The markets keep going up, and investors are still doing well.
Weak human behavior might work against dividend growth investing strategies when the next steep decline hits, and it will.
Viewing the world of money in different ways might help you avoid panic selling.
We are all human, and human behavior is not rational at times, especially when it comes to money. Since I believe that investing is an emotional endeavor, I myself have had to fight back against behaviors that could have ruined my own plan for a secure financial future. It was and is never easy, and I slip up, even now, as a retired "know it all."
Consider those folks who are new to the investing game and how they might feel just because of human behavior. I have found over many years of just watching, that there are some behaviors that appear universal in failed investment strategies:
Betting on a tip with overconfidence
We have all done this. Somebody whispers a hot stock tip on a sure thing. Being greedy, we want in on the action to make some fast money, or even hit the jackpot. We pour a few grand into a stock, and it pops by a few %, and we feel emboldened. We sink a bunch more into the tip and the bottom drops out. We dump the rest, call it a loser, and the stock soars the next day.
Jump on board
We see a stock that everyone is talking about so we feel as though we must be missing out. Naturally, we open our wallets to get in on the action. Ever see a hot craps table? Someone gets lucky, and everyone runs over to fight to place big bets on the hot roller. Most of the time everyone walks away from the table with far less money. Same thing with those hot stocks. We usually get in after the big move and are left holding the bag when the early money dumps their shares. Then, we dump ours and blame everyone else.
People turn into "sheeple"
The markets have been going up for years, and we finally take the plunge. Then, the bottom drops out, and shares nosedive. It seems that everyone is heading for the exits. We panic, curse ourselves for another dumb investment, and feel lucky to sell at just a 40% loss. The next week, the stock rebounds, and we swear that the markets are rigged just to take OUR money.
In a nutshell, it boils down to buyer’s remorse, seller’s remorse, fear of missing out, and panic.
People Smarter Than Me Have Done Heavy Research In Investor Behavior
OK, I am not the most savvy pro type of guy on Seeking Alpha, and I am not a clinical psychologist, but with all due respect, I should give a nod of the head to various folks who have spent more than 5 minutes studying human behavior by investors. As noted in this article, here are some of the "pros’" thoughts on behavior bias:
Trent Porter, founder of Denver-based Priority Financial Planning, says investors should become aware of their own biases. "While not inherently bad, and most are natural to human behavior, these biases could negatively impact one’s ability to increase their financial position," he says.
While the article goes on to list 6-7 topics for your consideration: loss aversion (none of us want to lose money, but should we be afraid as a dividend growth investor), mental accounting (if this goes down, I can lose x% of my portfolio, OH NO, I better dump and run!), illusion of control (the markets will do what they will do, and we cannot control anything), recency (well, if the market is going up, or down, now, it should continue the same path!), hindsight (I love this one – shoulda, coulda, woulda!), and the herd mentality (another of our favorites as we follow what the mobs are doing by either buying high or selling low).
In any event, take a look at the article noted above for further interpretations of each pitfall. Personally, I think my own observations are easier to understand, but give academia its due, I suppose. All of this being said, what do I do to fight back, in as simple a way as possible?
Try Looking At Your Portfolio This Way
Keep in mind that as a dividend growth investor for retirement, we are, and should be, focused on growing a reliable income stream. While the Dividend King Retirement Portfolio consists of stocks, share prices, and total value, does it truly matter if the share prices fluctuate as long as the income stream keeps flowing and increasing?
The model Dividend King Retirement Portfolio currently consists of Coca-Cola (KO), Procter & Gamble (PG), Johnson & Johnson (JNJ), 3M (MMM), Emerson Electric (EMR), Cincinnati Financial (CINF), Lowe’s (LOW), Hormel (HRL), Colgate-Palmolive (CL), Dover (DOV), and AT&T (T).
Take a look at the chart that REALLY counts, to me at least:
The stock, the number of shares, and the income stream. I plugged in an easy number of shares to compute the dividends. You would use your own actual shares when making a chart like this.
Now, IF you can focus on the income and number of shares, you will probably go a long way towards reducing many behavioral mistakes. As a matter of fact, just as I write this, CL increased its dividend by 5%, so on a lousy day for the markets, this hypothetical chart has actually gone UP by $40 bucks! Go ahead and add any increases to your income stream, and focus on that. You will be surprised at how few bad days you will TRULY have. Less stress about your investments, much less knee jerk panic selling, and a better understanding of how dividend growth investing works.
Let me be very clear, though. Doing this little exercise does NOT preclude anyone from doing the necessary research on each position held, nor does it preclude you from knowing your own personal risk tolerance level.
Here Is Another Way To Think About Sharp Corrections
Let’s say you bought an investment condo for $200,000 in South Florida. You rent it out for a cool $1,500/month to a fine couple and have no mortgage. You wake up one day and find out that the housing market just crashed. That condo just dropped in value down to $125,000.
Should you immediately dump the place before it drops further? Or, should you keep cashing the monthly rental checks that you have been getting, and understand why you bought the condo in the first place!
Your yield on cost for this property is about 7.5% and all of your expenses to maintain and manage the property are tax deductible. Still want to dump the condo? You NET 5% or $10k/annually roughly. That money pays the bills just like the dividend income stream does.
The Bottom Line
If you cannot look at dividend growth investing in these simple ways, then MAYBE you should be invested in guaranteed fixed income products. That is not a crime, it is reality. My own very simple little approach works most of the time for me.
How do YOU avoid derailing your long-term plan?
Not To Bore You, But…
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Disclaimer: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him, and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance. The long positions held are based upon what the model portfolio holds, and I personally could have held all of the stocks noted at one time or another.
Disclosure: I am/we are long CINF, CL, DOV, EMR, HRL, JNJ, KO, LOW, MMM, PG, T.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The portfolio is for educational purposes only and not an actual portfolio. The long positions are based on the model portfolios.