Friday, 4 December 2015

Change of tack?

I saw this article not long after I’d posted my thoughts on how I like dividend investing – I like to think I’m not so proud to think I know it all, it was chastening to think that my approach was wrong. However, rather have a knee jerk reaction, I just let it sit at the back of my mind, then I lost the link to the article… but now having found the article and had a bit of time to consider, I will be sticking to my approach.

The way Financial Samurai is advocating makes perfect sense, however, it is also the way a lot of people underperform. I dare say that everyone would be following a strategy which identified future Amazon, Google and Apple type returns, but such continued foresight is surely all but impossible in reality?

Even if you were able to latch onto a massive winner how long would you hold on to it? 300-500%... 1000%? Would you get worried in a correction and sell your winner to lock in the great gain? Not unreasonable to do so, but then you’ve got to find another and another and finding those multi-bagger winners has to happen quite frequently and kissing lots of frogs will just cost you money and time. Even dialing it back in and saying you’re trying to beat the market is a massive undertaking which most individuals fail at.

But say you do chase growth and build up the pot more quickly when you hit your escape number, or are approaching it, you then need to transition to income producing shares which leads to a potentially very substantial capital gains hit once you’re at that level of wealth (though potentially a large one off capital gains tax charge may be less than the cumulative tax paid on dividends received over the same period and ISA’s would help), but aside from that you also may feel that you are changing at the wrong time in the cycle and buying dividend paying shares when they’re expensive and locking in downside risk as well as potential loss of income, perhaps you think you can manage your early retirement by selling units of your growth stocks and relying on the price rising sufficiently all round to maintain your strategy. The risks of this are clear, but it also means your income is far from passive and if you’re able to do this successfully, you could get paid a lot of money to do it full time! Who doesn’t love that bit of irony!

This isn’t to say that only stolid unimaginative companies should be bought where the only attraction is a dividend, any company must have growth potential otherwise that dividend can’t / won’t be increased and will probably end up being cut.

I like seeing the value of my shares rise, who doesn’t, however, I love dividends hitting my account each month and seeing progressive growth year on year! It allows me to fly off to the time when different sources of income translate into something firm on which to take the plunge and quit work. I also know I don’t have the skill to consistently pick successful growth stocks and then pivot from one strategy to another. This self-awareness, hopefully, protects me from making really wild punts on The Next Big Thing in a bid to boost my overall net-worth.

To my relatively conservative mind a good strategy gets you from A to B; where B is realistic, achievable and one you would be happy with and the process of getting there is the same. Yes you want to get there quickly and aim high, but in seeking shortcuts by targeting high growth sectors, shares or funds in an overly aggressive or concentrated way can land you back at square one, or worse, in short order – better to focus on spending less and investing more than chasing future unicorns. 

Update: 10/12/2015 - as if by magic someone far more qualified than me pipes up with a similar sentiment.

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