Author Topic: Dividend growth/value investing VERSUS Index investing  (Read 4679 times)

StudentEngineer

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Dividend growth/value investing VERSUS Index investing
« on: May 14, 2017, 08:18:55 PM »
I’ve been investing since the beginning of 2016 and the more and more I learn on the topic the more I am pulled in two slightly different directions, value investing or index investing.  So many people here and in the FI scene espouse index investing as the best way to go and I’d love to have someone address whatever it is I am missing and convince me to jump on the index bandwagon.


For value investing I look for quality companies that are priced attractively relative to earnings and will likely (my opinion) succeed far into the future. I then hold these companies for decades to reduce frictional costs, the only price I pay is the commission to first acquire them (this can be extremely low if you use some of the newer brokers on the market).  My eventual goal is to build up a diversified dividend income stream from the 11 sectors of the stock market ( at least 2-3 well established companies in each) to fund my living expenses allowing me to retire at a young age (~30) and utilize the favorable taxation of dividend income without having to sell underlying shares.




Here is my screener for value / dividend growth investing.

PE (Under 20) :
Payout Ratio (Under 60%) :
EPS (Consistent)    3yr :
         5yr :
         10yr :
# Years Dividend Increases (for core 10+) :
Yield:
Dividend Growth    3yr :
         5yr :
         10yr :
Wide moat (yes/no, why):
How will they grow EPS:
Committed to Dividend?
Revenue (what caused the growth/decline)
                        3yr :
              5yr :
              10yr :
Qualitative, opinion on future of company and industry:



Pros about this type of investing
1. Get into investments at a lower cost (many studies have shown that getting into a stock at a cheaper price leads to superior returns over the long term)
2. Zero transaction fees once you own the stock
3. Can optimize taxes by tax loss harvesting, tax gain harvesting





Cons
1. Not diversified enough?  (However several studies point out that owning 20-30 companies across the sectors of the economy provide the vast majority of the diversification needed)
2. Requires some attention to note when to sell (if dividend cut)
3. Time.  To buy/maintain





Index investing


Pros
1. Instantly track your index which is proven to be superior to actively managed funds*
2. Passive



Cons
1. Cannot selectively/optimally tax loss or tax gain harvest since you cannot trade underling companies (also wash sale https://www.bogleheads.org/wiki/Tax_loss_harvesting)
2. Will always pay an annual percentage to have it managed (This is incredibly low but noteworthy nonetheless)
3. Cannot search for bargains, will pay a higher PE for the stocks
4. Some of the indexes have arbitrary definitions that change over time?**
 “In contrast, a dividend investor can build a diversified portfolio of individual dividend stocks, and just hold on to it through thick or thin, without paying any costs or having much forced turnover. This is a much better form of passive investing”


*Is it only true because of low cost and not selling in a bear market?  What would you say to this quote “Valuation does matter as it determines what future returns will be. Overvaluation was the reason why the Vanguard Pacific Index Fund did not return much over inflation over the past 27 years. Paying too much for equities is dangerous. Too much in my opinion is 25 – 30 times earnings or more. Sticking your head in the sand is dangerous. Buying asset classes for the sake of following some blind model could be costly down the road.”

**“For example, the popular index S&P 500 routinely changes 4% - 5% of its holdings every year. It also engages in changes to the strategy such as the one in 1976, the massive allocations to technology stocks in 1999, the elimination of foreign companies in 2002, and changes to its weighting mechanisms in 2005.”

An excellent article on this is from dividend growth investor: http://www.dividendgrowthinvestor.com/2017/03/five-myths-about-index-investing.html



In conclusion what I am seeing is that whichever strategy one chooses the main ways to perform well are to
1. keep costs low
2. find an attractive entry point
3. Buy quality companies
4. hold for a very long time
5. profit ??

I really want to hash out the true pros and cons of both methods with facts not opinions so studies proving a point would be great!  Thanks everyone!
« Last Edit: May 15, 2017, 01:54:17 PM by StudentEngineer »

Hargrove

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #1 on: May 14, 2017, 09:09:33 PM »
A blind investment in index funds probably beats a multi-million-dollar-financed hedge fund (with people who spent more than half a decade in school for finance employed there and paid full-time to do this).

