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Robert Allan Schwartz
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I'm a computer programmer and teacher of computer programming. I am self-employed, and manage my own SEP/IRA and investments for retirement. I invest in companies that pay dividends, have paid dividends for many years, and have increased dividends for many years. I am willing to ignore periods... More
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  • Do Younger Investors Have Time To Recover From Investing Mistakes? 39 comments
    Oct 1, 2013 6:02 PM

    Do Younger Investors Have Time To Recover From Investing Mistakes?

    It is commonly said that younger investors can afford to make riskier investments, as they have more years in which to recover from losses. Is this true?

    Suppose a younger investor invested in a company called Boo.com in autumn 1999. Less than one year later, in May 2000, the company entered bankruptcy and was liquidated. The investor lost 100% of his investment, but he was only a year older; perhaps he had plenty of time to recover from his loss.

    Some losses take longer to manifest. Suppose a younger investor bought stock in Lycos. In 2000 Telefonica bought Lycos for $12.5 billion. In 2004 Telefonica sold Lycos for $95.4 million. The younger investor would have lost more than 99% of his investment, and it would have taken 4 years, not one; perhaps he had plenty of time to recover from his loss.

    Some losses take decades to manifest. Suppose a younger investor bought stock in the Boston Globe, a more conservative investment than either Boo.com or Lycos. In 1993 the New York Times bought the Boston Globe for $1.1 billion. In 2013 the New York Times sold the Boston Globe for $70 million. The younger investor would have lost more than 93% of his investment, and it would have taken 20 years, not one; perhaps he had plenty of time to recover from his loss.

    A loss is not just about time, it's also about emotion. Loss aversion says that "losses are twice as powerful, psychologically, as gains". Or, as Indiana Jones said in "Raiders of the Lost Ark": "It's not the years, honey, it's the mileage".

    Suppose you are 25 years old, you make a significant investment, and 5 years later you realize a significant loss. Now you are 30 years old, and not only do you not have more than you started with, you have less than you started with. You are 5 years closer to retirement, but you are worse off than you were 5 years ago. You will probably put more pressure on yourself, and you will be tempted to choose riskier investments that appear to offer higher gains or higher yields. The bad news is, riskier investments stand a higher chance of failure, or they wouldn't be riskier. How many such cycles can one person stand before they give up and say, "I guess I'll just live off my Social Security"?

    Conclusion

    I disagree that younger investors have time to recover from investing mistakes.

    I disagree that younger investors can "afford" to make riskier investments.

    I believe that younger investors should invest conservatively until they can be sure that they have enough to retire on; then, and not before then, can they afford to make riskier investments, and not have their retirement jeopardized if the investments realize a significant loss.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (39)
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  • Dividend Growth Machine
    , contributor
    Comments (1446) | Send Message
     
    RAS: I completely agree with you. Some people say that young investors should take on more risk because they might hit a home run -- for example, an investment that increases tenfold within a couple of years. They might not hit any home runs, though, and even if they do, there's a good chance that their risky approach will lead to a lot of strikeouts. (And losing all your money is akin to getting kicked out of the ball game.)

     

    I'm content with hitting singles year after year, which will likely be good enough to win the game (in other words, meet my investing goals).
    1 Oct 2013, 06:52 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » DGM, me too!
    2 Oct 2013, 08:45 AM Reply Like
  • dividendbonanza
    , contributor
    Comments (394) | Send Message
     
    RAS,

     

    I've a little different approach with our grandkids and accounts we set up for them. The guideline is 80% DGI minimum and 20% growth stocks maximum.

     

    Interestingly, the youngest went 100% DGI.

     

    I want them to get a real life feeling for the risk/reward thought process.

     

    Of course, we are keeping the training wheels on!
    1 Oct 2013, 08:46 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » Sounds like the youngest has good smarts. :-)
    2 Oct 2013, 08:45 AM Reply Like
  • MisterJ
    , contributor
    Comments (585) | Send Message
     
    There are no working get-rich-quick schemes. That stuff only makes telemarketers rich and leaves you holding the bag. Mr.RAS correctly exposes the mistake of chasing home runs instead of conservative income and/or value. Thanks and let's warn our children and friends!!!
    1 Oct 2013, 08:58 PM Reply Like
  • User 6707651
    , contributor
    Comments (983) | Send Message
     
    Great article. That's why I 32 I don't touch high growth stocks. The whole, but I can make it back mentality sounds like a pathetic gambler throwing the dice just one more time (again and again)
    1 Oct 2013, 09:19 PM Reply Like
  • SafisKusai
    , contributor
    Comments (233) | Send Message
     
    your thinking i believe is mostly correct, however I think you assume that people will take a buy and hold forever stance. Your 2 examples that took a longer amount of time were based on mergers that happened where a premium is made while the investment still makes sense and the business is healthy. Generally you'll have a nice gain and your risk profile on that investment would go up because the investment is now fairly to overvalued now and your allocation of that single investment to your entire portfolio is much higher compared to the rest of your investments.

