What Strategy Works For You?

MoneyHeadEver wonder why so many young people are afraid to start investing? If you read the financial sites online, or watch the financial news networks, the answer becomes clear. There’s lots of so-called experts telling us what to do with our money. Some advice is over simplified and inadequate. Other advice is unnecessarily complex. For someone just getting started, all the varying information can be intimidating.

An Accidental Dividend Growth Investor

In 1995, my uncle gifted me one share of Chevron (CVX) stock for my birthday. I was 21 and it was my first real investment. On his advice, I began investing my own money into the stock, slowly buying more shares by adding small dollar amounts on a regular basis, a strategy known as dollar cost averaging. It’s very good fortune that my uncle’s employer was one of the best dividend growth companies over the past 20 years, and not Enron or MCI/Worldcom. You could say I’m an accidental dividend growth investor.

Not long after I started investing through the Chevron dividend reinvestment plan (DRIP), I bought my first share of Coca-Cola (KO), paying a broker a $50 fee to buy and transfer it to my name so I could participate in that DRIP too. After buying a second share through the DRIP, I gifted one share to my Dad for Christmas so we could participate together.

Click here to read my post CVX and How I Started Dividend Investing. 

Click here to read my post Patience Pays – 16 Years of Buying and Holding Coca-Cola.

If you read through those posts and look at my holdings today, maybe you’ll agree that investing this way has worked for me. The yield on cost (YOC) for my Chevron holdings is 9%. For Coca-Cola, 5.88%. My returns for both stocks have more than doubled.

Dollar cost averaging and dividend growth investing over time are strategies I’m comfortable with, despite not being perfect. Active traders probably think this is loser’s way to invest. You’ll never get rich buying and holding Coca-Cola for 17 years – why waste your time with long-term investing? You should’ve just bought GoPro (GPRO) back in June for better returns!

A Tired Debate

I recently tweeted a must read article that I saw on my Blogfeed. Ben over at A Wealth Of Common Sense wrote another excellent piece, this time pointing out that any argument about investment returns can be won by simply changing the range of dates. Click here to read it.

Over the last 3 years the S&P 500 is up over 21% per year, while the 5 year returns are almost 16% annually. It’s been on fire. But if you go back 15 years to include both the tech bubble and the Great Recession, the S&P is only up around 4.3% a year.

The same can be said for different investing strategies. You can probably formulate an argument for or against just about any investment method buy changing the dates. Surely over some period of time, each one is a winner.

And every strategy has its cheerleaders. You’ll hear things like “Buy and hold is dead, options trading is the way to create alpha”, or Why bother with stocks, BUY GOLD!”, or “Start trading FOREX now for out-sized gains”, or “This penny stock is about to explode!”, or “If you call yourself a Boglehead, how dare you invest in individual stocks?”, or “Two words, bro: emerging markets”.

If you can make good money trading FOREX, awesome. The same goes for penny stocks, gold, or options. If you know the risks, do your research and execute a strategy that works for you, go with it. Someone out there is beating stock market returns using these strategies. Maybe you can too, or you’ll learn a tough lesson trying.

The key for all investors is to find what strategy works for YOU, execute, and adjust it as necessary.

What Works For Me

You’ll find plenty of strategies out there to mimic. But as they say, personal finance is personal. Someone else’s beliefs and investment philosophies may seem sound, but may not match your needs and risk tolerance. So absorb all the advice and strategies you can read out there with a grain of salt, then formulate your own plan based on your objectives.

My general investment strategy is to build multiple streams of income so I am diversified and can live off of the income in retirement. I practice a few methods of investing in equities. In retirement accounts, I mostly invest in index funds and ETFs. I’d rather set it and forget it and not worry about beating the averages. In taxable accounts, I’m building dividend income by choosing companies with a history of dividend growth. I buy chunks of shares in my TD Ameritrade account when I see value in a particular stock (like my recent Parker Hannifin purchases), and I continue to dollar cost average into individual stocks through Computershare and in my no-fee portfolio with Loyal3.

Dollar cost averaging fits well into my investment horizon, my day-to-day lifestyle, and the amount of time I have to do research. It supplements the bigger and less frequent stock purchases I make throughout the year. I like it because by investing at regular intervals over a long period of time, I’m not always trying to guess tops and bottoms. I’m always in the game, whether a market crash is imminent, or a bull market has no end in sight. I won’t bore you with the math of it, but there’s some advantages there too. Like all strategies, dollar cost averaging is not perfect, but I know and understand the risks and disadvantages.

The Debate Continues

There’s plenty of choices when it comes to what investing tools to use, be it Loyal3 vs. Motif Investing vs. Betterment, Fidelity vs. Vanguard, e*Trade vs. TD Ameritrade vs. Schwab etc. etc. The vehicle you choose will not make a huge difference. Sure, fees eat away at returns over time so we want to minimize them. But all of the brokerages out there are competing for your assets by offering a compelling service. If you are happy with your platform, saving a dollar or two per trade is probably not worth moving to another.

Keep in mind, by investing in stocks using whichever method and platform you choose, you are well ahead of those that are not investing, which, by the way, is the majority of humanity. If you are actively adding cash to your stock portfolio, you are choosing today to invest in your future. And if you diversify, you lower your overall risk, helping to tame fluctuations that come with market swings. Diversify your broader income streams beyond stock investing and you’ll lower your risk even more.

And, of course, don’t forget the one piece of investment advice that every expert agrees on: start early.

The Amoeba Strategy

Another key to investing is to read as much as you can, actively monitor your strategy and objectives, then adjust your plan as needed. If you’re not regularly tweaking and refining your strategy, that’s when you fall behind. This can be as simple as reallocating a 401k, selling a losing stock, or adding a new type investment to your portfolio. Always keep in mind that the strategy you deploy today will likely need to change in the future.

