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The Dividend Investing Battle In the Age of Uncertainty

Mark Newfield

2

The Occasionally Raging Argument (at least this week)

I have seen arguments this week, and this is by no means a new discussion, raging about dividend investing strategies (typically, large-cap, dividend-paying stocks). A focused, dividend-driven portfolio is the greatest thing since creatine. Uh, it is really dumb to concentrate your portfolio this way and trade cash payout for growth. Why the debate on this (and other) strategies? The human brain is constantly searching for certainty. This search is probably the single largest obstacle to clear thinking in general and sound investing in particular.

I will also opine that arguments on all sides can be the result of being terrified, needing control, doubling down due to confirmation bias or endowment effect or both, and/or insecurity. Astonishingly, too, the more intelligent you are, the more likely you are to ignore disconfirming evidence . “The first principle is that you must not fool yourself and you are the easiest person to fool.” ― Richard P. Feynman (for more on this genius, I suggest you start here ).

OK, Mark, Just Tell Me Who Is Right

The gazillion dollar question. Who is right? What if I said: “Yes?”. Ah, Mark, that is a cheap escape, you slick person, you. Well, no, it is not.

I could address the various methodologies, denote professional investors on both sides of the discussion, create a bunch of charts, and draw a conclusion. That is a fool’s errand. The debate would simply rage on. When you delve into it, you will find that there are people who are successful using many different strategies.

If you ask Nick Murray , he will tell you that his years of experience have proven that a decently diversified, 100% equity mutual fund or ETF strategy, backstopped by five years of your income needs set aside in cash, a bond ladder or similar, is the right answer. Ask Mark Lebida (Chief Investment Officer of my firm) and you will get a core-satellite answer. The self-directed, three-fund portfolio? You can find data that “proves” it works. Use index funds , allocating your dollars across markets equivalent to relative market size around the world in an ultra low cost portfolio? Sure. We have data that supports this strategy, too. These are but a few of the many, many portfolio design and/or investment manager options.

My belief is that virtually any strategy will work so long as it is consistently applied and that you save enough to reach your goals given the historical behaviors of the strategy. I also know that if your strategy is relatively concentrated, the timing of when you create cash for spending can be critically important: unless you’ve saved so much that incurring actual losses will likely never affect your desired income stream.

Since your mindset significantly affects your investing behavior, and everyone’s thinking is different, every single one of us reacts somewhat differently to market events. Therefore, there is no single, “right” portfolio. There is only the “right” strategy for your unique you - one that you will stick to long enough for it to work.

Gee, Thanks, Now I’m Even More Uncertain

Yup. The sheer number of options, and all the “proof”, makes this whole thing confusing. Terrifying, even. This is your money. It is all the money you have. Maybe your religion or your spouse are more important to you than your money. Maybe. Who can make a decision, much less stick with the decision, under these circumstances?

Let us get back to the underlying issue: desire for certainty. We are constantly trying to find the certain one, the one, true ring . Do we know how big our universe is ? Not really. Do we know how the the brain works? Sort of and mostly no - ask Neil Bage or your favorite neuroscientist . What is in the oceans , which make up 70% of the earth? We have some knowledge, but are far from really understanding our own oceans.

If there is anything the historical performance charts tell me, it is that markets are a random walk . So you ain’t gonna get certainty. The approach ( Get over it! ) is easy. Executing this? Hard. I mean like good versus evil, epically hard.

However, You Are Not Without Control Here

You can choose your overall mindset. There are mindfulness techniques to help you cope with uncertainty .

As regards your portfolio design, I think it is crucial that you understand your investing mindset. Are you someone who will mostly ignore a 50% downturn? Ok, you can probably tolerate a 100% equity portfolio. Does your stomach turn if your investments drop 20% in value? Well then, you ought to take a different approach.

