How to Formulate Investment Goals

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.

The Problem

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:

Rule 1:

  • 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.

Rule 4:

  • 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.

 

13 comments

  1. Hi

    I think you are right and some what wrong in the same way, I don´t think that everybody that has the value of the portfolio as their final goal. It makes sense to have a total value of the portfolio as goal, if the persons are aware of the market fluctuations. I myself have the goal of 14 600 000 SEK as of 5 % yield on the capital would give me a monthly dividend of 60 000 SEK. But the goal of 14 600 000 is also set there because if the portfolio value drops 50 % I will still have 30 000 SEK in monthly dividend (under the condition that the yield is still 5 %) and can live on that amount of money.

    And if you should compare you should have a index that has included dividends, but also to compare its allocation with the index. do you have 60 % stocks and 40 % intrests you have to weigh your own allocation.

    Yield on cost as i define it is just for fun. Yield on the capital I have put in not the yield on the exsisting value. Because stocks are about the future not what happened in the past and what is going to make the stock price increase over time is increases profits from the company at hand. What is essential is the key ratio today and were they are going. I dont think yield on cost is good because of that reason.

    1. Hi Investacus,

      One reason for why I love having a blog, is that I can write things down and as the words go around and around in my head, I can come to new new thoughts and conclusions. I can now see that YOC is useless if we reach a bear market or whatever, because it doesn´t really say anything about my goal of becoming Financially Independent. It´s only a tool for keeping track of dividend growth.

      However, I´m not sure if it´s even smart to update portfolio value every quarter or year. Maybe just focus on dividends and dividend growth? Thanks for commenting buddy.

      1. Hi again

        I use YoC by the same reason and because it´s fun to look back at. It is a lagging metric and should only be used to evaluate your own performance in picking dividend growth stocks.

        I update my portfolio value every weekend, it is made easy by my google sheets and the various formulas and googlefinance data retrivals. Investing is about accumalating wealth and therefore portfolio value should always be intresting to show. But it shouldn´t be used as the primary goal for a dividend investor as you say. What metric i think should be used look further down.

        I just wanna jump in on your discussion with Dividend Portfolio. I think using the number of stock is a way of making it a little too easy for yourself. In an ideal world hopefully can we find companies that never cut their dividends or stagnate in the amount they pay out, but the investing world aren´t that easy; “there are no free lunches”. The simple reason is that dividend investing are the long-run game and even if Johnson&Johnson has paid increasing dividends for 50 years straight it is not certain it will continue to do it for the next 50 years, then you have to change the stock you picked first to another stock since it didn´t live up to your expectations and your criterias. Then you change the said stock to another stock, and a long-term goal should be that changeable.

        The only metric that I think should be used is the dividend received during the past year or the estimated dividend you are supposed to receive during the coming year. Because of that I use the dividend received as the primary metric to evaluate the year and as a goal is the total dividend during a full year I primarily focus on.

        Like this year and last year, haven´t gone super great and haven´t overperformed the market. But my dividend amount has increased 80 % and are estimated to increased another 55 % this year.

        1. Agree. Having “controll” over YOC is not only fun, but very important if you are a dividend growth investor. It makes you focus on both yield and growth.

          Interesting and wise. The reason I included the thought in the comment was because I saw a swedish investment blogger doing this. Can´t remember the name right now though…
          I haven´t really thought about it before, and in my opinion, it´s sound sas you say, a bit to easy. At the same time it sounds pretty difficult, because the performance of stocks and their dividend varies, so knowing the exact number one should own is hard. And as you say, what happens when a stock has to exit the portfolio. Daaamn. So many factors to take into account. Let´s just discard that idea right now!

          As you can see in the article, I included rule 3 and 4, and they are the most imortant.

          Same as you here, but the year to year is just amazing. It´s only been 4 monhts now, but I´m only 11% behind the total dividend income from 2016, and we have 8 more months to go. 2017 is going to be superb.

          Thanks for commenting Investacus. Glad to see that you bothered sharing your knowledge =)

  2. Stockles, I’m like you and am a novice investor. But, here is my 2 cents (and I’m not even sure my opinion is worth 2 cents).

    For some reason, I thought that dividend investors use dividend income received as opposed to the value of their portfolio as the benchmark for success. It’s one of the goals I use and it’s one of the reason why I chose dividend growth investing as a strategy. So, given your example, if my $1,000,000 portfolio reduced 30%, hopefully, the dividend income I would be receiving from that portfolio would remain the same (or increase) based on the companies I invest in. That’s why I primarily focus on companies with a history of having dividend increases, even during tough times like a recession.

