As originally appeared in The Jerusalem Post on January 25, 2018.
My wife and I recently attended an event at our son’s high school that focused on relating to our children. One of the points made was that we all tend to have our hopes and dreams for our children, but usually, the children don’t follow our script. And that we can’t make them into something that they are not. I remember back to this same child’s interview for first grade. We sat with the principal and he asked us what high school we would like our son to go to. I remember answering that neither one of us has any idea, this is first grade; for high school, we will send him to a school that is most suitable for him, not the school which will give us the most honor!
It was at this school function that I remembered how a few years ago I wrote a column for Marketwatch.com, and I was lambasted for questioning the wisdom of using dividend stocks as a replacement for bonds. It didn’t help that the headline writer changed my original title to “Time to dump high-dividend stocks?” Nothing like a little shock value to get a lot more article views.
As a result of that article, I received an invite to be a guest on a very well-known investment radio show. The host was so taken aback by what I said that I spent an hour defending myself. I explained that 1- I am not the headline editor and 2- I have nothing against dividend stocks, it’s just that when investors use them as a replacement for bonds that I get scared. When investors start trying to change the laws of investing, bad things happen. As I wrote, “When you start seeing headlines like, “5 dividend stocks for a successful retirement” or “Retirement strategy: Buy any dips in dividend winning stocks,” warning signs should start to flash. A basic rule in investing; nothing goes up in a straight line forever. I am not against dividend stocks; it’s just that when they become the panacea for all investors I get worried.”
Sort of like trying to make your child into something she isn’t!
A stock is a stock
Why is it that investors try and transform an asset or system into something that it isn’t? Just like trying to fit that square peg into a round hole, you can keep on trying but as time goes by you will continue to fail. Sure you may have some short-term success, but most investors are in it for the long haul, trying to grow their money over time, hopefully realizing there may be periods of where markets drop. I can’t tell you how many investors call me and say that they will sell as soon as it is obvious that they should sell. Well, history and statistics from behavioral economists teach us that that strategy in of itself will set you up for big losses and severe portfolio underperformance. If you invest in stocks, you are looking for a long-term appreciation but must understand that markets can drop and drop hard.
I often need to remind my clients that they can’t change the role of a certain investment into another role. Carl Richards writes in the NY Times, “Investors make a similar mistake every time they try to make stocks feel safe like bonds or try to get bonds to generate big returns like stocks. Stocks, bonds, and even cash are what they are. That doesn’t stop us from trying to change their nature though. More often than not, we end up disappointed because they fail to meet our expectations. “
Richards nails it. You can’t turn a stock into a bond or vice versa. Sure over the short term they may have overlapping characteristics that make you think you can replace one with the other, but over time, investments usually revert to their mean.
Richards continues, “The closest thing we have to a universal rule in finance is that risk and expected return are related. Once we’ve got a diversified portfolio of investments, we must take greater risk to get a higher return. Risk is mainly a function of how wildly the investment you own fluctuates in value. In other words, in order to get a higher return, we need to deal with something going up and down. Sometimes a lot. That’s the deal we make with the markets, and there’s no real way around it. Every time I see someone trying to figure out a clever way to break this rule, it ends up breaking them.”
Just like successful parenting, if you want to be a successful long-term investor, don’t try changing the laws of investing.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.gpsinvestor.com or email firstname.lastname@example.org.