Questions about Investing in Stocks – Indexing vs Dividends

[NotMyProblemParticipant 965]

So I’m at the point where I’ve got a safe full of cash/silver. I own a rental property, and I even have a nice pile of Bitcoins.

Over the next 3-4 years I plan on focusing my capital on paying off my mortgage, but I’m also building my cash pile, waiting for a good opportunity to enter the stock market.

It seems there are 2 dominant views. One is to simply buy the S+P 500 Index and make 9.2% over time. The other view is to never buy a stock that doesn’t pay a dividend. I’m curious what you guys think is the best way to go.

I’m a bit of a lazy investor. I like to buy an asset and hold it forever, so I’m leaning more towards just buying the S+P 500 index.

For those of you who don’t know, the S+P 500 is an index of the top 500 companies in America, diversified across multiple industries. The list is constantly being updated to always include the best performing stocks.

The benefits of buying an index fund is that it takes minimal effort- there’s no need to pick stocks. Over the past 100 years, the S+P returned an average of 9.2% over any 30 year period, which means your money will double about every 7/8 years.

Since it’s diversified across all industries, it’s about as low risk as you can get when it comes to equities. Statistically, only 20% of active money managers actually beat the market. The S+P represents “the market”.

I’d love to hear the opposing argument- why dvidends are better? Also, I’m curious if any of you are consistently beating the market (9.2%) over the long-term?

If you are beating the market, I’d like to know what the opportunity costs are? Meaning how much time does it take you to research and manage your portfolio?

How many hours a year does it take you to do all that research? How much more are the fees?

My line of thinking is that it may not be worth spending 100 hours a year to possibly beat the market. 100 hours per year x $20 per hour = $2000 lost income. Plus fees.

And then there’s the risk that I’ll return less then the market and have wasted my time. The other thing to consider is that by picking stocks, I’ll probably be over-exposed to one or more industries, which means I’d be taking on more risk than I’d have if I had simply purchase the index.

My plan is to wait for a nice market correction, and then buy while there’s blood in the streets.

What’s your thoughts?

Not my property... Not my problem

[uchibenkeiParticipant 7965]

if you’re lazy, index is probably the best bet for you. it’s good that you’re honest with yourself.

I bathe in the tears of single moms.

[TuneoutParticipant]

NotMyProblem wrote:

Statistically, only 20% of active money managers actually beat the market.

I’ve actually read it’s less than that and remember an actively managed stock will have higher MER’s (Management Expense Ratio).

The S&P 500 is a good index(one I have as well) however
I would suggest diversifying your portfolio to include
foreign Indexes as well and if you wish keep a certain percentage in a bond Index for security.

Two funds I like that have had positive reviews are
Vanguard and TD e-series funds.

Both offer Dividend Reinvestment Programs (DRIPS) so the
earnings are reinvested automatically and all you have to do is rebalance your portfolio once a year or so.

Once it gets to say $75,000 you may want to cash out a portion and try your hand at ETF’s if you think your
skill at picking stocks has improved.

Morningstar and Investopedia are good online resources for research and investing information.

Oh and consider what vehicle you want to put the investments in,here in Canada two of the popular
ones are RRSP’s (Registered Retirement Savings Plans)
and TFSA (Tax Free Savings Accounts)

It sounds like you’re in America so I don’t know what they would have to compare.

Just one thing I can add DON’T get advice from you’re local bank,they will just try and sell you debt instruments and Managed Mutual funds with high MER’s.

Lifes a bitch,but you don't have to marry one!

[NotMyProblemParticipant 965]

Tuneout wrote:

I would suggest diversifying your portfolio to include
foreign Indexes as well and if you wish keep a certain percentage in a bond Index for security.

Good call- I was considering this as well. For now it would only be like 10-20k so I would be focusing it on the S+P at first.

In the future I was considering the Shanghai Composite Index and perhaps some other indices. I think China will be the next great country and I figure that’s the best way to get some exposure.

Not my property... Not my problem

[Silent NoiseParticipant 211]

I follow Investors Business Daily
Free charts, big interactive ones. You can get a free 4 week trial or just use the non-paid content on the site. Get the book How to Make Money in Stocks by William J. O’neil. He’s the man behind the site. Excellent read.

There’s a methodology behind buying stocks. Basically you buy when stocks with good fundamentals are emerging from sound patterns while the market is healthy.

Most stocks bought from the correct buy points go up, if they don’t, you sell if it’s down over 7%. If it’s up over 20% within 3 weeks, keep it, otherwise take your profits when you’re up 20-25%.

From this i’ve bought:
UFPI at $88.01 now $107
PLNT at $19.79 now $22
DOL.TO at $78 now $97
and EBIX at 50.01 now $58

It doesn’t require a lot of study, when you consider the reward. You’re not doing yourself a favor by sticking your head half in the sand by investing in indexes, and funds.