     

    I think that young people can afford to have a greater risk profile but should stick to pre-set stop losses and portfolio rebalancing. People should also understand that taking greater risk does not necessarily mean betting the family farm on a lotto ticket. Diversifying risk is pretty important in my opinion and if you are going to have something more risky in your portfolio, you should watch it and understand any new developments and any upcoming developments to be able to manage that risk so that it doesnt go to 0.
    1 Oct 2013, 10:30 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » "I think you assume that people will take a buy and hold forever stance."

     

    No, I don't assume that.
    In my dividend growth investing, I take a "buy and MONITOR" stance.
    2 Oct 2013, 08:46 AM Reply Like
  • AgAuMoney
    , contributor
    Comments (4430) | Send Message
     
    Dave, completely agree.

     

    Those that teach young investors have time to recover from a loss are correct in that the young have time. They are incorrect in not recognizing the cost and permanent set back that loss will incur due to missed opportunity and missed compounding.

     

    I suspect those teachers simply do not have the wisdom of experience commensurate with their knowledge of theory.
    2 Oct 2013, 12:22 AM Reply Like
  • dividendbonanza
    , contributor
    Comments (394) | Send Message
     
    AAM, nicely stated.
    2 Oct 2013, 12:32 AM Reply Like
  • Paul Wagner
    , contributor
    Comments (1796) | Send Message
     
    Robert.."I disagree that younger investors have time to recover from investing mistakes."

     

    Another way of stating that is: "I believe younger people shouldn't invest." I don't think that's what you meant.

     

    "Mistakes" come in all shapes and sizes. They are inevitable. I bought penny stocks in my 30's. Big mistake. I'm 67, retired 17 years now and living off my investments. I learned not to buy more penny stocks. The experience made me smart(er).

     

    My point is that it is the portfolio that counts, whether you invest in real estate, stocks, bonds. Striking out on occasion with a reasonable amount of your money makes sense IF you've done your due diligence.
    2 Oct 2013, 12:31 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » "Another way of stating that is: "I believe younger people shouldn't invest." I don't think that's what you meant."

     

    Paul, you're right, that is not what I meant. Of course younger people should invest. As soon as possible. Just not in risky investments that could lose most or all of their investments.
    2 Oct 2013, 01:17 PM Reply Like
  • PendragonY
    , contributor
    Comments (5423) | Send Message
     
    Dave,

     

    I agree 100% with what you said. What people don't understand is that when you lose a $1 at 25, you not only lose that dollar, but all the income and gains that $1 might have made over the rest of your investment lifetime (and that is not even taking into account compounding of dividends). So losing a $1 at 25 is a way bigger hit than losing a $1 at 60.
    2 Oct 2013, 01:40 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » Pen, that's a very good point. Thank you!
    2 Oct 2013, 01:41 PM Reply Like
  • Eddie Herring
    , contributor
    Comments (1921) | Send Message
     
    Pen

     

    He's notBob and notDave, he's Robert. Ha ha, just kidding.

     

    Eddie
    2 Oct 2013, 02:23 PM Reply Like
  • PendragonY
    , contributor
    Comments (5423) | Send Message
     
    :(

     

    Eddie, that's very true. They all give such good advice I get confused soemtimes. I typed in my response after AuAg typed in his and I let his confusion spread to me.

     

    Sorry Robert (but you seemed to know who I was talking to anyway!).
    3 Oct 2013, 11:56 AM Reply Like
  • Eddie Herring
    , contributor
    Comments (1921) | Send Message
     
    RAS

     

    My son lives about 5 hours away from me. When we go visit we usually go by auto. One route we can take is predominately interstate highway. Another route is predominately 4 lane state roads. Same thing when my son and his wife come visit us. We could travel the interstate and drive much faster and "possibly" get there sooner but our risk of being involved in an accident goes up quite a bit, as does theirs.

