Check out this article by Dividend Mantra: http://www.dividendmantra.com/2013/08/why-i-hold-100-of-my-equity-investments.html
It’s titled “Why I Hold 100% Of My Investments In A Taxable Account.” This, my friends, is how you think through a decision. Jason explains what the conventional wisdom is with retirement asset allocation, and then goes on to explain why it makes sense for his own financial planning to deviate from that. That is exactly how you should approach problems in life—you figure out what the generally accepted “good” practice is for a given situation, and then you apply the facts of your own life to see if it fits. Jason’s Dividend Mantra blog is one of the best homages to good judgment and critical thinking that is out there today.
Pete at Mr. Money Mustache, who is soon going to get his own post dedication on this site, recently put out an article titled “The Black Hole Second Home.”
You can read it here: http://www.mrmoneymustache.com/2013/08/18/reader-case-study-the-black-hole-second-home/
Pete has a knack for hitting you over the head with numbers and explaining why a given decision is either a no-brainer “yes” or “no”. In this case, he takes a question from a reader that has a vacation home in Jackson Hole that is losing money. You can probably already guess what Pete wants her to do with it. For those of you who like to think about how human psychology interferes with rational decisionmaking, pay attention to the psychology of the person in Pete’s case study—she has resisted selling her home because she is hoping the market will somehow be better next year.
While that can turn out to be true, it can also be the source of a lot of extended misery in your life because it allows you to fool yourself into thinking that irrational behavior will somehow magically become rational over time. When I am doing something stupid in my own life, I try to cut it out as quickly as I can once I fully recognize it. In fact, the biggest mistakes in my life occur when I create an artificial reality to fool myself out of acknowledging the truth of what is wrong. Pay close to how the protagonist in the case study has yet to sell the money pit vacation home because the value *might* improve next year.
Today’s post on Control Your Cash is great: http://www.controlyourcash.com/2013/08/21/the-most-expensive-meal-in-the-world/
This article calculates the time and financial costs of gardening, and explains the futility of doing things that appear superficially cheap. That’s why I run a blog on investing rather than frugality—I have no motivation to point out ways to save $1.50. But I do have a motivation to find ways that will generate $1,000 in passive income five years from now, and life is more fun when you devote your energy to expanding the pie rather than cutting, cutting, cutting. And plus, your financial situation is largely determined by the costs of your car, house, healthcare, any recurring bills over $100, and the stupid stuff that creeps into your budget ($75 bar tabs). I really like reading Greg’s stuff at Control Your Cash because he understands that a successful financial life isn’t about spending twenty minutes plotting ways to save $0.25 on light bulb usage.
And lastly, check out Dividend Growth Investor’s recent piece on the predictive power of rising dividends: http://www.dividendgrowthinvestor.com/2013/08/the-predictive-value-of-rising-dividends.html
That article cuts to the heart of what dividend investing is all about. Right now, if you buy Coca-Cola, you will get a $0.28 check four times per year for every share that you buy. Nothing is certain, but the odds are, that dividend check will be higher next year (at least, JFK’s assassination, the Vietnam War, the fall of the Soviet Union, 9/11, and the rise of global terrorism hasn’t stopped Coca-Cola from raising its dividend every twelve months). That’s what makes this fun—we know Exxon, Colgate, Coca-Cola, Procter & Gamble, and Johnson & Johnson will be sending out more cash to its shareholders this time next year than it is today. On the other hand, I have no idea whether Coca-Cola will trade above its current price of $38 this time next year or not. Stock prices always fluctuate, but the dividends in a diversified portfolio of excellent companies only go one direction—up.
Originally posted 2013-08-21 23:38:08.
Tim,
I've been reading MMM for almost a year now. I really like it. However, if you go on their forums and mention investing in dividend paying stocks(or anything but index funds) you will be chastised.
Thanks for the links, I hadn't seen controlyourcash before and like it so far.
I think the reason why people rag on blue-chip dividend stocks is twofold: (1) they are not thinking like business owners, and (2) they are thinking about stocks individually, rather than comprehensively.
How many times do you hear someone say: What if I buy General Electric or Bank of America in 2007 to somehow point out that stock investing is bad. Here's my alternative: the risk of an individual stock can be quite high, but the risks get much smaller when you diversify among excellent. What if you have equal stakes in Procter & Gamble, Johnson & Johnson, PepsiCo, Coca-Cola, Colgate-Palmolive, ExxonMobil, Chevron, Disney, and so on? How does that fail, in aggregate?
Here's another calculation of the cost of gardening on a system of self-watering containers I have built.
A self-watering bucket system (two 5 gal buckets and a piece of pipe to connect the reservoir) can be bought for about $6 in materials and about 10 minutes in construction time. They will produce about $2 worth of vegetables per month with almost no effort—certainly no more effort than picking them up at the grocer instead. If your grow season is, say, 6 months, you get a cash stream of $12/year for $6 down, forever. (One bag of seeds will last many years if intelligently planted, one seed per plant instead of just dumping the bag and thinning out)
Compared to financial investments, the return on investment of such a gardening system is incredibly high. You have an inflation adjusted yield of 200% or so. Conversely, to get $12 out of XOM per year, you'll have to spend over $400.
It's better to think of frugality as investing, namely finding ways to recurringly generate value, instead of just simply "cutting back". With the correct perspective on frugality, most people can unlock a lot of value in their lives.
In conclusion, you can overpay for garden setup just as you can overpay for an investment. However, if you pick wisely instead of being sold a hot stock from a broker or a hot tomato plant from Home Depot as it may be, returns can be very good indeed.
Jacob, fair enough. Good points.
Tim,
Thanks for pointing to my recent article. I find that you can have the same level of skill, whether you buy $400 or $4 million worth of XOM stock; therefore, I think investing is more scalable than gardening.
Of course, if you enjoy gardening, or cooking it is perfectly good to do it no matter what the cost. I like reading, which doesnt directly lead to any immediate benefits. But if I get one good idea from it, it might result in myself improving my life tremendously..
Certainly investing scales better. However, gardening (when done right) has such a high ROI that you'd need to be holding XOM positions of $25-50,000 before the time spent on gardening exceeds the time spent on researching/keeping track of one holding for a similar return of value. In other words, it takes quite a bit of money before scaling wins out. I simply consider gardening to be yet another "asset" in my "portfolio". It's so undervalued I can't ignore it.
Tim,
I appreciate you including me. And I really appreciate the kind words. Thanks!
It's a wonderful feeling to be in a great group of young, like-minded dividend investors. You typically think of stodgy, old men sitting in stinky recliners when you think of dividend investors. We're changing the mold!
You're doing great things here. The rate at which you're putting out high quality content is astounding. Keep up the great work, my friend!
Best wishes.
Great stuff as always. Nitpicky comment: could you make outbound links stand out a little? As they are now, it's hard to see that they are clickable links. Thanks.