[Ho Lee Fuk, MGTOW!Participant 100]

Hey Sovereign,

If you want to invest in the Index, but dont want to actually invest in an Index Fund, try the SPYDER Ticker symbol “SPY” ETF. It tracks the S&P500 accurately, has very low fees & Also pays out a dividend (Which i believe is the average of all dividends paid out by companies that do so, dependent on each company’s weightings though). Maybe the best of both worlds for you, since you’re unsure. I believe you’re able to buy in you’re 401K account too, so any gains/divvies are tax free. SPYDER also has major sector ETF’s representing different parts of the US economy (eg, healthcare, Consumer discretionary, utilities etc)

One of the reasons why even big hedge/mutual funds can’t beat the index is because of fees (Fixed and performance fees combined). the fact that S&P averages 8-9% a year yet average investor only gets 2% trying to outsmart the market means majority really dont know how to manage investments, risk & money in general. If you dont want to get into the intricacies of how to seek & acheive “Alpha” (Performance better than any major indexes) then you’re smart to just stick wit the index.

I trade full time, an intermediate term trend following strategy quite a bit more involving but definitely not all consuming and i use the SPY ETF as a barometer for market health. My strategy is definitely in alpha right now & it only takes me 15-30 minutes a day to manage & 3-4 hours on the weekend to do research on. I dont have to watch the market, i do quick analysis at the end of the day after market close & Just set/move whatever orders that will be reflected at the open the next day. I’m purely a price based trader which allows me this convenience & Ignore news,fundamentals & other’s opinions. Fees depend on the broker you go with.

I’d recommend using an online discount broker (Etrade, TD Ameritrade etc) as opposed to a traditional broker for this (10-20 dollar fees vs 50-100 dollars makes a huge difference over the long run). Besides if all you want to do is buy ETF’s why do you need the advice of traditional brokers? Especially considering many of these online discount brokers actually have lists of ETF’s that are free to enter and exit! I personally use A company called Interactive Brokers. Not beginner or inactive trader friendly, but amazing for more active trader like myself they cater mainly to professionals (Hedge funds/prop firm traders, HFT etc)

Since you asked about pros and cons of dividends, ill leave you with this. First of all, im not an advocate of buy and hold at all. I believe there are better investing styles out there that require minimal effort. Now you have to really decide what you want. Capital appreciation or Dividends. One of the reasons why companies pay out good, stable dividends, is because they’re grown to such a level that exponential growth is no longer possible (think Mcdonalds, P&G, Kimberly Clark etc), so the only way to keep people around is to give em a payout every quarter which stabilizes stock prices. small caps and Growth companies (Tesla, Amazon, Netflix) pay little if any dividends because they can reinvest it into the company, but since they’re growing at a fast rate, you get the benefits of capital appreciation of that (Think 100’s or 1000’s percent increases over the years) So decide what is more important to you. My personal opinion? I feel like dividends is like tripping over dollars to make pennies. But thats just me

Lastly, you say you want to wait for a crash to buy when there is blood on the streets. But how will you determine the level of blood & how hard the pain is? It’s really hard to consistently pick bottoms and tops in the market (People who do have broken clock syndrome or just lucky). Many have bought thinking its a bottom, only to see it drop & cut themselves trying to catch a falling knife. If you want i can PM or even create a new thread for you to share a super simple price based strategy you can use to better gauge when to enter and exit markets.

Hope this Helps man

[SandalsParticipant 4253]

NotMyProblem wrote:

I think China will be the next great country

Have you been there?

I recommend reading these:

First: Rich Dad’s Who Took My Money?

Then: Rich Dad’s Guide to Investing : What the Rich Invest in That the Poor Do Not!

NotMyProblem wrote:

I’d love to hear the opposing argument- why dvidends are better?

A dividend means the company is earning a profit, and you as a shareholder are earning money from that. If a company does not pay a dividend, the company is either gambling with your money, diluting your money in splits or series rounds, or the execs are just flat out taking your money. There are different types of shares. It’s not that the shares don’t pay a dividend, it’s just that your shares don’t pay a dividend.

If you are not familiar with the term Par Value, and how it is used when setting up a corporation, then I recommend not investing in the stock market.

The stock market was designed to be a casino, and the house always wins. If you’re not the house, I don’t recommend playing.

NotMyProblem wrote:

For those of you who don’t know, the S+P 500 is an index of the top 500 companies in America, diversified across multiple industries. The list is constantly being updated to always include the best performing stocks.

I don’t know about the S&P, but the only company left in the DOW is GE. That’s the DOW. GE is the DOW. Not a very strong index, was it. All the other companies were removed and replaced to cover up the fact that the whole index is a failure.

The list being constantly “updated” means the list is a total failure. You’ll be wiped out, and the next day, the plunge protection team will reset the indexes an replace the companies in the list, but only after your money is gone. That’s how the game works.

Your cash/silver stash is good, but don’t tell anyone about it or it will disappear. To invest, create a system of cash flow first, then only play the stock market with what you never expect to see back.