     

    We can travel the state route and "possibly" get there later but it's probably a little safer and I believe our risk of being in an accident goes down. Plus the scenery is just better.

     

    I've driven both routes multiple times. It's not unusual for traffic to get backed up on the interstate due to accidents. In fact, one time I had to detour back on to the state roads in order to continue traveling because of the interstate being blocked by an 18 wheeler accident.

     

    Obviously I'm using this to make a point here concerning investing and taking more risk. In driving both routes they usually come out within 30 minutes of each other in travel time. Same thing with my younger son and his wife driving it the opposite way coming to visit. We take the more conservative route (4 lane state roads) and have a more pleasant trip and enjoy the things we see along the way. It doesn't matter whether it's me and my wife driving, or my son and his wife driving, the trip time is about the same.

     

    I tend to believe the same thing in my investments. I take the more conservative DGI approach and enjoy the ride along the way. I've indicated to my kids they should do the same thing. They can get there just as quick, with less stress, and enjoy the ride a little better. While they may occasionally want to take another route (invest in a riskier stock) predominately they're going with the conservative route (DGI). And I believe they'll reach their goals just as soon as the riskier route.

     

    Eddie
    2 Oct 2013, 02:17 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » "they're going with the conservative route (DGI). And I believe they'll reach their goals just as soon as the riskier route."

     

    If not sooner! :-)
    2 Oct 2013, 03:09 PM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4173) | Send Message
     
    Eddie ~
    We used to try to get from one major city to another along the freeways here in CA's central valley using 4-lane roads or even 2-lane roads. Finally gave it up and decided "you can't get there from here." Just too many long detours around large agricultural areas. But it was fun trying! I'm just thankful I don't have to routinely travel the freeways anymore. :)

     

    Which has nothing to do with investing, of course. I think Robert's right about younger investors needing to wait until they have secured their retirement before investing in riskier stocks. I think I'm living proof of that. LOL!

     

    Miz
    2 Oct 2013, 04:18 PM Reply Like
  • Eddie Herring
    , contributor
    Comments (1921) | Send Message
     
    Miz

     

    I agree. Using the driving analogy again, when we teach our kids to drive, don't we teach them to start out slow, to not take risks? And we do that to keep them safe, from getting in to accidents. Why would we teach them to take more risk with their investments starting out?

     

    Eddie
    2 Oct 2013, 05:08 PM Reply Like
  • Paul Wagner
    , contributor
    Comments (1796) | Send Message
     
    Eddie: did you ever ask yourself why the interstate highway was built, if the state route is more pleasant, safer and gets you there "just as quick"? Why would anyone want to build a highway that was less pleasant, less safe and didn't get you there any faster?

     

    It's most likely that your state highway had become slow and less safe, or that it would most surely have become so over time unless the interstate highway had been built to relieve the burden on the state route. If everyone now abandoned the interstate like you and your son have, your favored state route would again become crowded, slow and less safe. In which case, you might decide to hop back on the less-crowded, safer interstate highway. So, you have the building of the interstate to thank for the fact that the state route now affords you the opportunity in your retirement the luxury of a leisurely pace of travel.

     

    To use your analogy, if everyone took the DGI approach and invested only in that relatively small cohort of public companies that meet your standards, the DGI "highway" would eventually become overcrowded (overpriced) and thus risky and you would sooner or later find that you would be better off seeking out other fine companies whose shares were more reasonably priced relative to their growth rates and who were advancing the frontiers of technology and services valuable to society.

     

    The reason the DGI highway remains a safe place for you to invest is because many investors, particularly young ones and enterprising ones, are funding the newer companies, the Googles, the Facebooks, the Teslas, etc. and the small caps -- unwisely you might suggest. If their investment money was all going into the DGI favorites, those shares would be overpriced, the yields would be negligible and you might decide to rethink your strategy.
    4 Oct 2013, 11:27 AM Reply Like
  • Paul Wagner
    , contributor
    Comments (1796) | Send Message
     
    or maybe later. ;=)>
    4 Oct 2013, 11:29 AM Reply Like
  • Eddie Herring
    , contributor
    Comments (1921) | Send Message
     
    Paul

     

    As a matter of fact I have asked that very same question before. As you know Eisenhower was the primary driver behind the interstate highway system being built but what a lot of people don't realize is what drove (no pun intended) him. It wasn't just to connect larger cities.

