Practicing patience as an investor is a competitive advantage often overlooked by adrenaline-seeking day traders and those trying to capitalize on trendy, meme stocks such as GameStop.
A favorite blog feed of mine by James Clear really hit this idea home. Imagine the ability to determine what you do with your time in a proactive way, instead of reactive. Perhaps true wealth is not money but the ability to direct the scarcest, non-renewable resource of all, our time. Time is the greatest dividend and compounding ingredient of our lives – and also our portfolio’s success.
The tortoise and hare childhood fable reveals lessons in patience and overconfidence, resilience and discipline. It is what drives me every day to remind clients (and myself) that slow and steady wins the race. Our desire for immediate gratification and the self-induced pressure to find the next Amazon, Google or Apple stock can test our patience and cause the hare in us to make fast, rash decisions. Sometimes the patience of finding, investing and understanding what you own, why you own it and the research to do so can be outweighed by the lack of patience to stay with the investment over time.
Dividends are like tortoises. Meme stocks are hares. Remember, slow and steady gets us home in the long run. In the short run, there can be a lot of excitement in momentum as short-term wins are achieved, especially when they are big. However, that often builds false confidence. Returning to that strategy for another ‘quick win’ increases your odds that, eventually, the market will hit a low and you’ll lose.
Here is some wisdom we can gain from our friend the tortoise:
- Dividends need to grow, but they don’t need to be the highest yielding. Consistency in growth is key.
- Not all dividends are created equal. Strategy is crucial when deciding to be patient with higher risk dividends.
- The health of your portfolio and patience to reinvest growing dividends over time can have lasting results.
Morgan Housel eloquently illustrates the time factor of growing wealth in his book The Psychology of Money, a must read for all investors. Housel points out that there are thousands of books about how Warren Buffet has built his fortune, “but few pay attention to the fact it’s not just being a good investor but that he has been doing it since he was a child.” Buffet is a phenomenal investor, and we miss a key point according to Housel if we attach all his success to his investment insights. The real key is he has been a phenomenal investor for eight decades!
So, does dividend investing mean a boring portfolio? Not always. For investors who want some excitement, tech stocks can be a win – if thoughtfully considered. You can have the excitement of high-yielding tech stocks as long as you also pay attention to and carefully choose based on their track record over time. Remember, it’s easy to want to jump on a stock when it spikes but that doesn’t always mean it will have sustained dividend increases, and therefore, the bubble can burst as quickly and “hare like” as it came.
Compounding wealth with dividend growth takes patience while meme stocks and gambling take luck. Your ability to live well in retirement (or even before then) will be largely influenced by how patient you can be, like the tortoise, in winning the race.
Wayne Anderman CFP® MBA is the founder of Anderman Wealth Partners, based in the Greater Fort Lauderdale Area, and a registered representative of Avantax Investment ServicesSM. Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory Services.
This information is intended to be for illustrative purposes only and does not reflect any particular investment or investment needs of any specific investor. By including these links, we are not making a specific product recommendation.
Diversification and asset allocation do not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets. Investments are subject to market risks including the potential loss of principal invested.