Lately, I’ve seen that many dividend investors tend to use portfolio value as one of their main goals or measures 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 these are just thoughts 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 no 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 works 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 it will be very hard for you to not become emotional or to stay calm when one of your major metrics for how you are performing is going to shit. I claim that you will be destroyed if the 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 the S&P 500 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. This 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 compounding. This should be your main goal, and will also take away your focus from market fluctuations.
- For dividend investors like us 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 to 600,000 NOK, which is around $6,000. By using Rule 2, I can 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 comment because I’m also one of the novice investors that hasn’t experienced a recession. Therefore this post might just be bullshit, but then again, maybe not.
What do you think about the 4 Rules For Formulating Investment Goals? Please comment and join the discussion below so we can all learn from each other.