They're not infallible, but you should suspect "but I read some articles on the internet" or even "but I read some books" is an inadequate preparation to go up against that with a more surefire win than index funding.

Imagine a horse race with 4 horses. Each horse pays 5x your bet if you pick the winning horse. You would be crazy to not bet on every horse. The stock market goes up. A blind model can become statistically silly to NOT use.

So can you pick the one horse, so to speak? Maybe. We can't prove you won't. But nothing you're describing is new or revolutionary in value hunting. Billionaires who golf with other billionaires have networks that you just don't. Dividend cuts are often made after typical market close and moved on in a nanosecond by market makers. What time and info you have access to during your spare time is researched by a guy whose full-time job it is to watch every security in a portfolio, which is bought and sold before regular markets even open up. When you see a stock seem to jump straight off a cliff or leap straight up one, that's someone trading more shares than you'll ever have, in a split-second.

You CAN still win. You gamble against worse gamblers than you, or less lucky ones, and you can still win, and that's really what you're hoping to do. But none of your pros are both 1) real and 2) exclusive to value investing. Index investing has them all. Vanguard mutual index funds are automatically tax harvested. The annual percentage to have them managed is, almost certainly, cheaper than commissions you're making trading value investments separately. You will NOT merely "pay a higher PE" - rather, you will acquire all the bargains, and all the higher PE. You will pay a very average price. You can, sort of, search for bargains, by weighting value indexes more, by the way.

And sure, valuation matters. But the graph of every up and every down has a start point and an end point you don't really know until after the time has passed. So your ability to know valuation is what's missing. Every time a hedge fund makes 30% returns in a month, a boatload of people lost a TON of money. You can win the gamble, but you ARE gambling.

As for dividend growth investing (and yes, there's an index for that too), some people just highly value the peace of mind of drawing dividends alone (and not reducing principal). If that's a psychological tweak that matters to you a lot personally - that's just how well you sleep at night, so that's really just personal preference.
« Last Edit: May 14, 2017, 09:11:46 PM by Hargrove »

MDM

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #2 on: May 14, 2017, 09:33:50 PM »
Index investing
...
Cons
1. Cannot tax loss or tax gain harvest since you cannot trade underling companies
This is not correct.

In general, one may incur capital gains and losses on mutual fund shares just as on individual stocks.

See Tax loss harvesting - Bogleheads and Tax gain harvesting - Bogleheads for finer details.

StudentEngineer

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #3 on: May 14, 2017, 09:54:50 PM »
So can you pick the one horse, so to speak? Maybe. We can't prove you won't.
You CAN still win. You gamble against worse gamblers than you, or less lucky ones, and you can still win, and that's really what you're hoping to do. But none of your pros are both 1) real and 2) exclusive to value investing. Index investing has them all. Vanguard mutual index funds are automatically tax harvested. The annual percentage to have them managed is, almost certainly, cheaper than commissions you're making trading value investments separately. You will NOT merely "pay a higher PE" - rather, you will acquire all the bargains, and all the higher PE. You will pay a very average price. You can, sort of, search for bargains, by weighting value indexes more, by the way.

As for dividend growth investing (and yes, there's an index for that too), some people just highly value the peace of mind of drawing dividends alone (and not reducing principal). If that's a psychological tweak that matters to you a lot personally - that's just how well you sleep at night, so that's really just personal preference.

Thanks for your thoughts!  So then what would you say to creating my 'own' index fund using motif or something similar and buying up as much of whatever index I was looking at in the ratios that the index does?  Then I wouldn't have to worry about picking correctly and for a one time fee I no longer have an annual recurring fee?  Then I can also selectively tax loss and gain harvest.

I see what you mean about valuation, so then you do not support the premise of buying stocks that are 'cheap' based on their historical averages I assume?

Yeah I really do appreciate the psychology behind dividends and knowing that they are more secure than share price especially in a bear market.


Index investing
...
Cons
1. Cannot tax loss or tax gain harvest since you cannot trade underling companies
This is not correct.

In general, one may incur capital gains and losses on mutual fund shares just as on individual stocks.

