One of the things that I find difficult, is too choose the best solution for my FIRE. Applied to investing, this translates into what core investing strategy you decide on. You know, they say you need to set up a plan and stick to it.
I feel that I am in a discovery phaze only. I would like to see, play and experience with a few investment styles before making up my mind. And I know that is bad, so how do I deal with that?
Reasons not to choose.
There is always an article out there that brings an inspiring story on the results they have with their style.
Being an index investor at the core, I keep being fascinated with the results of the dividend investors. That draws my attention. I want to go and explore it myself.
There are also the people that use indexing to get market returns. That is what I do now, but it is boring. What if I am missing out on something great?
How to proceed?
Some time ago, I already figured out that I need a layered approach to investing. This should enable me to sleep at night and try to have almost zero worries about the basic aspects of money. So yes, I do believe I have the basic hygienic covered like an emergency fund, pension saving, some guaranteed products and first-step products.
This actually leaves me with the following question:
What style is ok for me?
As time is the most precious thing of all, I want to make sure my investment style can deal with a flexible amount of time it gets from me. So, I should
- avoid the feeling that I have to free up time to invest. Hence, I need to automate as much as possible and have a main system that does not fail if I skip a month
- have fun with my investments
Based upon the above criteria, here is how I see the different styles
1. Index investing with rebalancing
This is what I do. It is actually easy to implement. I have the allocation thought true, now it comes down to spending approx 5 minutes per month to execute it. Perfect fit for criteria 1: It asks almost no time and if I miss a month, nothing really happens.
The fun part here is really low as it is execution only. On the bright site, it leaves a lot of free time to do other things.
2. Index investing with momentum or other technique
This sounds like a lot of fun and allows to be occupied for quite some time. However, It means you “have to” follow up regularly to see what you need to do. I do read from a lot of studies that you can get superior results.
Looks tempting, but takes more time – do the calculations – and temperament to follow the system. Missing a month could mean you do not sell when you are supposed to sell.
For now, I exclude this.
3. Dividend investing
Others make it look easy. I believe it is more difficult than people think. It requires time to follow up the stocks you own and see if the basics for the dividend growth is still there.
What interests me in the DGI approach is that you do not need to sell the principal to get income and that a market correction should have a limited impact on your income. For sure, there will be companies that stop paying a dividend.
Living in Belgium, I will pay 27pct dividend tax to the Belgium government. I need to add to that foreign tax. In the case of many countries, this will cost me another 15pct. This leaves out of 100USD dividend, about 62USD net in my pocket…
I am sure that dividend investing will end up being a big part of my portfolio, just not now, while I accumulate.
I secretly have already dividend stocks, as part of my play portfolio. This is where I learn about DGI.
All things considered, I believe that at this moment of the journey, indexing is the best for me. The fun part comes from my play portfolio. It is a small portfolio, so no real harm can be done. I am also convinced that over time I will switch to a dividend paying portfolio to support my FIRE lifestyle. I might end up being invested half-half. The doubt will never go away… The right style is personal and might change over time
Why did you pick a certain style? Or do you mix certain investment styles?
24 thoughts on “my struggle: index vs DGI”
I personally have a preference for index investing and for stocks that do not pay dividends.
The most efficient allocation of capital for a growing company would be in its R&D. The 2nd most efficient would be to buybacks its shares when they are low, anticipating that they would generate a higher yield than an R&D investment. The 3rd option is to pay dividends and is the only option where the investor pays taxes.
I think if you’re in a growth perspective, index investing with no focus on DGI is good.
If you are retired and you are looking for recurring income, DGI could be an interesting option.
For me, Index investing is what I’ll focus on for the next 30 years 🙂
Looks like we are aligned on what to do for the next years. It also eliminates the research on stocks. I keep more time to do other things
If I can “toss in my coin”, being a 26% tax payer myself, at the beginning index investing sounds better… Less hassle, less drama, less costs. But at the same time I hate it when you sell a fund and it takes 1 week for the money to be credited, I hate it when I am not feeling totally in control, and more than anything I hate it when losses of indexes cannot be compensated with gains (this might be an Italian thing with ETFs only, but it’s there)…
I will start considering Berkshire for my future “fund” needs, but apart from that I guess that I will be sticking to the single shares hoping that perseverance will pay off sooner than later… 🙂
Hey Stal, thx for sharing another high taxed opinion.
Belgium has the inverse situation from Italy it seems. I am taxed on gains on stock within the first 6 months. ETFs are tax free.