     

    Based on his military experience and influenced by the autobahn of Germany he saw in WWII, he recognized that an interstate system would provide vital transportation for military uses during national emergencies. Of course he saw the convenience for civilian uses as well, but his military background I believe drove him.

     

    I recognize that the state routes provide safer and often just as quick trips, depending on the locality, as the interstates because of more people choosing to use the interstates. And of course the reason for that falls back to the different motivations, preferences, and destinations of the people traveling. Of course one could argue that if everyone chose to do like my son and I, then the interstates would become less crowded and we could switch back to them. :-)

     

    To be quite candid about it I'm not real concerned about too many people switching over to the DGI highway. Here's why I feel that way:

     

    1 - The modern financial industry, including academia, is geared toward promoting transaction based investing. In other words trading not investing. That will continue to steer people away from DGI type investing.

     

    2 - Dividend growth investing takes patience. Our society is no longer a society willing to wait for gratification. Hence the majority of those coming to the market want quick gratification. The recent commentary on one of my articles concerning options is a good indicator of that. It's part of the "humanness" that conflicts with long term investing.

     

    This may sound bad (in the sense of conceit), but I think it takes a certain mindset to choose to utilize the DGI methodology and stick with it over a lifetime of investing and quite frankly, I think the number of people with that mindset are in a minority.

     

    That's not to say those that don't follow DGI are unwise, unintelligent, foolish, etc. (pick your adjective here) but I am saying it's a different mindset. And personally I think it's a wiser way to travel the investing highway.

     

    3 - As you point out with Google, Facebook, etc., people are always looking for the next big thing. They aren't interested in the "old ways" even if those old ways have proven time after time to be the best way.

     

    4 - There will continue to be new technology, new inventions, new requirements for services to support those new inventions, as you pointed out above, that will continue to attract a large number of investors.

     

    5 - Benjamin Graham originally wrote The Intelligent Investor in 1949. In it he espoused the dividend methodology of investing and separated it from what he referred to as speculation. And there were others before him. Today I think what he called speculation we call trading. Regardless, since 1949 I don't think a larger proportion of people are utilizing the DGI methodology than they did in his day. People change slowly if at all.

     

    6 - One of the reasons DGI is so "popular" at the moment is because of low interest rates and people are looking for fixed income rates that will provide a better rate of return. As soon as rates start to rise then DGI will become less popular. When that happens I still will think DGI the best way to go overall but there will be many who will start looking elsewhere for higher income rates. And I won't blame them.

     

    7 - Fear and Greed aren't going anywhere.

     

    So consequently, and recognizing this is purely a selfish motivation, I'm going to continue, and encourage my family and friends as well, to travel the DGI highway as the best route for investing. :-)

     

    Eddie
    4 Oct 2013, 04:23 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » "he recognized that an interstate system would provide vital transportation for military uses during national emergencies."

     

    And not just for cars and trucks. Many sections of the Eisenhower Interstate are long enough, and straight enough, to act as runways for planes.
    4 Oct 2013, 06:09 PM Reply Like
  • User 6707651
    , contributor
    Comments (983) | Send Message
     
    I was always told that under passes could also hide both planes and, supposedly, later mobile launchers. Don't click below if you like interesting factoids like these http://1.usa.gov/GDIjRW
    4 Oct 2013, 08:11 PM Reply Like
  • Eddie Herring
    , contributor
    Comments (1921) | Send Message
     
    I never heard the 1 in 5 mile thing. Interesting. Now I'll have to bring it up to the first Fed. transportation person I run into...
    4 Oct 2013, 11:13 PM Reply Like
  • Paul Wagner
    , contributor
    Comments (1796) | Send Message
     
    Great comment, Eddie. I trust you didn't feel I was critical of DGI investing or DGI investors. I only wanted to point out that Robert's contention that young investors should avoid risk until they are safely retired is counterintuitive to me. You probably don't fall into the "young" category and you want to avoid risk, both in your motoring and your investing and you and Robert think a young person should avoid risk. So, if a comfortably retired person should avoid risk and a young person should avoid risk, then the progress of our economy must depend on foolish investors.

     

    I know that's not how you or Robert really feel, but the implication of your logic is suggestive of that.
    4 Oct 2013, 11:27 PM Reply Like
  • Eddie Herring
    , contributor
    Comments (1921) | Send Message
     
    Paul

     

    No, I didn't take it as critical. I didn't mean for my response to indicate that and hope it didn't come across that way.

