Measuring Your Strategy Results
This morning a Fidelity Investor Community contributor with the handle flexydad said something many investors don’t factor into their investing strategy. If they did, they would be less likely to make hasty decisions based on emotion. Flexydad said, “One other factor of high-quality dividend growth stocks that I appreciate are their predictability/reliability for an income stream.” The reason he could say this, I suspect, is that he measures the income he is receiving. Do you? Part of investing success is monitoring your results. Of course, this is best done if you have a goal.
He also made three very important points that investors would do well to consider. Here is what he said (with some words removed): “For example, during the past 7 years, my income stream has not fluctuated even though there have been several 10-20 % drops in the market (most notably with Covid in early 2020). The only exception to this predictably was during covid were several stocks unexpectedly cut their dividends, resulting in a drop of 5% in income. In general though, while the underlying stocks fluctuated in value, the income stream was much better behaved.
Pure growth stocks, however, are subject to sequence risk in that you may have to withdraw cash during non-favorable price points. So, in comparing the total return of a dividend growth stock versus a pure growth stock, it is important to factor in the sequence/timing of when a withdrawal will be made (e.g.- for budgetary or RMD purposes) and how that impacts total return after the withdrawals have been made.”
Here are three realities you should consider:
1. Income Is Often Needed During Down Markets
It is a rare retiree who can function without income in a bear market. Flexydad notes that he realized a slight drop in his income from some of his positions. However, the drop was minor compared to the drop in the markets. He said it was “better behaved.” I experienced the same thing.
2. Growth Stocks Are Good Until They Are Not
Do you know which investments suffered the most in my investment portfolio in 2008-2009 and in the Covid era? Growth stocks suffered big-time. Technology sector stocks to be more specific. But I don’t have to rush to sell any of them. I also don’t want to sell them. So don’t miss his helpful reminder: “Pure growth stocks, however, are subject to sequence risk in that you may have to withdraw cash during non-favorable price points.” A non-favorable price can include selling at a loss or selling at a low point in the market. Neither option is a good one, in my opinion.
3. Total Return Includes Dividends and Withdrawals
During 2022 we have withdrawn about $92K from our accounts at Fidelity. I did not sell any investments to get the cash.
I learned an important lesson in 2008-2009 about my investment choices. It caused me to change my strategy and, as a result, my stock and investment choices, and my buy/sell “rules.” As a result, the Covid market plunge was just a temporary blip on the radar of my dividend-focused approach. The withdrawals and transfers to our checking account was the source of our charitable giving, paying estimated federal and state income taxes, paying property taxes (coming in December), giving gifts to family members, and special projects like a new roof on our home. That was all done without selling any assets. It was also done without having more than 2-3% in cash or other short-term investments.
Why This Approach Is Helpful
It changes my thinking and is a check on my emotions. 1) I don’t have to spend much time thinking about a change in strategy or “rebalancing” my portfolio and 2) I can continue to live, give, and fix things that break, or get damaged by hail and not have to worry about selling something in a down market to raise cash. I think if more investors looked at their dividend history, they would learn some important lessons about staying on course. The following image may help you see where to go on the Fidelity website to learn more about your own investment performance.
A prudent investor takes the time to look at their investment performance. There are two pieces to this puzzle. The first is the growth of the overall investment portfolio. That does not have to suffer on the altar of dividend growth. The second is to look at the income that has come into your accounts and the cash you have been able to deploy in the things that matter most to you.
What Might You Do?
You may want to look at Fidelity’s tools to see if you have access to the “Performance” tab. If not, call Fidelity and ask them if they can give you access.
A Reminder from 1 Timothy 6:17-19
I have been to India twice. While I knew intellectually that there were many poor people in the world, it became more than just cold, lifeless facts when I saw so much of it first hand. It has continued to inform our charitable giving and our spending on ourselves. I like the Apostle Paul’s reminder to his protégé Timothy in the letter he wrote to Pastor Timothy regarding his preaching:
“As for the rich in this present age, charge them not to be haughty, nor to set their hopes on the uncertainty of riches, but on God, who richly provides us with everything to enjoy. They are to do good, to be rich in good works, to be generous and ready to share, thus storing up treasure for themselves as a good foundation for the future, so that they may take hold of that which is truly life.” 1 Timothy 6:17-19 ESV