You can use a variety of quantitative and qualitative tools to assess your mindset. For most people, we find that some sort of reasonably low cost, diversified portfolio is a good choice. That makes the key decision the amount of volatility built into the portfolio. This is not without its issues. If you stick to your strategy, and that to me is the one of the two really important things you can control, there are times it will be “wrong”, might feel really wrong, and may stay that way for years. As my good friend Brian Portnoy says: “Diversification means always having to say you are sorry.” Why? One or more of your investment classes will be performing poorly at any given time. That is actually the goal: that the investment classes balance themselves out over time: Not too hot, not too cold. At times this definitely feels awful - there are times when they are all negative. This, generally, happens to be the time when you most want to bail out and when you most need to stand pat.

Are you willing to let compounding work by staying invested and continuing to consistently save when you feel like everything in your investment strategy is wrong?

What Else Can I Do?

First, do not use the word “loss” when your investment portfolio has gone negative in a given timeframe. You are experiencing volatility (and will many times over any multi-year period). It is highly likely that you are experiencing a temporary reduction in value . You only incur a loss if you liquidate an investment when it is worth less than you paid for it. To be fair, in a lifetime of investing, there are probably a few investments you make that will not ever exceed what you paid for them. Those items, at sale, do create real losses ( which can, sort of, be a good thing ). However, if you reinvest those dollars, you give yourself an opportunity for gains in other investment selections.

Second, many of you have a long time horizon , even if you are 66 like me. The Social Security Administration says I have 19.89 years left . I am planning for at least 35 years and I want a contingency cushion at 100, too. Am I crazy? No, I look at the data, and I know that your and my economic status and education level are important drivers of your lifespan - and the actuarial tables are driven by the past, not the future. Medical technology is continuing to rapidly advance. What used to kill you might be a disabling event today or it may be curable altogether. Either way, you remain alive. The fact that you are reading this implies that you are wealthier than the population and also more highly educated. You probably have better healthcare options than the average person and you know more about wellness, hence a strong probability that your lifespan will be greater than the average. A small aside: my Dad is 99 - statistically he should have been dead about 17 years ago. If we had planned for him to be dead at age 82 to 85, he would be living solely on Social Security right now, or I would be writing decent-size checks, neither of which would have been a pleasant outcome.

Once again, staying the course is highly likely to be beneficial. This is boring, I know. You might want the excitement of “beating the market” - your brain craves dopamine just as much as it wants certainty. In the long-term, I am betting you will be quite happy with boring, good, long-term results in line with your values, purpose, and desired outcome(s). The chart below shows that, by holding just two assets over a 13 year period you have an incredibly good chance of realizing positive returns.

Source: Macrobond; MSCI World Equity Mid and MSCI Large Cap Total Return in GBP, 1 January 1972- July 2022

One other thing about leaving your money invested: compounding takes time. No one has proven that they can time the markets. There are plenty of people who have gotten lucky once. We read about them all the time - and hardly anyone acknowledges that it was luck. If you keep moving money in and out, it is nigh impossible to get the benefits of compounding. Intentionally creating the conditions that require luck for you to be successful is not a wise thing.

Third, save more than you think you need to. This is the second, truly controllable item. It implies spending less than you make. It also implies knowing how much you need to save. Say hello to (shameless, talking my book, plug) having a financial plan .

Fourth, maintain a liquid reserve. This might be, for example, cash, an ultra-low volatility bond fund, Treasury bills, a money market account, or any combination of these types of options. The purpose here is to have resources such that you can avoid withdrawals from your investment accounts in down markets.

The Wrap

Save more than you think you need to.

Most successful investors/wealth builders who achieve outstanding results have done so by sticking with their strategy for long periods: at least 10 years and more likely 30+ years.

Maintain a liquidity reserve.

Remind yourself that what you are most probably experiencing in down markets is a temporary reduction in value.

You may note that my advice is awfully similar to what I wrote here . Hmmm.

Thanks for reading Mark’s Substack! Subscribe for free to receive new posts and support my work.

