Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
SDS, thank you for your comment. You're right that dividend investors are naturally valuation sensitive because they're looking for yield (or projected yield, for dividend growth investors), and that will prevent self-re-inforcing bubbles.
While "bubble" is therefore the wrong term, there's still a risk that dividend stocks generally become overvalued relative to non-dividend paying stocks.
The problem is that interest rates are being kept (artificially?) low by the Fed. With bonds essentially yielding nothing, *any* dividend yield may look attractive relative to bonds and non-dividend paying stocks.
Richard Shaw just did an excellent analysis of whether dividend stocks are overvalued: http://bit.ly/AjLoQW
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Smarty_Pants,
Perhaps the key issue here is ease of risk management. Sometimes stock picking distracts you from focusing on the real sources of risk in your portfolio. See http://seekingalpha.co...
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
SmartyPants, thanks for mentioning "Market Wizards" by Jack Schwager. I read it a number of years ago, and remember that I tremendously enjoyed it, but hadn't remembered the frequent insights about risk management. Thank you for the reminder!
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Cam,
Agree -- the strategy you outlined is particularly powerful in taxable accounts, where the cost of incurring capital gains might outweigh the benefits of rebalancing. Dividend stocks would be equally inefficient in taxable accounts, as you'll be paying tax on the dividends.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
giorgiolb,
On "John Bogle became quite rich selling index funds, so it's no surprise he feels that way":
You're right to be mindful of someone's self-interest when evaluating their advice. People are often affected by self-interest even without realizing it.
On the other hand, the best businesses are created by people, like Steve Jobs, who passionately believe in their products and generate enormous value for their customers.
I think John Bogle falls into the category of people who passionately believe in their product for all the right reasons. You get a strong sense of that when you read his book "On Investing", included in my list of The Best Investing Books Of All Time here: http://bit.ly/xQx0bM
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Lawrence, thanks for the links and resources. I was particularly interested in backtests of different rebalancing strategies. William Berstein article tests different frequencies for rebalancing, but I haven't seen anyone comparing periodic rebalancing to rebalancing triggered by deviations from target allocation.
Here's an idea I raised in the ETF Guide: You rebalance when allocations get seriously out of alignment with your target, and you then over-adjust. For example, if you're targeting 10% of your portfolio for US large caps and they become 15%, ie. a 20% deviation from your target, you then cut them back to 8%. The reasoning being: - swings in asset classes tend to have momentum, so let it ride to somewhat (in this case all the way to a 20% deviation from target); - rebalancing is based on an assumption that asset classes revert to mean trend. By "overcompensating" in the other direction, you're cutting back on an asset class that has become overvalued.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
chowder, thanks for your comment. I know this is off the investing topic of the article, but I just wanted to say: Congrats on your daughter making the Dean's List and winning a full scholarship. I'm sure you're proud!
I can see that with small amounts, a DRIP works. And as David Fish says in a separate comment, learning the power of compounding is an important educational message.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
katgod, thanks for your comments, and your point that in smaller accounts the number of trades you make is critical, so if you use ETFs you need to limit the number.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
DF,
Since Chowder said that every time his daughter accumulates $1k he adds another position, wouldn't it be better to add the dividends to that cash so she gets to the $1k faster, and then make an informed decision about which is the most attractive stock to buy? The incremental trading cost would be zero.
Re. your comment about deciding a stock is a worthy long term investment and adopting an "ownership" mentality: Does that mean you don't sell stocks due to valuation? For example, if the stock price doubled and the yield halved, and you could find other stocks with the same growth characteristics at double the yield, would you still hold the original stock? I'm asking this so I can better understand how you see things.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Robert, not sure I understand your comment. Dollar cost averaging lowers the average cost relative to what?
A DRIP means that you're committing to buy that stock, whatever the price, and foregoing comparing it to other stocks that might be more attractive.
I understand why someone who buys an index fund might say "I'm not interested in picking stocks", but if you're a stock picker (in this case you're buying individual stocks) why would you say "but I'm not a stock picker when I re-invest my dividends"?
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Chowder, thanks for sharing that. The strategy you described seems risky. If one of those stocks blows up, she's lost 1/6th of her portfolio. If two blow up, that's 1/3.
I must admit I also don't understand the rationale behind automatic dividend reinvestment. It says "re-invest the dividend in this stock whatever the stock price". Why should an investor be totally indifferent to the price you buy stocks at?
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Cam, I've found very little literature on rebalancing. Perhaps the key is to choose whichever of the two approaches (periodically or based on deviation from target allocation) you feel you're most likely to stick with. Many people find it hard to rebalance into an asset class when it's fallen a lot, so periodic rebalancing might be easier for them.
If anyone knows of any good literature on rebalancing, please leave a link!
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
jakefountain, I don't think the amount you have should determine how many stocks you should hold. For people who have $25k in savings, that sum will be crucial to them, so why should they risk a 50% drop more than someone with $1m in savings?
