Lately, I´ve seen that many dividend investors tend to use portfolio value as one of their main goals or measurement for success. Most investors haven´t experienced a recession or a major bear market, and I claim they should rethink their goals. UPDATE: Not sure if YOC is usable after all. Instead, Dividend Income might be the key. However, you can read the article for fun anyways. Remember to check the comments for further info.
Although, keep in mind that this is just a thought from a novice investor, and not a recommendation or anything similar.
So, What am I saying?
Investors measure success by how much the value of their portfolio is now prior to the last update. I claim that this only works as a goal or guideline if the marked is neutral or bullish. Then the money that´s added increases the portfolio. Simple as that. And for the next update, this will also be the case, and so on. Therefore, investors are only experiencing the effect of a positive and almost linear function, where there are few or non drawbacks.
Say we have a portfolio worth $1 000 000. The problem with this goal is that when we reach a drawback / crash / recession, the portfolio will be reduced. The goal, which also work as a guideline, will become something undefined. An empty space.
Let´s reduce the portfolio by 30 %. The value is now $700 000. Your main goal is now further away, and you have no way of guiding yourself anymore. Are you supposed to add $300 000 to make up for the difference? Add more? The only thing that´s certain is that your “linear function” will look something like this:
What I´m trying to say is that it will be very hard for you to not become emotional or staying calm when one of your major measurement for how you are performing are going to shit. I claim that you will be destroyed if value is your only way of measuring progress.
So what’s the solution then?
I have written down 3 Rules For Formulating Investment Goals:
- Measure success by how you are performing to your selected index. If S&P500 is your index, then anything equal or better should be good. That´s it.
Rule 2 (Very important):
- Track your dividend Income each month, each quarter and year. Will make you focus on dividend and not market fluctuations
Rule 3 (Most important):
- Track your Year to Year dividend income and growth. By comparing the dividend income from last year or any prior year, you will be able to see the effect of dividend growth and compaunding. This should be your main goal, and will aslo take away your focus from market fluctuations.
- For us dividend investors, who want a specific amount back from our investment through dividends, you have to know that specific amount. For me it´s around 500 000 – 600 000 NOK, which is around $60 000. By using rule 2, I can now say that as of now (30.04.2016) that means I must have around 12 000 000 NOK. This Yield on Cost will be different from time to time as it correlates with stock prices.
But by using this as your target you will be able to navigate when we reach a bear market. All you need to do is to add as much money as you can so that the yield correlates with your goal. Simple, right?
It would be awesome if more experienced investors would care to comment, because I´m also one of the novice investors that hasn´t experienced a ressesion. Therefore this post might just be bullshit, but then again, maybe not.
What do you thing about 3 Rules For Formulating Investment Goals? Please comment and join the discussion bellow so we can all learn from each other.