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The Dividend Investing Battle In the Age of Uncertainty. Mark Newfield. 2. The Occasionally Raging Argument (at least this week) I have seen arguments this week, and this is by no means a new discussion, raging about dividend investing strategies (typically, large-cap, dividend-paying stocks). A focused, dividend-driven portfolio is the greatest thing since creatine. Uh, it is really dumb to concentrate your portfolio this way and trade cash payout for growth. Why the debate on this (and other) strategies? The human brain is constantly searching for certainty. This search is probably the single largest obstacle to clear thinking in general and sound investing in particular. I will also opine that arguments on all sides can be the result of being terrified, needing control, doubling down due to confirmation bias or endowment effect or both, and/or insecurity. Astonishingly, too, the more intelligent you are, the more likely you are to ignore disconfirming evidence . “The first principle is that you must not fool yourself and you are the easiest person to fool.” ― Richard P. Feynman (for more on this genius, I suggest you start here ). OK, Mark, Just Tell Me Who Is Right. The gazillion dollar question. Who is right? What if I said: “Yes?”. Ah, Mark, that is a cheap escape, you slick person, you. Well, no, it is not. I could address the various methodologies, denote professional investors on both sides of the discussion, create a bunch of charts, and draw a conclusion. That is a fool’s errand. The debate would simply rage on. When you delve into it, you will find that there are people who are successful using many different strategies. If you ask Nick Murray , he will tell you that his years of experience have proven that a decently diversified, 100% equity mutual fund or ETF strategy, backstopped by five years of your income needs set aside in cash, a bond ladder or similar, is the right answer. Ask Mark Lebida (Chief Investment Officer of my firm) and you will get a core-satellite answer. The self-directed, three-fund portfolio? You can find data that “proves” it works. Use index funds , allocating your dollars across markets equivalent to relative market size around the world in an ultra low cost portfolio? Sure. We have data that supports this strategy, too. These are but a few of the many, many portfolio design and/or investment manager options. My belief is that virtually any strategy will work so long as it is consistently applied and that you save enough to reach your goals given the historical behaviors of the strategy. I also know that if your strategy is relatively concentrated, the timing of when you create cash for spending can be critically important: unless you’ve saved so much that incurring actual losses will likely never affect your desired income stream. Since your mindset significantly affects your investing behavior, and everyone’s thinking is different, every single one of us reacts somewhat differently to market events. Therefore, there is no single, “right” portfolio. There is only the “right” strategy for your unique you - one that you will stick to long enough for it to work. Gee, Thanks, Now I’m Even More Uncertain. Yup. The sheer number of options, and all the “proof”, makes this whole thing confusing. Terrifying, even. This is your money. It is all the money you have. Maybe your religion or your spouse are more important to you than your money. Maybe. Who can make a decision, much less stick with the decision, under these circumstances? Let us get back to the underlying issue: desire for certainty. We are constantly trying to find the certain one, the one, true ring . Do we know how big our universe is ? Not really. Do we know how the the brain works? Sort of and mostly no - ask Neil Bage or your favorite neuroscientist . What is in the oceans , which make up 70% of the earth? We have some knowledge, but are far from really understanding our own oceans. If there is anything the historical performance charts tell me, it is that markets are a random walk . So you ain’t gonna get certainty. The approach ( Get over it! ) is easy. Executing this? Hard. I mean like good versus evil, epically hard. However, You Are Not Without Control Here. You can choose your overall mindset. There are mindfulness techniques to help you cope with uncertainty . As regards your portfolio design, I think it is crucial that you understand your investing mindset. Are you someone who will mostly ignore a 50% downturn? Ok, you can probably tolerate a 100% equity portfolio. Does your stomach turn if your investments drop 20% in value? Well then, you ought to take a different approach. You can use a variety of quantitative and qualitative tools to assess your mindset. For most people, we find that some sort of reasonably low cost, diversified portfolio is a good choice. That makes the key decision the amount of volatility built into the portfolio. This