The problem about smaller account sizes is that with trading fees based on a flat rate such as $10 per buy or sell, smaller accounts lose a higher percentage to trading costs than larger accounts. That's why ETFs or index mutual funds might be even more attractive for smaller accounts.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
gobraves39401, thanks for your comment. Rebalancing between asset classes is a no-brainer in a 401k, because there are no tax consequences. There are a variety of views about how exactly to rebalance. I described some of them here: http://seekingalpha.co... Hope you find that helpful.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Lawrence, thanks for laying this out so clearly. I agree that this isn't a matter of "personal taste" or "different strokes for different folks". Rather, investment strategies can be back-tested empirically, and some perform better than others.
At the same time, many people have lost confidence in financial advisors and money managers, and therefore need to manage their own money. For many of them, the asset allocation strategy supported by the data doesn't work psychologically or emotionally, and that removes it as an option.
On SPY and VTI, the performance is remarkably similar. (As a cap weighted index, VTI is dominated by its large caps.) So are they really so different?
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
While "bubble" is therefore the wrong term, there's still a risk that dividend stocks generally become overvalued relative to non-dividend paying stocks.
The problem is that interest rates are being kept (artificially?) low by the Fed. With bonds essentially yielding nothing, *any* dividend yield may look attractive relative to bonds and non-dividend paying stocks.
Richard Shaw just did an excellent analysis of whether dividend stocks are overvalued: http://bit.ly/AjLoQW
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Perhaps the key issue here is ease of risk management. Sometimes stock picking distracts you from focusing on the real sources of risk in your portfolio. See http://seekingalpha.co...
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Agree -- the strategy you outlined is particularly powerful in taxable accounts, where the cost of incurring capital gains might outweigh the benefits of rebalancing. Dividend stocks would be equally inefficient in taxable accounts, as you'll be paying tax on the dividends.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
On "John Bogle became quite rich selling index funds, so it's no surprise he feels that way":
You're right to be mindful of someone's self-interest when evaluating their advice. People are often affected by self-interest even without realizing it.
On the other hand, the best businesses are created by people, like Steve Jobs, who passionately believe in their products and generate enormous value for their customers.
I think John Bogle falls into the category of people who passionately believe in their product for all the right reasons. You get a strong sense of that when you read his book "On Investing", included in my list of The Best Investing Books Of All Time here:
http://bit.ly/xQx0bM
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Here's an idea I raised in the ETF Guide: You rebalance when allocations get seriously out of alignment with your target, and you then over-adjust. For example, if you're targeting 10% of your portfolio for US large caps and they become 15%, ie. a 20% deviation from your target, you then cut them back to 8%. The reasoning being:
- swings in asset classes tend to have momentum, so let it ride to somewhat (in this case all the way to a 20% deviation from target);
- rebalancing is based on an assumption that asset classes revert to mean trend. By "overcompensating" in the other direction, you're cutting back on an asset class that has become overvalued.
Interested in thoughts on this...
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
I can see that with small amounts, a DRIP works. And as David Fish says in a separate comment, learning the power of compounding is an important educational message.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Since Chowder said that every time his daughter accumulates $1k he adds another position, wouldn't it be better to add the dividends to that cash so she gets to the $1k faster, and then make an informed decision about which is the most attractive stock to buy? The incremental trading cost would be zero.
Re. your comment about deciding a stock is a worthy long term investment and adopting an "ownership" mentality: Does that mean you don't sell stocks due to valuation? For example, if the stock price doubled and the yield halved, and you could find other stocks with the same growth characteristics at double the yield, would you still hold the original stock? I'm asking this so I can better understand how you see things.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
A DRIP means that you're committing to buy that stock, whatever the price, and foregoing comparing it to other stocks that might be more attractive.
I understand why someone who buys an index fund might say "I'm not interested in picking stocks", but if you're a stock picker (in this case you're buying individual stocks) why would you say "but I'm not a stock picker when I re-invest my dividends"?
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
I must admit I also don't understand the rationale behind automatic dividend reinvestment. It says "re-invest the dividend in this stock whatever the stock price". Why should an investor be totally indifferent to the price you buy stocks at?
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
If anyone knows of any good literature on rebalancing, please leave a link!
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
The problem about smaller account sizes is that with trading fees based on a flat rate such as $10 per buy or sell, smaller accounts lose a higher percentage to trading costs than larger accounts. That's why ETFs or index mutual funds might be even more attractive for smaller accounts.
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
Investing For The Long Term: Dividend Growth Stocks Or S&P 500? [View article]
At the same time, many people have lost confidence in financial advisors and money managers, and therefore need to manage their own money. For many of them, the asset allocation strategy supported by the data doesn't work psychologically or emotionally, and that removes it as an option.
On SPY and VTI, the performance is remarkably similar. (As a cap weighted index, VTI is dominated by its large caps.) So are they really so different?