What I Know About InvestingGuest Post
I started Sure Dividend in March of 2014. Over the years – both before and after starting Sure Dividend – I've learned a few lessons about the stock market.
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Some of these lessons were painfully learned through experience. Others were learned through examining what has worked historically.
#1: Always, Always Keep Costs In Mind
In most areas in life, the saying "you get what you pay for" rings mostly true. No one wants to hear that their brain surgeon is 'not that bad at what he does, but he is the cheapest'.
That's not the case with investing. for a few reasons. First, every dollar spent on managing your investment account is a dollar that is no longer compounding for you. It's a direct trade off. The more you pay, the less money you have. And the point if investing is to make money.
Second, it's important to be aware of the incentives that different costs create. Does your brokerage make money when you buy and sell stocks? Then they probably try to influence their customers to buy and sell quickly. Does your financial advisor make more money when you buy a mutual fund with a high sales commission? Then it's likely those higher commission funds will at least get discussed.
Third, keeping costs low is the one area of investing that is almost completely under your control. You can cut costs, but you can't guarantee better performance from your investments in any other way.
#2: Invest For The Long Run
Since most of the investing industry (but not all) is incentivized by trading, there's a push to trade more frequently.
Beyond that, trading makes us feel like we are doing something, like we have some control over what happens next with our investments. But that's not the case. You have an equal amount of control (none) over the stock price of the stock you most recently purchased, versus one you purchased years ago.
Warren Buffett says to only invest in businesses you'd be happy to own if the market closed down for several years. This is an excellent test to run on your investments. Are you investing because you believe in the future of the business and want to be partner in the business... Or are you investing because you hope the stock price will be up next week?
The reasons long-term investing works are:
- Reduces trading costs
- Allows money that would be paid as capital gains taxes to continue compounding
- Forces you to think like a business owner instead of a stock trader
#3: Base Your Investments on Expected Real Total Returns
As noted earlier, virtually everyone invests to make money (or at the very least, to not lose money).
What does 'making money' mean? The real growth of your wealth is measured by after-tax, after inflation total returns. Total returns include both dividends and capital gains.
Therefore, investors should focus on expected total returns when making their investments. In the stock market, returns can come from only 3 sources:
- Dividends (or distributions, etc.)
- Growth on a per share basis (earnings-per-share growth as an example)
- Increase in a valuation multiple (a rising price-to-earnings ratio as an example)
There's no other place returns are going to come from with investing. Based on the above formula, the ideal investment is a high yielding, fast growing stock that appears undervalued (good luck finding that unicorn!).
In reality, most stocks will generate the bulk of their returns from only 1 of the sources above. 'Dividend socks' tend to have high yields, 'growth stocks' have fast growth rates, and 'value stocks' have low valuation multiples. But these distinctions aren't really useful - what is useful is comparing stocks based on expected total returns over a multi-year period.
#4: Diversify, But Don't Over Diversify
It makes very little sense to put all of your money into just 1 or 2 stocks... Even if they are very likely to perform well. The chance that something bad happens to any 1 stock in the future is too great.
Reasonable diversification is focusing on owning 20 to 30 or so (there's no 1 exact perfect number) stocks. This gives you nearly all the diversification benefits of owning hundreds of stocks, while still giving your portfolio reasonable concentration in your best ideas.
#5: Prepare Yourself To Hold During Recessions
Most investors want to buy low, and sell high.
The sad reality is that when we see a stock price go down, our natural instinct is to sell. If virtually the whole stock market is down, maybe its time to get out of stocks altogether.
This type of thinking is probably the single biggest destroyer of individual investor wealth in the stock market. It is based in thinking only about price, and not about value.
Think about it... If a stock was a good buy at $50/share, and the whole market collapses and the stock is worth $25/share now, it is a much better buy. You literally get twice the value for every dollar invested.
Even if you don't have funds to add to the market during a recession, holding is greatly preferable to selling. Panic selling transfers money from those investing to make a quick buck to long-term investors looking to buy into great businesses at bargain prices. It's completely your choice what type of investor you want to be.
Important News From Sure Dividend
If you read the section above on costs, you know that our incentive as an investment information provider is to have people join our newsletters - and then stay along as readers because the value from our newsletters is far greater than the cost.
At Sure Dividend, we are about long-term investing. It isn't as flashy as trading, but our readers appreciate our focus on investing in a way we feel is best.
In order for us to thrive as a company, we have to live up to a high standard of excellence in our investment information, because we focus on a less flashy area of investing.
And, we want as many people as possible to benefit from the wealth compounding effects of investing in great dividend stocks trading at fair or better prices.
To that end we are currently offering a deep discount on each of our 3 newsletters...
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