Today, I wanted to share nine lessons that I have learned about successful investing over the past decade and a half. Those were learned from personal experience, through my interactions with readers and through observations of other investors.
1) Diversification matters.
Diversification is the only free lunch out there. This means holding as little as 40 – 50 individual companies from as many sectors as possible. Diversifying over time helps build the discipline to allocate money in the best ideas every single month. By slowly building out a dividend machine over time, you will end up with a portfolio that is well diversified, since different companies and sectors are available at different points of each economic cycle. Having some allocation to fixed income in retirement could be helpful as well, though not as helpful in the accumulation phase.
2) Patience is important.
I believe that successful dividend investing requires patience. It helps you avoid paying excessive costs to brokers and taxes to governments. It allows you to enjoy the full power of compounding for your capital and dividend income. My review of the Corporate Leaders Trust fund offers a compelling case behind building a portfolio of solid blue chips, and then leaving it alone.
3) Stick to your strategy
The ability to have a strategy and stick to it through thick or thin is underrated. Switching to something else because someone has done better over an arbitrary period of time will be costly down the road. Make sure this strategy fits your personality. Staying put can deliver better results than jumping ship all the time. My review of this fund showed a perfect example about this. The best strategy is the one where you will hold tight, when things are tough, when everyone else seems to be (temporarily) making more money than you. When you want to switch, this is usually the time to double down.
4) Keeping investment costs low
You need to keep costs low. This includes taxes, brokerage fees etc. The less money you spend at your broker, or at Uncle Sam’s, the more money you will have working for you. It is a no-brainer. A patient dividend investor, who leaves their portfolio alone, will have a lower cost of investing than the lowest cost fund out there. Lower turnover has been shown to correlate with high returns for patient investors in solid blue chip dividend stocks. If you have a $100,000 portfolio consisting of 50 individual securities, and you have paid 50 brokerage commissions to buy and hold those companies forever, your costs will be low if you never sell.
5) Avoid micromanaging your investments
Investors should not micromanage their investments. Just because a company or an industry has had a bad quarter or an year, that doesn’t mean this problem will persist forever. You need to pick a diversified selection of businesses, and let them do the heavy lifting for you. Some will fail outright, while others will deliver miraculous things – it is impossible to know which ones will do what in advance however. This is why any time spent worrying may pressure you to sell something that is just about to turn the corner, and buy something else that is just about to falter. In 9 out of 10 situations where I sold for any “good reason”, I would have been better off simply doing nothing. The investors who do rebalancing are also guilty of too much micromanaging.
6) Avoid noise.
Too many people worry about the economy, jobs, the markets etc. This is useless information for you. No one can time the markets successfully. Therefore, do not try to pick tops or bottoms. Just have an investing strategy for the long-term, and ignore everything else that may prompt you to do anything. Time in the market beats timing the market.
7) Focus on things within your control.
You have more control over your savings rate, what you invest in, your holding period and your costs, than your investment results. But if you stick to it long enough, good things may happen to you.
This includes selecting and sticking to an investment strategy through the ups and downs. It also means holding patiently, in order to let the power of compounding do the heavy lifting for you. It also means keeping taxes low, by maxing out retirement accounts ( and getting employer matching dollars). If you hold patiently to investments, your commission costs will be low.
8) Avoid experts and their opinions.
I have found that the smartest sounding people are usually pretty bad investors. I have found that most experts out there are good at marketing themselves and sounding smart, rather than making money. It is much easier to make money talking about investments, rather than earning dollars by investing money. This is why you need to be skeptical about investment experts, because they usually have an agenda to sell you. You are the only one who truly cares about your money.
9) Try to improve all the time.
This means looking at strategies that are different than yours, and learning from people who share different opinions from you. I spent a decade looking at ticker tapes, reading books on different strategies before I decided on dividend growth investing. Buying companies with growing dividends is an idea taken from trend following and momentum. Buying and Holding diversified portfolios with low turnover is an idea taken from indexing. Buying companies at attractive valuations, while trying to avoid overpaying is an idea taken from value investing. My edge is in buying a diversified portfolio of quality dividend stocks at attractive valuations, and then holding on to them tightly for decades. In a world where everyone has a short attention span, and everyone is worried about losing a fraction of a penny to high frequency traders, it pays to invest for the long term. Trying to improve can pay off larger dividends and capital gains for you down the road.