See Tax loss harvesting - Bogleheads and Tax gain harvesting - Bogleheads for finer details.

I think I misworded my statement.  Yes of course you can still tax loss or tax gain harvest however you cannot do it selectively, you would have to sell a whole share of the index (winners and losers) and so it may end up being less effective.  Also if you merely buy vtsax you have to wait 30 days after selling to rebuy to avoid the wash sale. 

Thanks for your links to the bogleheads, they were informative.

MDM

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #4 on: May 14, 2017, 10:29:53 PM »
...you would have to sell a whole share of the index (winners and losers) and so it may end up being less effective.
Yes, this is true.

Quote
Also if you merely buy vtsax you have to wait 30 days after selling to rebuy to avoid the wash sale.
Or, instead of waiting, buy VFIAX immediately.  No wash sale because the total stock market and the S&P 500 aren't "substantially identical" - but they do tend to move together very closely.   Going from VFIAX to VTSAX also works, etc.

Hargrove

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #5 on: May 15, 2017, 05:22:37 AM »
Thanks for your thoughts!  So then what would you say to creating my 'own' index fund using motif or something similar and buying up as much of whatever index I was looking at in the ratios that the index does?

Index funds like the S&P500 automatically pare out any funds that lose in value for the stocks that take their place. That's not likely something you can do on the fly, or for cheap. The expense ratio of an even broader fund like VTSAX is 0.04%. Not 4%... 0.04%. That's $4 on 10k invested with enormous diversification. Motif's batch trades are about $10. If you can manage every 25k you have with one single trade in an entire year, your commission fees will beat Vanguard's.[/quote]

Quote
I see what you mean about valuation, so then you do not support the premise of buying stocks that are 'cheap' based on their historical averages I assume?

If you can see the future, I wholeheartedly support buying stocks that are cheap! I just think very few people can see the future.

Quote
Yeah I really do appreciate the psychology behind dividends and knowing that they are more secure than share price especially in a bear market.

A sword is waiting over the head of a company that cuts a dividend that has a long streak, but that doesn't mean they're secure in a bear market. It means a company may strangle itself to death paying dividends at the expense of appreciation on the stock, which will mask how little the stock is returning to you but will hurt in the long run.

StudentEngineer

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #6 on: May 15, 2017, 08:24:28 AM »
As a practical matter, index investing is relatively easy.  Take money, insert into index fund, pay no attention to fluctuations, get index average returns.  Done.  No need to find the needle, because you bought the entire haystack.

And conversely value investing is devilishly hard.  To do better than the market on a consistent, risk-adjusted basis you need to select stocks or other investments which are offered in the market at a significant discount to intrinsic value based on publicly available information which the rest of the market does not recognize.  Just remember, every time you buy there is someone who holds the exact opposite opinion as you and is selling at that price.  As Seth Klarman says, "Buying is an act of arrogance."

I do appreciate the ability to set it and forget it.  What would you say to the notion that the market is irrational in the short term but in the long term appropriately values companies?  With that train of thought couldn't you make the argument that the market is not correctly pricing companies in the short term?


Congratulations on asking these questions.  You are starting to learn, which is the beginning of wisdom.

As an engineer, you are likely smart and analytical.   This is great for most situations, but not necessarily for investing.  Still, imagine how smart you were with 2 years of school vs now.  Having invested for 2 years, you have much less experience, so it is best to educate yourself before setting your strategy.  I recommend starting with the bogleheads wiki.

As had been said, value investing would be great if there was any working model for determining future value of equities that was reliably predictive.  The problem is that that screener you posted is simplistic and wont work.  No one posting has a predictive model that sustinable works.  It is likely no one has one period.  I've spend 35+ years deeply involved with the strategies and finances of large enterprises, and as an individual investor and i dont think i can beqt the indexes sustainably over time.

Read up.

Thanks for your insight.  I will definitely read up on the bogleheads wiki and get a more firm basis on index investing.  Would you recommend going with vanguard's etf of vtsax or the individual shares? I currently dont have the 10k minimum for the admiral shares.