     

    I definitely don't fall into the "young" category. Personally I don't think any of us can completely avoid risk. I do think we should avoid risk that we are not capable of handling or that we don't have the experience to handle. There is risk even in DGI.

     

    Going back to my driving analogy, I didn't encourage my sons to learn to drive "hot rods" as I called them when I grew up. I was concerned they'd be speed demons like I was in my younger years. So I taught them to drive within speed limits, wear seat belts, use directional signals, drive defensively, etc., all things to reduce risk. Turns out my daughter drives faster than either of my sons. :-) Go figure...

     

    I believe in doing the same with investing. Once a person gains some experience and gets to a certain level of competence with investing, then if they want to take on more risk, that's their choice. But they need the ability to recognize and manage that risk. And I believe that's pretty much true for any age.

     

    Eddie
    5 Oct 2013, 12:59 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » "I only wanted to point out that Robert's contention that young investors should avoid risk until they are safely retired is counterintuitive to me."

     

    That's not what I said.

     

    What I said was that a young person should avoid risky investments until after they have assured themselves of enough money to have a secure retirement.

     

    My point is similar to saying, "First, you pay your bills. Second, if you have any money left over, you can invest."
    7 Oct 2013, 08:36 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » "There is risk even in DGI."

     

    There is risk in every human activity.
    All I'm suggesting is that certain kinds of risk are best avoided until after one's basic needs are taken care of.
    Another way of saying that is, "Don't gamble with the food money."
    7 Oct 2013, 08:37 AM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4173) | Send Message
     
    Wow, love the new photo, Robert! You have a great smile and a very pretty cat! :)

     

    Miz
    7 Oct 2013, 05:39 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » Why thank you, Miz! I'm glad you think so!

     

    Yes, Fermata is a very pretty cat, and she knows it, too. She prances around the house saying, "Aren't I pretty?". :-)

     

    I'm the one with the short whiskers. :-)
    8 Oct 2013, 08:41 AM Reply Like
  • User 6707651
    , contributor
    Comments (983) | Send Message
     
    is she a rag doll? She looks a lot like a cat my parents used to have
    8 Oct 2013, 10:36 AM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » Fermata is a Balinese, which is a slightly-longer-haired cousin to a Siamese. She doesn't shed, which is a great benefit.
    8 Oct 2013, 11:27 AM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4173) | Send Message
     
    You're lucky that's all she says as she prances around. Mine used to say, "Feed me!" or "Fetch my toys!" or "Pet me -- NOW! And tell me how beautiful I am while you're at it!" LOL!

     

    Miz
    8 Oct 2013, 05:15 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » Miz, you're right, Fermata says those things to me too. :-)
    9 Oct 2013, 08:46 AM Reply Like
  • AgAuMoney
    , contributor
    Comments (4430) | Send Message
     
    Wow, where did this 'Dave' come from!

     

    Sorry Robert!
    2 Oct 2013, 10:49 PM Reply Like
  • Robert Allan Schwartz
    , contributor
    Comments (12736) | Send Message
     
    Author’s reply » "Wow, where did this 'Dave' come from!

     

    Sorry Robert!"

     

    No problem, Harry, but don't let it happen again. :-)
    3 Oct 2013, 09:00 AM Reply Like
  • sweeps63
    , contributor
    Comments (932) | Send Message
     
    Though I agree with you that the concept that younger investors have more time to make back mistakes is flawed, I think that the younger investor, should diversify their holdings, have some good core positions, but also make a few partial positions into speculative or "high growth" companies. The key being that the money is speculative and partial position (1/8 - 1/4 of my usual position).
    I have done this with a few positions and made a very good return (though modest in dollar amount) on most, but on a few others I've also lost (on paper, Gold Miners). Though thanks to a lot of great writers and commentors here on SA I've set up my Core and diversified my holdings.
    Unfortunately, my best speculative was KKD, which after it went up 18% in 2 months I sold out of as this was the return rate I was looking for in two years not 2 months and I wanted to capture my profits, if I still held or only sold enough to cover my gains my return would be over 264% in about 1 year.
    Sometimes I wished I had invested more in these speculatives, but others I'm glad I didn't, if one of them does hit it big, great! Then a 1/8th position should do as nicely as a Core full position and at the same time I would not have lost as much if it hadn't and will still have the other 7/8ths going into Core and such.
    7 Oct 2013, 01:05 PM Reply Like
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