3 Things 11-11-24

Thing One

The Benefits Of Human Advisors

The following was taken from an article written several years ago for the Wall Street Journal by Andrew Loo, a professor at MIT’s Sloan School of Management:

“At a conference last year, I was approached by an audience member after my talk. He thanked me for my observation that it’s unrealistic to expect investors to do nothing in the face of a sharp market-wide selloff, and that pulling out of the market can sometimes be the right thing to do. In fact, this savvy attendee converted all of his equity holdings to cash by the end of October 2008.

He then asked me for some advice: “Is it safe to get back in now?” Seven years after he moved his money into cash, he’s still waiting for just the right time to reinvest; meanwhile, the S&P 500 earned an annualized return of 14% during this period. Investing is an emotional process. Managing these emotions is probably the greatest open challenge of financial technology. Investing is much more complicated than other chores like driving, which is why driverless cars are already more successful than even the best robo advisers.

Despite the enthusiasm of tech-savvy millennials—the generation of investors now in their 20s and 30s who are just as happy interacting with an app as with warm-blooded humans—robo advisers don’t take into account the limits of human cognition; they don’t make allowances for emotional reactions like fear and greed; and they can’t eliminate blind spots. Robo advisers don’t do emotion. When the stock market roils, investors freak out. They need comfort and encouragement…”

As the last few sentences explain, the benefit of having a human advisor that you can talk to, that you can ask questions of, and who can help you keep to your plan when everything in you is telling you to push the panic (sell) button, can be invaluable. Pass it on.

Thing Two

The Importance Of Dividends

Excerpted from fidelity.com

"...When examining the 2 ways of getting paid to invest—capital gains and dividends—it's natural that dividends have special appeal. A stock's capital-gains potential is influenced significantly by what the market does in a given year. Stocks can buck a downward market, but most don't. On the other hand, dividends are usually paid whether the broad market is up or down.

The dependability of dividends is a big reason to consider dividends when buying stock. Not every stock must pay a dividend, but a steady, dependable dividend stream provides nice ballast to a portfolio’s return. For example, Procter & Gamble, the consumer-products giant, has paid a dividend every year since 1891. Procter & Gamble's stock price has not risen every year since 1891, but shareholders who owned the stock at least got paid during those down years. They weren't totally dependent on capital gains to get paid.

Payback on your initial investment

The rising dividend stream not only provides a hedge against inflation but also accelerates the payback on investment. Think of payback as a safety-net approach to stock investing. Nobody knows for sure how a stock is going to behave over time, but calculating a payback period helps establish an expected baseline performance—or worst-case scenario—for getting your initial investment back. Most investors look at 2 stocks and select the one they believe has the most upside over time. This places all the focus on reward. Calculating a stock's payback based on dividend flow forces you to address the following question: If this stock never makes me any money in terms of price appreciation, how long would it take for the dividend payments to bail me out of my initial investment?

To understand the concept of payback, look at the following example. Let's say you buy 200 shares of a $40 stock. Your investment is $8,000 and the stock pays an annual dividend of $1.20 per share (that's a yield of 3%). Based on that dividend, you expect to receive $240 in dividends the first year. If that dividend stream never changes, you will recoup your initial $8,000 investment in roughly 33 years. What if that dividend stream grew just 5% per year? You would recoup your initial investment in 20 years. In other words, your payback period would be reduced by some 13 years.

This calculation is not affected by the movement of the stock price over time. It isn't impacted by the stock's yield over time. It only makes one assumption—expected dividend growth—to compute the length of time to recoup your initial investment.

Should you focus on stocks that have the quickest payback? Not necessarily. Ultimately, total return is what matters. It's great to have a stock pay back your initial investment in just 15 years, but it's better to own a stock that increases your initial investment 5-fold in 15 years. Still, using dividend payback is a worthwhile concept for framing the risk-return potential of 2 stocks. The dividend payback matrix helps determine payback times (in years) based on dividend yields and dividend-growth assumptions..."

Note, the table below, which was included with the article, is a fairly handy tool for examining the dividend yield-growth-payback relationship at a glance. That said, you don't really need to get overly concerned with using it. But you should at least internalize what it says about the importance of considering dividends when investing in stocks, especially when their values move lower and you get understandably antsy.

Thing Three

Just A Thought

“When we are no longer able to change a situation, we are challenged to change ourselves.” - Viktor Frankl