Index funds like the S&P500 automatically pare out any funds that lose in value for the stocks that take their place. That's not likely something you can do on the fly, or for cheap. The expense ratio of an even broader fund like VTSAX is 0.04%. Not 4%... 0.04%. That's $4 on 10k invested with enormous diversification. Motif's batch trades are about $10. If you can manage every 25k you have with one single trade in an entire year, your commission fees will beat Vanguard's.

Quote
I see what you mean about valuation, so then you do not support the premise of buying stocks that are 'cheap' based on their historical averages I assume?

If you can see the future, I wholeheartedly support buying stocks that are cheap! I just think very few people can see the future.

Quote
Yeah I really do appreciate the psychology behind dividends and knowing that they are more secure than share price especially in a bear market.

Quote
A sword is waiting over the head of a company that cuts a dividend that has a long streak, but that doesn't mean they're secure in a bear market. It means a company may strangle itself to death paying dividends at the expense of appreciation on the stock, which will mask how little the stock is returning to you but will hurt in the long run.
I've seen the argument made that with the index doing that, they are essentially buying high and selling low.  What do you say to that and this "**“For example, the popular index S&P 500 routinely changes 4% - 5% of its holdings every year. It also engages in changes to the strategy such as the one in 1976, the massive allocations to technology stocks in 1999, the elimination of foreign companies in 2002, and changes to its weighting mechanisms in 2005."?

Absolutely the fees are rock bottom and I see what you mean that I may be able to beat the fees but it really is so minuscule as to not make a substantial difference.

...you would have to sell a whole share of the index (winners and losers) and so it may end up being less effective.
Yes, this is true.

Quote
Also if you merely buy vtsax you have to wait 30 days after selling to rebuy to avoid the wash sale.
Or, instead of waiting, buy VFIAX immediately.  No wash sale because the total stock market and the S&P 500 aren't "substantially identical" - but they do tend to move together very closely.   Going from VFIAX to VTSAX also works, etc.


Got  it.  Do you own only those two indexes or do you own others as well?  Do you prefer the etf versions of them or the admiral shares?  Thanks!
« Last Edit: May 15, 2017, 08:27:16 AM by StudentEngineer »

Proud Foot

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #7 on: May 15, 2017, 10:52:59 AM »
Congratulations on asking these questions.  You are starting to learn, which is the beginning of wisdom.

As an engineer, you are likely smart and analytical.   This is great for most situations, but not necessarily for investing.  Still, imagine how smart you were with 2 years of school vs now.  Having invested for 2 years, you have much less experience, so it is best to educate yourself before setting your strategy.  I recommend starting with the bogleheads wiki.

As had been said, value investing would be great if there was any working model for determining future value of equities that was reliably predictive.  The problem is that that screener you posted is simplistic and wont work.  No one posting has a predictive model that sustinable works.  It is likely no one has one period.  I've spend 35+ years deeply involved with the strategies and finances of large enterprises, and as an individual investor and i dont think i can beqt the indexes sustainably over time.

Read up.

Thanks for your insight.  I will definitely read up on the bogleheads wiki and get a more firm basis on index investing.  Would you recommend going with vanguard's etf of vtsax or the individual shares? I currently dont have the 10k minimum for the admiral shares.

Agreed with the recommendation to read up on the bogleheads wiki.  As far as the VTSAX (Total Stock Market) or the ETF version, to me it depends on how much you save monthly and which type of account it is in.  If you are wanting to invest everything you save monthly then you would want the fund as you can invest by the dollar amount rather than the share amount.  Purchasing the investor shares of VTSAX (VTSMX) has a $3k minimum and will convert to VTSAX once your balance reaches $10k.  This is not a taxable event if in a taxable account whereas selling the ETF to purchase VTSAX would be a taxable event.

As to the question in your original post, aside from results, the biggest difference between the two investing strategies is the time component.  It can be very time consuming to screen for companies and then do enough research to beat the market investing in individual stocks.  Not saying it cannot be done but it is difficult and time consuming.  The index approach saves you a lot of time and over the long run will produce a consistent return.  This is very beneficial to the person who wants to retire to spend more time hiking, traveling, with family/friends, or any other pursuit. It would severely cut into the time they can use for their passions/interests to use that time managing their portfolio during their accumulation phase or retirement phase.