Diversification is a zero-sum game. Focus, but read those books I mentioned first. The sun’s rays do not burn, until brought to a focus.

[~BSParticipant 3266]

Aside from the fact that high dividend paying stocks tend to be the more stable, slower growing companies, there is no real difference between the two other than the company itself is deciding to pay out the shareholders versus the shareholder deciding to do it in terms of liquidating stock.

Company 1 – 10% income, 0% dividends, 10% regained
company 2 – 10% income, 2% dividends, 8% retained

It’s actually the same thing. Company 2’s share price should be lower to reflect the dividend payout.

For dividend paying funds, you want them in tax advantaged accounts since you pay taxes on them as they are distributed to you versus no dividends, which is taxed when you sell.

"He didn't marry until now, so he won't ever do it. Think about it, why would a man like him ever marry? It's too late to catch him. " ~some cunt

[NotMyProblemParticipant 965]

Ho Lee Fuk, MGTOW! Thanks for the advice but I’m definitely not interested in trading. I’d want to hold for at least 2-5 years. Cause I’m lazy and I work non-stop. Thanks for the advice though, I’m finding this fascinating.

————-

Sandals wrote:

I recommend reading these:

First: Rich Dad’s Who Took My Money?

Then: Rich Dad’s Guide to Investing : What the Rich Invest in That the Poor Do Not!

Thanks for the tip. I’ve read some of his other stuff and thought it was excellent. Just ordered both books!

Sandals wrote:

If you are not familiar with the term Par Value, and how it is used when setting up a corporation, then I recommend not investing in the stock market.

The stock market was designed to be a casino, and the house always wins. If you’re not the house, I don’t recommend playing.

Will be looking up “par value” as soon as I’m done typing this. Again thanks for the tip. And yes I’ve suspected the stock market is one big casino and that’s why I haven’t gotten in yet.

I still have another year of saving before I’d be ready so I still have plenty of time to read and research. I’ve been reading for years now and I still don’t understand it. I don’t think anyone does.

I guess my thoughts were to diversify for the sake of diversification, but that seems kind of stupid the more I think about it. My instincts tell me I’d be better off investing in what I understand 100%.

I should probably just focus on paying off my mortgage and building my cash pile. I’ve been looking for businesses to start. I have some ideas but I’d like to get my first rental paid off first, as well as build up a nice stash of liquidity.

Thanks for the tips I’m looking forward to reading those 2 books

Not my property... Not my problem

[NotMyProblemParticipant 965]

Rich Dad’s Who Took My Money?

Hahaha it’s hilarious when you think about it. Books are the ultimate cash-flow asset. Rich dad aint gettin my money. That’s what the library is for.

Not my property... Not my problem

[BeerParticipant 11832]

NotMyProblem wrote:

I’d love to hear the opposing argument- why dvidends are better? Also, I’m curious if any of you are consistently beating the market (9.2%) over the long-term?

I’ve only been hitting it hard investing for the last 18 months or so, but I’m up about 30-40% during that time with my post tax investments. I have a fairly simple strategy. My general outlook is buy only dividend payers I plan on holding forever. I pick individual stocks, but the way I go about it is if you follow the market it tends to move in sectors. When the telecom sector for example goes down…the majority of stock in that sector tends to go down. So if telecoms have a couple bad quarters, why not try to grab what you think are some strong stock in that sector? In the long run I think this strategy will give me more shares at higher yields than if I just invest in index funds that evenly distribute my money into sectors regardless of if they are at highs or lows.

Will I beat the market long term? I don’t know. Will the markets long term average even be the average for the next 10-20 years thanks to the current fiscal policy? I don’t know. I do know our market is a never ending cycle of bubble and bust. When people bought into the .com bubble they got massacred when it popped. When they bought into the real estate and financial bubble they got massacred when it popped. All I’m trying to do is minimize my exposure to the bubbles by buying into sectors that are currently trending down rather than the latest hot sector.

Hind sight being 20/20, it would have been awesome to be the guy buying maybe consumer staples when .coms were screaming, then after the .coms tanked, recognize tech stocks had a couple bad quarters and go bargain hunting, or to be the guy who was gobbling up utlities when real estate/financials were screaming and again, go bargain hunting when those sectors had a couple awful quarters? The way I look at it now is energy, materials, and financials just had a few bad quarters…why not start buying in? Eventually they’ll have a few good quarters, my price per share will rise, my dividends will rise, and I’ll be watching what sectors start to trend down as those recover so I know where to reallocate my resources for my next stock picks.

Just my thoughts. Hopefully it works out well, and over time just due to the churn of the market I’m hoping to up end with a well diversified portfolio, none of which was bought at peak prices. Like I said though, I’ve only been at it for 18 months. Its worked out well so far but I wouldn’t really claim that would qualify as beating the market long term unless the trend continues on for 10+ years, but on the bright side if the next 4 or so years continue to be 30% years with my rate of savings I’ll be able to retire any time!

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