    Additionally, since I’m in the accumulation phase, I plan on also reporting on the number of shares I own as distinct from the value in the position. The number of shares I own will always increase even if somehow the value of the position decreased because of a pull back or the lack. That’s because I’m constantly adding to my position and hope to never sell. I’ll leave the trading of stocks to the professionals. That’s not to say that I won’t ever sell. If a company decides to cut its dividend or if I no longer believe in the company’s fundamentals, then I might sell. But by and large, I will continue to increase the number of shares I own in a particular stock.

    Food for thought.
    Dividend Portfolio recently posted…April Dividend Income ReportMy Profile

    1. Hi Dividend Portfolio,

      Great comment and you are absolutely right. The dividend income is not going to get smaller just because the value of our stocks has decreased. Nope. It will remain the same, or increase due to dividend growth.

      I´m 100 % with you on the dividend Income. That´s what I focus on, and I think other dividend investors should too. When we reach a crash, one can just buy more stocks, and then see that the dividend Income has grown significantly. I think that´s the measurement one should use. Not regularly updating the value of the portfolio. I´m thinking about making a plan that takes the “number of stocks” I need to accuire to achieve FI. Say I need 1000 Starbucks stocks, 1000 Hormel Food Stocks and so on. In a bear market, I will be able to buy a lot more stocks than right now, so maybe that could be a measurement too? Not sure though. Many thanks for commenting and btw, your 2 cents are always worth a lot. Great input.

  3. Good points… Tracking progress is somehow important. Why somehow… I gave up having a goal, I go for a system that I trust. The results should follow.

    I join the YOC argument. It is there for fun, nothing more. What is the YOUC is really great and the actual yield is really bad (due to strong price increase). Imagine there is another stock out there with a better actual yield. Would that not be a better candidate for the portfolio?

    When you are DGI investor, the only metric should be the amount of dividend you get. Portfolio value is secondary( at least, that is what I hear from DGI investors on meetups) I am an indexer for now and all that matters is my € value of the portfolio. I see the limits of this approach

    1. Hi ATL,

      Interesting view. So you actually gave up having a goal. I´m very interested in finding out how that works for you in time. Or maybe you do have a goal, and that´s just following the system and letting things work their own way. That´s also somewhat a goal.

      I agree. As you can see, I updated the article with rule 3 and 4. It´s by far the most important.

      I can see that indexing might have different goals comperated to DGI. However, I think we all should focus in creating goals that will make us as calm as possible when we reach a bear market / resession. note: I´m not really talking about 10 – 15 %, but if we go to 25 % or even beyond, things will get scary.

  4. Great article!

    I also believe that the income received and dividend growth should be the most important metrics we use. But I also feel that just keeping tabs on everything, maybe just for fun, is just as “important”. Personally I have great interest in seeing if my total value is increasing/decreasing every month even though it doesn’t really matter.

    Not sure what you mean by adding more money if your YOC is lower than 5%? Do you mean add more money on higher yielding stocks?
    If you have bought the “right” companies the YOC will eventually rise to your (or over) desired yield, but keeping it more or less constant on 5% is going to be quite tricky I believe.

    Regarding your first rule, my 50 øre is that comparing ourselves to indexes is not a good measurment at all. It will most likely give you negative feelings due to the fact that most investors perform worse. And why is beating the marked so important? Set your own goals and just love all the hard work you put in it.

    And when the correction finally hits us straight in the face, do the same hard work and keep buying quality!

    1. Hi Bapo,

      Totally agree there. It´s really fun to keep “tabs” as you say. My only concern is that I haven´t really experienced a bad market yet, and I suspect that the fun won´t last when everything is pointing the other direction. Therefor I´m trying now to think about the measurements that will provide the most comfort to the mental state.

      I crossed that part. It doesn´t really make sence.

      Interesting. Not the most commen thought, but definitly worth 50 øre. Actually, I said something about this before, and that lagging behind (a bit) the index is okey in my opinion, because investing is a hobby and it makes my life more fulfilling. There are few hobbies that doesn´t cost anything 🙂

  5. Awesome post! Definitely some great tips and advice on saving. It’s also great to start a savings money for emergencies or long term goals. thanks foe sharing this helpful article.

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