MDM

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #8 on: May 15, 2017, 11:09:00 AM »
Do you own only those two indexes or do you own others as well?  Do you prefer the etf versions of them or the admiral shares?  Thanks!
See Three-fund portfolio - Bogleheads for some thoughts on useful index funds, and ETFs vs mutual funds - Bogleheads for that subject.

The cost difference between admiral and investor class is negligible when one is starting.  E.g., assuming ~0.1% difference and that both classes were available, the cost of a $5000 investor class fund would be $5/yr more than the cost in admiral class. 

BreakTheChains

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #9 on: May 15, 2017, 11:50:32 AM »
Congratulations on asking these questions.  You are starting to learn, which is the beginning of wisdom.

As an engineer, you are likely smart and analytical.   This is great for most situations, but not necessarily for investing.  Still, imagine how smart you were with 2 years of school vs now.  Having invested for 2 years, you have much less experience, so it is best to educate yourself before setting your strategy.  I recommend starting with the bogleheads wiki.

As had been said, value investing would be great if there was any working model for determining future value of equities that was reliably predictive.  The problem is that that screener you posted is simplistic and wont work.  No one posting has a predictive model that sustinable works.  It is likely no one has one period.  I've spend 35+ years deeply involved with the strategies and finances of large enterprises, and as an individual investor and i dont think i can beqt the indexes sustainably over time.

Read up.

The problem is as soon as a viable model becomes common knowledge, all potential excess gains are arbitraged out. You have to constantly stay ahead of the curve if you want to beat the indexes, coming up with new ways of exploiting loopholes or predicting trends. The best I'm aware of is Renaissance Tech, and they do it by limiting their size and being super secretive. This is not something a person can do part time.

https://en.wikipedia.org/wiki/Renaissance_Technologies

Kaspian

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #10 on: May 15, 2017, 12:26:43 PM »
I read a lot about this in the past and came to the conclusion that index investors and dividend investors generally end up at the exact same place.  It's possibly because of similar personality traits and behaviors--general frugality, dollar-cost-averaging, not panicking in a downturn, keeping a broad eye on returns, reinvesting dividends, understanding the power of compounding, etc.  So, as a staunch indexer, I would never say anything against diligent dividend investors.  It's mostly an apples and oranges situation as far as I can see.

StudentEngineer

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #11 on: May 15, 2017, 02:14:35 PM »

Markets are often, but not always (I would say, not even usually), irrational in the short term.  The problem is knowing when you are right and everyone else is irrational, or whether the market is correct and you are just delusional.

I'd say for starters, if you haven't already, go get a copy of Security Analysis by Benjamin Graham and read it cover to cover.  As far as I can tell it is based on the course notes for the course he used to teach at Columbia.  Warren Buffett was his star pupil in that class.  When you are convinced that you grok it, you have a good shot of being a good value investor and beating the market.

Good Luck!

Thank you for the recommendation I just added it to my reading list.  I like the twist you put on that, is it the market that is delusional or you?




As to the question in your original post, aside from results, the biggest difference between the two investing strategies is the time component.  It can be very time consuming to screen for companies and then do enough research to beat the market investing in individual stocks.  Not saying it cannot be done but it is difficult and time consuming.  The index approach saves you a lot of time and over the long run will produce a consistent return.  This is very beneficial to the person who wants to retire to spend more time hiking, traveling, with family/friends, or any other pursuit. It would severely cut into the time they can use for their passions/interests to use that time managing their portfolio during their accumulation phase or retirement phase.

Very good point on the time required, I added that to the initial post.  That may very well be a deciding factor for me to switch to solely indexing.  Investing is one of those arenas that it seems that only a modicum of knowledge is needed to be successful and anything more than that does not materially make a difference, in fact it could cause you to be cocky and try to time and trade the market leading to inferior returns over time.


The problem is as soon as a viable model becomes common knowledge, all potential excess gains are arbitraged out. You have to constantly stay ahead of the curve if you want to beat the indexes, coming up with new ways of exploiting loopholes or predicting trends. The best I'm aware of is Renaissance Tech, and they do it by limiting their size and being super secretive. This is not something a person can do part time.

https://en.wikipedia.org/wiki/Renaissance_Technologies

Wow thats incredibly interesting thanks for the link.

