I wanted to write a quick post about my typical investing method. I am for the most part a dividend growth investor along with index fund investor. I see advantages to both and currently have both stocks and index funds in our portfolio. Over the years we have typically had mutual funds in our different 401k and taxable accounts and then around 1998 or so I started to get more interested in individual stocks and occasionally day trading.
So I opened up an account at Ameritrade and funded it with a small amount. I learned technical analysis on stock charts and when to buy and sell in different situations. It all looks good when you have hind site but trying to determine what will happen in the future is impossible. You may be right some of the time but you have to determine what percentage of the time you will be right vs wrong and what your risk/reward ratio is. Plus your commissions on each buy and sell will be deducted from your account and have to be figured into your gain or loss, you will be lucky to break even, most aren’t. I have made mistakes in the past, as everyone has, and although I didn’t loose that much money or I may have even broke even, I lost quite a bit of time that my money could have been growing and not just churning. This is not to mention the time and energy I wasted on keeping track of wash sales etc. for tax purposes. Some years I had a stack of papers several inches thick I had to send to the IRS because the limit you could e-file was 1000 stock transactions. Sad, sad, sad. But I guess some people just have to learn on their own and I did learn, its a loosing battle.
So now I am a solid buy and hold investor with maybe 3 or 4 sales a year, sometimes none. Like Warren Buffett says, “Our favorite holding period is forever” I believe that was his quote. The only reason I would sell a stock is if the dividend is cut and also I see the business or industry as deteriorating and not being able to recover. I am always looking for solid blue chip companies that have a long history of paying and raising dividends and have an appreciating stock price. I have a portfolio with over 80 stocks now so I am very diversified, I can’t stress enough how important this is, and my returns typically follow the S&P 500 index. I am hoping to keep up with the index in good years and fall not as much when the index is down in bad years. I will be happy if I can beat the S&P by 1% over time.
So at this point I am watching to see which stocks that I own are the strongest over the long term and try to buy more of them on pull backs. Really pretty simple, but I just keep doing it over and over regardless if the market is up or down, just buy, buy, buy. I have all dividend reinvested currently so this adds to the compounding effect and when a company we own raises it’s dividend this just amplifies the compounding. I really am hoping for and expecting a decent 20% to 30% correction soon but who really knows. I would much prefer to buy stocks on sale rather than the lofty prices we are paying now. The main thing is to start young, keep your spending low and your saving high and continue to buy and you will reach your goal.
Here is a little chart of what starting early with $8000 invested per year and increasing this by just 10% per year. If you are making $45,000 per year and get a typical 3%-5% raise it will easily cover this increase in investment. Better yet put all raises into increased investments and supercharge your portfolio. The key is to not increase your lifestyle spending every time you get a raise. Some years you may get a larger raise and even bonuses that could help to get you there sooner. 20 years is a long time when you are only 20 and a lot of good things can happen in that amount of time if you keep consistent.
|Example of 8% Typical Return|