overall portfolios, I come up with the conclusion that Bogle did worse than the benchmark. Having too much bonds is an active decision that Bogle made, and if he was part of the study measuring investor returns, his performance would have been rated as “mediocre”.

      Another comparison by index funds is that not everyone can beat the market. Hence, you should not invest on your own, right? But this argument is bogus. It can be turned around to say “ not everyone can be a doctor, hence you should not even try”. So if only a minority of people can become doctors, then why did you become a doctor?

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