And that’s good, because your knowledge and life situation will change too.

You may begin your investing journey by way of mutual funds because they are in your company’s 401k. Then maybe you buy some ETFs in a brokerage account, then stocks. As you learn and understand more, you may add option buying and selling to your repertoire. Kids are ready for college, time to change the strategy. Maybe at a certain age you’ll start buying a lot of bonds.

A lot happens over a lifetime. One strategy does not fit all.

Final Thoughts

Reading through investment research, other blogs and finance sites, or watching financial television, I see investors and professional money managers clamoring about what strategy is the be all and end all – pure indexing, frequent trading, growth stocks, options trading, dividend growth etc. The truth is, many people are successful at many different strategies over various time periods. There’s lots of ways make money through investing, and plenty of people to tell you which way is best.

If you’ve made it this far down the post, and are looking for one more finance guy on the internet to give you some advice, I’ll offer you mine:

Start early. Find what strategy works for you. Adjust as needed.  

Image courtesy of 2nix at FreeDigitalPhotos.net

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12 Responses to What Strategy Works For You?

  1. Income Surfer December 3, 2014 at 7:24 am #

    Nice post RBD. Long term dividend investing, in conjunction with generating multiple streams of income, has worked out very well for you. Something for most people to strive for. Have a great day buddy
    -Bryan

    • Retire Before Dad December 3, 2014 at 7:56 am #

      Hey Bryan… Thanks. I try not to preach here. Dividend growth and DCA have worked for me, but it’s not the only game out there. I’ve learned I’m not a good trader over the years. Gotta stick to what gets result.
      -RBD

  2. No More Waffles December 3, 2014 at 8:02 am #

    RBD,

    Excellent post, really liked reading through it.

    In my book, there’s just one really good strategy: the one you’re most comfortable with. What everyone else tells you doesn’t matter in the slightest.

    Let’s hope dividend growth investing is as kind to me as it is to you!

    Best wishes,
    NMW

    • Retire Before Dad December 3, 2014 at 9:58 am #

      No More Waffles,
      Thanks. A lot of us think DG is the way to go. I’ve learned over time it’s my best bet to build income. It also fits my lifestyle and career well. Investing is not a full time endeavor for me. If it was maybe my strategy would change.
      -RBD

  3. Dividend Mantra December 4, 2014 at 9:51 am #

    RBD,

    Great post. Totally agree.

    In the end, there’s many ways to make money. You could make a case for many of them, especially over long periods of time. But the important thing is to do what works for you and your goals, and get really good at it. Like my individual investments, I like to think of DGI as within my circle of competence. FOREX? Not within my circle of competence. Maybe some can make good money, but I’d probably end up losing mine to those making theirs. No, thanks. A rising passive income stream that’s funded by the rising profit of high-quality companies is something I can understand and get behind, so that’s where I’m at.

    Best regards!

    • Retire Before Dad December 4, 2014 at 10:03 am #

      DM,
      Thanks. I like the term circle of competence. I used to think mine was wider, thinking I could figure out long term trends and buy growth stocks based on what I’d read. Sometimes that works. I bought into LED lighting years ago and made some money. But eventually I was humbled and lost money because certain growth stocks will get hit hard when suddenly they are out of favor with traders. Now I prefer more boring companies, like UTX and PH. Traders mostly avoid these, missing out on the dividends I crave.

      It’s taken years to learn my strengths. Investors just starting need to find their strengths and go with it.
      -RBD

  4. Michelle December 4, 2014 at 8:00 pm #

    I am one of those young people who are too scared to invest. I am just too nervous and feel that there is too much risk. Any advice would be appreciated.

    • Dividend Harvester December 5, 2014 at 10:27 pm #

      Michelle- What exactly are you nervous about? Nervous that if you purchase $2,000 worth of stock that the “value” will go down in a week? Investing is not a short term venture. My 7 year old has a portfolio worth almost $9,000 paying almost $300 a year in dividends; he actually gets excited when I tell him he’s an owner of a company.

      Do you put money into a savings account? Investing this way is really no different and I think it’s almost just as safe. You have to look less at the “market value” of the investments and more at how much income it will produce for you. The main difficult thing right now is that quite a lot of the major DGI stocks are quite overpriced right now and finding a short term value is a little difficult with most at all time highs.

    • Retire Before Dad December 6, 2014 at 3:33 pm #

      Michelle,
      I think the advice I mention in the post applies. Get started, slowly. Get a feel for what makes you comfortable. If you have a 401k, start with that, or an IRA or Roth. Buy simple market index ETFs that fluctuate with the market. Or, you can even start buying individual stocks through a simple brokerage (I recommend Loyal3 for both beginners and intermediate investors). You can always hire an adviser, but with a small amount of money, you’d best invest on your own using simple platforms.
      -RBD

  5. Evan December 8, 2014 at 2:21 pm #

    I always like to say if there was any one singular type of investment strategy that always worked – then other types wouldn’t exist.

    Despite actively investing for a while I sometimes stray and buy a non-value oriented dividend growth stock and each time I have buyer’s remorse lol. I get so mad at myself, but I have it mostly under control lol

  6. Mr. Captain Cash December 20, 2014 at 6:42 am #

    RTD,

    Great post I really enjoyed it. I’d have to agree your final points and with NMW that there is only one good strategy which is the one your comfortable with and completely understand. I myself am a fan of having a diverse index portfolio with rebalancing through additional investment purchases.

    Happy Holidays

  7. jackiebolen January 23, 2015 at 9:03 pm #

    I’m also an advocate of the multiple income streams. Putting all your retirement eggs into one single basket is kind of a frightening prospect. Even more scary is people that put all their eggs into the “government will support me” basket and don’t save enough of their own money.

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