is not without its issues. If you stick to your strategy, and that to me is the one of the two really important things you can control, there are times it will be “wrong”, might feel really wrong, and may stay that way for years. As my good friend Brian Portnoy says: “Diversification means always having to say you are sorry.” Why? One or more of your investment classes will be performing poorly at any given time. That is actually the goal: that the investment classes balance themselves out over time: Not too hot, not too cold. At times this definitely feels awful - there are times when they are all negative. This, generally, happens to be the time when you most want to bail out and when you most need to stand pat. Are you willing to let compounding work by staying invested and continuing to consistently save when you feel like everything in your investment strategy is wrong? What Else Can I Do? First, do not use the word “loss” when your investment portfolio has gone negative in a given timeframe. You are experiencing volatility (and will many times over any multi-year period). It is highly likely that you are experiencing a temporary reduction in value . You only incur a loss if you liquidate an investment when it is worth less than you paid for it. To be fair, in a lifetime of investing, there are probably a few investments you make that will not ever exceed what you paid for them. Those items, at sale, do create real losses ( which can, sort of, be a good thing ). However, if you reinvest those dollars, you give yourself an opportunity for gains in other investment selections. Second, many of you have a long time horizon , even if you are 66 like me. The Social Security Administration says I have 19.89 years left . I am planning for at least 35 years and I want a contingency cushion at 100, too. Am I crazy? No, I look at the data, and I know that your and my economic status and education level are important drivers of your lifespan - and the actuarial tables are driven by the past, not the future. Medical technology is continuing to rapidly advance. What used to kill you might be a disabling event today or it may be curable altogether. Either way, you remain alive. The fact that you are reading this implies that you are wealthier than the population and also more highly educated. You probably have better healthcare options than the average person and you know more about wellness, hence a strong probability that your lifespan will be greater than the average. A small aside: my Dad is 99 - statistically he should have been dead about 17 years ago. If we had planned for him to be dead at age 82 to 85, he would be living solely on Social Security right now, or I would be writing decent-size checks, neither of which would have been a pleasant outcome. Once again, staying the course is highly likely to be beneficial. This is boring, I know. You might want the excitement of “beating the market” - your brain craves dopamine just as much as it wants certainty. In the long-term, I am betting you will be quite happy with boring, good, long-term results in line with your values, purpose, and desired outcome(s). The chart below shows that, by holding just two assets over a 13 year period you have an incredibly good chance of realizing positive returns. Source: Macrobond; MSCI World Equity Mid and MSCI Large Cap Total Return in GBP, 1 January 1972- July 2022. One other thing about leaving your money invested: compounding takes time. No one has proven that they can time the markets. There are plenty of people who have gotten lucky once. We read about them all the time - and hardly anyone acknowledges that it was luck. If you keep moving money in and out, it is nigh impossible to get the benefits of compounding. Intentionally creating the conditions that require luck for you to be successful is not a wise thing. Third, save more than you think you need to. This is the second, truly controllable item. It implies spending less than you make. It also implies knowing how much you need to save. Say hello to (shameless, talking my book, plug) having a financial plan . Fourth, maintain a liquid reserve. This might be, for example, cash, an ultra-low volatility bond fund, Treasury bills, a money market account, or any combination of these types of options. The purpose here is to have resources such that you can avoid withdrawals from your investment accounts in down markets. The Wrap. Save more than you think you need to. Most successful investors/wealth builders who achieve outstanding results have done so by sticking with their strategy for long periods: at least 10 years and more likely 30+ years. Maintain a liquidity reserve. Remind yourself that what you are most probably experiencing in down markets is a temporary reduction in value. You may note that my advice is awfully similar to what I wrote here . Hmmm. Thanks for reading Mark’s Substack! Subscribe for free to receive new posts and support my work.