Should dividend investors invest in index funds? Index funds are perfect for most people who don’t want to bother about active versus passive investing their finances and retirement.
If your goal is to accumulate a certain amount of net worth in the future, and do not want to spend any time learning about investing, index funds could be your best solution. However, if your goal is to generate income in retirement, index funds might not be most optimal use of your resources. With dividend growth investing, you put a portfolio of 30 – 40 equally weighted individual securities, from as many sectors that make sense, which are attractively valued at the moment. After screening for your entry criteria, you construct your portfolio, and sit on it, while receiving a rising stream of dividend income. In addition, with dividend stocks, you are a buy and hold investor with a long-term view. You are not switching money from one company to another.
Therefore, you are reducing reinvestment risk due to transactions, and have a much lower chance of generating lower returns that come out of frequent portfolio churning. One reason against index funds, is that they include a lot of companies which do not pay ANY dividends. Therefore, the yields on index funds are very low, and not sufficient to live off of today. That’s why in order to live off this nest egg in retirement, you need to sell of a chunk of it every single year. This leaves you with a shrinking asset base, which is relying on continued growth in prices. P 500, which make them poor choices for the enterprising dividend investor. The first is that there is a lot of turnover every single year, which is not good for wealth building.
This means that every year anywhere between 15 and more than 25 companies are added and replaced by the benchmark, incurring fees for the investor. The second flaw is that index funds are weighted based on float and market capitalization. This is to serve the mutual fund industry, not the investor. For example, back in 1999, a lot of old economy stocks were thrown out of the index, and substituted for red hot technology stocks such as Yahoo!
The fourth flaw with index investing that they are not a magic panacea for sure stock market profits. An investor who doesn’t know anything about investing, and is passively saving in index funds, can still lose money. They can also lose money if they put money to work without taking valuation into account. The ordinary investor can find a way lose money even with idiot-proof index funds. The other thing is that while index funds have rock bottom expenses, they could still add up over time. If you never sell, you would never have to incur commission expenses again.
100K portfolio, you are better off cost wise in 2 years. Over the past decade, more and more investors are beginning to embrace passive index investing strategies. I am just wondering to myself, what if everyone is in index funds one day? I wonder what the consequences and inefficiencies that could arise from this phenomenon of people believe you do not need to know what you own, as long as it is an index fund. If at one point everyone is invested in index funds, this could create all sorts of inefficiencies in the market. For example, if a company asks shareholders to vote on certain issues that could be otherwise profitable, noone would vote, since conventional efficient market theory says all information is already priced into the stock. As a result, index fund managers might not even bother voting, as they won’t believe their vote counts.
In conclusion, there are a few main ideas that enterprising dividend investors should take from this article. The first idea is to buy and hold, and not engage in active trading. If you slowly built a portfolio of 30 blue chip stocks, from as many sectors that made sense, and you HELD ON, for several decades, you should do very well for yourself. The second idea is also to educate yourself about money and investing AS MUCH AS POSSIBLE. The main idea is that you are the one responsible for your retirement future.