The cost difference between admiral and investor class is negligible when one is starting.  E.g., assuming ~0.1% difference and that both classes were available, the cost of a $5000 investor class fund would be $5/yr more than the cost in admiral class. 

Appreciate the links, I am more partial to equities than bonds due to my very long time horizon and projected long 'retirement' so I think I would go with a 2 fund portfolio at this time.

I read a lot about this in the past and came to the conclusion that index investors and dividend investors generally end up at the exact same place.  It's possibly because of similar personality traits and behaviors--general frugality, dollar-cost-averaging, not panicking in a downturn, keeping a broad eye on returns, reinvesting dividends, understanding the power of compounding, etc.  So, as a staunch indexer, I would never say anything against diligent dividend investors.  It's mostly an apples and oranges situation as far as I can see.

I agree, as long as those traits are maintained an investor should be successful.  I am however particularly drawn to indexing for its lack of time commitment. 

However I'm curious on whether that is truly optimal.  Yeah it may help you not over analyze short term fluctuations and stay the course, but is something lost when you stop paying attention to your investments?  I suppose thats more of a person to person basis but I think some may lose the sense of reward with investing if they go solely with indexing.  Might be wrong on that not sure...

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #12 on: May 16, 2017, 09:26:09 AM »
"Zero transaction fees once you own the stock"

That doesn't make sense to me, because each year you have more cash to invest.  It's never free - you pay commissions.  If you pay $10 to buy $1000 worth of stock, that cost you 1.00%.  Compare that to Vanguard Total Stock Market (buying ~3500 stocks), where you pay 0.05% per year.  So after 20 years, you break even.... ignoring the $10 you need to spend to sell that stock.  Point isn't that you'll buy $1000 chunks for $10, but that it's not free and you need to compare expense ratio to cost of buying stock.

As soon as you start to become a cheap investor, spending fewer $10 commissions, you also get more concentrated.  If you buy four stocks for $10 each, that $1000 now suddenly has a 4% commission.  So worrying about costs drives you toward buying fewer stocks.

There's also an alternative to your either/or problem: index most of the money, and "tilt" with a small percentage to a value index fund.  Let someone else pick value, and buy the whole fund.  You'll get diversification that way, and the costs are low.

To be clear, $20,000 with a 0.05% expense ratio costs $10/year.  Make sure you're not trying to save $10/year by becoming your own active mutual fund.  Over 85% of those fail to be the S&P 500 over 3, 5 and 10 year time frames.  The odds are against you.

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #13 on: May 16, 2017, 12:44:00 PM »

I read a lot about this in the past and came to the conclusion that index investors and dividend investors generally end up at the exact same place.  It's possibly because of similar personality traits and behaviors--general frugality, dollar-cost-averaging, not panicking in a downturn, keeping a broad eye on returns, reinvesting dividends, understanding the power of compounding, etc.  So, as a staunch indexer, I would never say anything against diligent dividend investors.  It's mostly an apples and oranges situation as far as I can see.

I agree, as long as those traits are maintained an investor should be successful.  I am however particularly drawn to indexing for its lack of time commitment. 

However I'm curious on whether that is truly optimal.  Yeah it may help you not over analyze short term fluctuations and stay the course, but is something lost when you stop paying attention to your investments?  I suppose thats more of a person to person basis but I think some may lose the sense of reward with investing if they go solely with indexing.  Might be wrong on that not sure...

I guess the "fun factor" is lost in index investing, but from my experience people who need a thrill should definitely look outside their portfolio for jollies.  I dunno... Take up bungee jumping or rock climbing if you need an adrenaline rush with reward experience?   Nobody would think of looking for titillation while tinkering with a microwave or repairing a lawn mower. Stimulation searching is the primary cause of portfolios failing.

StudentEngineer

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Re: Dividend growth/value investing VERSUS Index investing
« Reply #14 on: May 16, 2017, 01:20:49 PM »
Student, i would advise you pay general attention as to whether better future investment options emerge and also to consider special opportunities life presents to invest in yourself.