The time to get my money is neutral for me. The settlement cycle for stock and ETF is the same. For mutual funds, I can be a little longer.
All the best
This is a great question to consider, but I don’t think you have to feel “stuck” in any one or two or even three investing styles — you can absolutely use multiple styles together, and can change your strategy as you feel like it. That said, the research tends to say that the less “exciting” you can make it, the better. Automate your purchases, and then don’t give it another thought. 🙂
That is what I try: automate and let it run…
I like the idea of mixing investing styles. That might be a solution for the medium term.
I would prefer not to change too often my strategy, but running a few in parallel, why not!
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Mixing styles is another way to diversify, after all. 🙂
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And diversification is a good thing I heard!
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I think you know my investing style 😉
I like Dividend Growth Stock in combination with trading options.
I do not invest to have a certain sum of money. I invest to have a passive income.
And I think for me it is the best strategy.
Trading options for income is also part of my style.
For now, I invest to build wealth. I will have to figure out later how to convert this into passive income.
you are a smart man, go with what you feel most comfortable with. Experiment with the others options to get experience, and in the mid term see if you want to further diversify. This is essentially what you are doing already. Good point about taxation, it may be that from this perspective dividends are not the best option in Belgium?
How about real estate? You can make that into passive income as well.
Thx for the comment Mr. CF.
I used to own a rental, but sold it 2 years ago. I decided to take a profit on the house equity and use the cash to do works in and around our main house.
Rentals are on the agenda again for the next years as well… I like the passive income it generates. I will have to look on how to make it cash flow positive adventure.
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I kinda view my dividend portfolio as my own index fund. It’s still far from perfect in terms of diversification but yesterday I pulled up some charts in my main investing account and it was quite remarkable to see how closely the performance of my portfolio tracked several indexes. Especially the DJIA and AEX are really close matches since the start of 2016.
Thx for sharing this. I expected a DGI portfolio to have less volatility.
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You can sell options on ETFs too. Use cash secured puts to get a cheaper entry or sell covered calls to increase returns. Of course, both strategies also have their down sides (especially CC can cost you performance in strong years).
That is one of the things I do now. This way, I avoid some Belgian tax issues.
I am looking into combining my indexing with selling puts as a next step
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As I’m sure you know, we are individual stock pickers. I do like the benefits of indexing – low fees and you get a slice of everything, but it makes me cringe thinking about some of the bad companies / potentially poor value buys that are made with my money. You definitely get a lot more time for yourself (not researching etc) by using index.
I suppose one other thing is that I like owning an actual piece of a business. If the fund goes bust (very unlikely, but theoretically possible) then poof goes your stuff.
With stock picking the losses are multiplied because of how bigger % that investment is in your portfolio. But the opposite is also true, the gains are more heavily weighted too.
Definitely go with what works for you, I’d be fairly interested in buying an index fund in the S & P 500 as that would be good foreign exposure for us 🙂
I’m a DGI person and you know that. 🙂 Having said that we’re focusing more and more to index and thinking that a hybrid investing style is a good one.
At end of the day, you need to pick something that suits you and would allow you to sleep well at night.
Your comment is spot-on. You need to sleep well at night.
The thing with dgi that holds me of are the high and double taxes in Belgium.
Well as you know I have a mix of funds and individual stocks. I favor the funds. I also use a total return strategy in my retirement account. So I think you don’t need to be 100% committed to one strategy; adopting two approaches is a way of diversifying or reducing risk against one method failing. Simplicity and automation as you mention are important too; as you do have to think what could happen in you fall ill and your wife has to manage the portfolio.
Even with DGI it’s always possible in the long term that future changes to the tax law affect or reduce the dividend payments of companies; the further your FIRE horizon the more uncertainty there is.
Same doubts here, for now I’ll stick with my indexfunds. Maybe in the future some dividend investing..
It is just easier this way. I will worry later on getting income out of my portfolio.
I have had, or should I say, I still have the same issue as you do. I´m a DGI, but it´s true what you say about time. It really takes a lot of time to be able to keep up with the companies, and you need to own quite a few due to diversification.
What I love about dividend investing is that you get payed all the time. Like january and february, I got payments nearly every second day. That´s just awesome.
Another thing to think about is that with dividend investment, you get money even though if markets crash. That means you can buy companies or stocks at lower prices than before. With index, you just ride the train.
I will read more on this blog. We have the same goal.
IT is an important choice to make: DGI vs index. A lot depends on your character
and fiscal treatment in your country.