Relevant Articles:
- Use these tools within your control to get rich
- Are you patient enough to become a successful dividend investor?
- Dividend Portfolios – concentrate or diversify?
- My Dividend Growth Plan - Diversification
- Dividend Investing Knowledge Accumulates Like Compound Interest
I believe that successful dividend investing requires patience. It helps you avoid paying excessive costs to brokers and taxes to governments. It allows you to enjoy the full power of compounding for your capital and dividend income. My review of the Corporate Leaders Trust fund offers a compelling case behind building a portfolio of solid blue chips, and then leaving it alone.
3) Stick to your strategy
The ability to have a strategy and stick to it through thick or thin is underrated. Switching to something else because someone has done better over an arbitrary period of time will be costly down the road. Make sure this strategy fits your personality. Staying put can deliver better results than jumping ship all the time. My review of this fund showed a perfect example about this. The best strategy is the one where you will hold tight, when things are tough, when everyone else seems to be (temporarily) making more money than you. When you want to switch, this is usually the time to double down.
4) Keeping investment costs low
You need to keep costs low. This includes taxes, brokerage fees etc. The less money you spend at your broker, or at Uncle Sam’s, the more money you will have working for you. It is a no-brainer. A patient dividend investor, who leaves their portfolio alone, will have a lower cost of investing than the lowest cost fund out there. Lower turnover has been shown to correlate with high returns for patient investors in solid blue chip dividend stocks. If you have a $100,000 portfolio consisting of 50 individual securities, and you have paid 50 brokerage commissions to buy and hold those companies forever, your costs will be low if you never sell.
5) Avoid micromanaging your investments
Investors should not micromanage their investments. Just because a company or an industry has had a bad quarter or an year, that doesn’t mean this problem will persist forever. You need to pick a diversified selection of businesses, and let them do the heavy lifting for you. Some will fail outright, while others will deliver miraculous things – it is impossible to know which ones will do what in advance however. This is why any time spent worrying may pressure you to sell something that is just about to turn the corner, and buy something else that is just about to falter. In 9 out of 10 situations where I sold for any “good reason”, I would have been better off simply doing nothing. The investors who do rebalancing are also guilty of too much micromanaging.
6) Avoid noise.
Too many people worry about the economy, jobs, the markets etc. This is useless information for you. No one can time the markets successfully. Therefore, do not try to pick tops or bottoms. Just have an investing strategy for the long-term, and ignore everything else that may prompt you to do anything. Time in the market beats timing the market.
7) Focus on things within your control.
You have more control over your savings rate, what you invest in, your holding period and your costs, than your investment results. But if you stick to it long enough, good things may happen to you.
This includes selecting and sticking to an investment strategy through the ups and downs. It also means holding patiently, in order to let the power of compounding do the heavy lifting for you. It also means keeping taxes low, by maxing out retirement accounts ( and getting employer matching dollars). If you hold patiently to investments, your commission costs will be low.
8) Avoid experts and their opinions.
I have found that the smartest sounding people are usually pretty bad investors. I have found that most experts out there are good at marketing themselves and sounding smart, rather than making money. It is much easier to make money talking about investments, rather than earning dollars by investing money. This is why you need to be skeptical about investment experts, because they usually have an agenda to sell you. You are the only one who truly cares about your money.
9) Try to improve all the time.
This means looking at strategies that are different than yours, and learning from people who share different opinions from you. I spent a decade looking at ticker tapes, reading books on different strategies before I decided on dividend growth investing. Buying companies with growing dividends is an idea taken from trend following and momentum. Buying and Holding diversified portfolios with low turnover is an idea taken from indexing. Buying companies at attractive valuations, while trying to avoid overpaying is an idea taken from value investing. My edge is in buying a diversified portfolio of quality dividend stocks at attractive valuations, and then holding on to them tightly for decades. In a world where everyone has a short attention span, and everyone is worried about losing a fraction of a penny to high frequency traders, it pays to invest for the long term. Trying to improve can pay off larger dividends and capital gains for you down the road.
Relevant Articles:
- Use these tools within your control to get rich
- Are you patient enough to become a successful dividend investor?
- Dividend Portfolios – concentrate or diversify?
- My Dividend Growth Plan - Diversification
- Dividend Investing Knowledge Accumulates Like Compound Interest