Dividend investing for a good night’s sleep
There are many pitfalls and risks on the stock market that can lead to poor returns. There is market risk, which is about the entire stock market, and there is company risk, which is about something in a specific company. By focusing on companies with good dividends, you can filter out a lot of bad companies, but it is not as simple as just buying anything with a dividend.
You need to do your analysis and choose the right company. In this post, I do not intend to go into detail about how that particular analysis part is done. However, I want to highlight that it is perfectly possible to invest in dividend stocks via funds. There are several different ones to choose from that have such a focus.
Another risk that is not talked about as much but is probably even worse than the others is about bad investor behavior. Stock market psychology. Few admit it, but many people are drawn to behavior on the stock market that destroys returns. Behavior like selling cheap and buying expensive. When the stock market has crashed, investors are scared and sell, thinking that they will buy again when it turns around. It is completely crazy behavior. To even think that you can time it and besides, it is already too late to sell. You should have sold before it went down!
Peter Lynch’s Fidelity Magellan fund beat the stock market by a wide margin, but his average investor in the fund had periodically poor returns. In some years, the fund had around 10 percent returns while its average investor was in the red. Entirely explained by bad behavior. The investors had sold when it fell and bought back after it rose again.
Dividend investing can be a strategy that reduces the risk of that bad behavior. Investors with a focus on dividends look not only at stock prices but also at the dividend. If the dividend is unthreatened, such investors tend to have an easier time sitting still. A strategy for a good night’s sleep, so to speak.
The risk of bad behavior is certainly not something to be overlooked. It’s a sneaky rascal that wipes out more returns than you might think.
There are many different strategies to use on the stock market and the important thing is to find one that suits you. Many of us probably feel good about a strategy that makes for a good night’s sleep.
*In Sweden we get good long summer vacation, which is very good as it gives a quality time with family. I could not post more recently as I was on week long trip. Q session is in full swing, I will come with more updates in coming days…
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