My own research suggests that individual innovators can earn a premium over 'average returns' by investing in their own business, if wisely considered.  Most of our wealth was earned via hard work, with the retirement 'icing' via passive investing. 

For example, if you really know parking and have an idea of how to efficiently manage a parking lot (say you are a wiz at parking lot mobile aps), then go out and sell land owners on hiring you to manage their assets for them, then start that parking lot management business (a great business BTW).  Self employed business development of that type will out earn passive strategies and is a path to financial independence, independent of the work, save and index model.

For me, the best strategy is a bit of both.  Invest in stocks and in yourself  (education, exploring ideas, perhaps getting investors).  Investing in oneself carries risk and a risk premium.  Be prepared to fail a few times, so businesses that can self fund growth without huge capital are best.

Good Luck.

That is definitely something to keep in mind.  Thanks for bringing that up.

"Zero transaction fees once you own the stock"

That doesn't make sense to me, because each year you have more cash to invest.  It's never free - you pay commissions.  If you pay $10 to buy $1000 worth of stock, that cost you 1.00%.  Compare that to Vanguard Total Stock Market (buying ~3500 stocks), where you pay 0.05% per year.  So after 20 years, you break even.... ignoring the $10 you need to spend to sell that stock.  Point isn't that you'll buy $1000 chunks for $10, but that it's not free and you need to compare expense ratio to cost of buying stock.

As soon as you start to become a cheap investor, spending fewer $10 commissions, you also get more concentrated.  If you buy four stocks for $10 each, that $1000 now suddenly has a 4% commission.  So worrying about costs drives you toward buying fewer stocks.

There's also an alternative to your either/or problem: index most of the money, and "tilt" with a small percentage to a value index fund.  Let someone else pick value, and buy the whole fund.  You'll get diversification that way, and the costs are low.

To be clear, $20,000 with a 0.05% expense ratio costs $10/year.  Make sure you're not trying to save $10/year by becoming your own active mutual fund.  Over 85% of those fail to be the S&P 500 over 3, 5 and 10 year time frames.  The odds are against you.

I stand by what you quoted, as soon as you own the stock you pay zero fees.  Of course to initially own the stock there are commissions, however as I noted previously there are ways to mitigate that cost greatly with discount brokers, robinhood etc.

That being said, I completely understand where you are coming from.  Pinching pennies and not looking at the overall picture could lead to inferior returns that greatly outpace the savings from pinching pennies.

Getting into a value fund is also another way to approach this and I appreciate that take on things.


I read a lot about this in the past and came to the conclusion that index investors and dividend investors generally end up at the exact same place.  It's possibly because of similar personality traits and behaviors--general frugality, dollar-cost-averaging, not panicking in a downturn, keeping a broad eye on returns, reinvesting dividends, understanding the power of compounding, etc.  So, as a staunch indexer, I would never say anything against diligent dividend investors.  It's mostly an apples and oranges situation as far as I can see.

I agree, as long as those traits are maintained an investor should be successful.  I am however particularly drawn to indexing for its lack of time commitment. 

However I'm curious on whether that is truly optimal.  Yeah it may help you not over analyze short term fluctuations and stay the course, but is something lost when you stop paying attention to your investments?  I suppose thats more of a person to person basis but I think some may lose the sense of reward with investing if they go solely with indexing.  Might be wrong on that not sure...

I guess the "fun factor" is lost in index investing, but from my experience people who need a thrill should definitely look outside their portfolio for jollies.  I dunno... Take up bungee jumping or rock climbing if you need an adrenaline rush with reward experience?   Nobody would think of looking for titillation while tinkering with a microwave or repairing a lawn mower. Stimulation searching is the primary cause of portfolios failing.

Very good point, if boring and out of sight leads to better returns then why complain?


I am going to be moving over some of my holdings into the investor shares of vtsax.  I also currently have an index tracking technology and consumer staples so I have not been solely an individual stock owner.  At this time I am going to maintain my holdings on my individual stocks since I have fairly significant unrealized capital gains and I bought them for the very long term anyways.

Thanks for your insight everyone.  Anyone else is welcome to add to the discussion.