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My primary objective is income replacement! ... The objective is to start earning an income stream now, to replace the income that will be earned throughout the working years. I want that income to be reliable, predictable and increasing. The income stream will need to continue to grow to stay... More
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Market Strategies
  • Market Strategies - Benchmarks 63 comments
    Feb 27, 2013 7:59 AM

    A young portfolio manager asked an Eighty-year old advisor for his secret to successful investing.

    Old advisor: "Good judgment."

    Rookie: "How do you get good judgment?"

    Old advisor: "Experience."

    Rookie: "How do you gain experience?"

    Old advisor: "Bad judgment."

    One of the first things most investors are "conditioned" to focus on when they start investing, is to compare your results against an Index or some sort of benchmark. It is ingrained into our thought process so much that it almost becomes second nature. It's almost as automatic as breathing.

    Wall Street has conditioned our thinking into this little box that says if you can't beat the Index, you might as well own it.

    I believe that comparing your results to a benchmark is not only defeating, I think it qualifies under the bad judgment response by the Old advisor above.

    The purpose of this instablog is to deliver the message that if you make the decision to take control of your investments, and you are wanting to compare your results against an Index, that it is "Crazy Thinking!"

    Wall Street loves the concept of us using a benchmark because they know we won't beat it every year. People who manage money for a living can't beat the market every year, so they know we can't either. Money managers want us to doubt ourselves and our abilities. They want us to change our strategy and buy the Index. They need us to doubt ourselves and buy the Index. That's how they earn their fees. They want us to let them manage our money so they can't outperform the Index every year either, but at least get paid for that underperformance.

    This instablog is not about owning or not owning an Index if that's your choice. It's about not comparing your results from other investments to it.

    I thought most people become self directed investors because they were dissatisfied with the performance of an Index and wanted to better themselves. If that's the case, then why compare your results to something you don't want?

    I know some of you will continue the exercise. Some of it is insecurity. Some of it is reassurance. Some of it is ego gratification. Regardless of the reasons, I think it is "Crazy Thinking."

    Let's start with this. Do you know what the S&P 500 value is going to be at the end 2013? Do you know whether it will finish up or down? Do you know what the percentage of increase or decrease it will be? Then if you don't know the answer, how can you beat something you have no idea of what the result is going to be? How do you plan for it? How do you execute?

    One of the most important aspects of succeeding in anything we do in life is to have specific, meaningful goals. We need a target to shoot for. How do you hit a target you can't see? How do hit a target that you don't even know is the target? You don't know what the Index target is. I'm starting to think that those who chase the Index are like the blind leading the blind. Nobody knows where they are going until they get there, but they don't know where there is. ... Ha!

    One of the portfolio's I manage is called Project $3 Million. The portfolio is posted online for others to follow. It's a real portfolio, using real money, and it's updated in real time.

    Here's the link: ...

    This portfolio's goals were established at the end of 2008. The pre-determined goal for the portfolio value at the end of year 2012 was $74,355.49. That is where the portfolio needed to be to stay on schedule for the $3 Million at age 65. The 2012 year end result was $84,710.60. The portfolio is ahead of schedule.

    Those goals are specific! We know exactly what the target is. The target for year end 2013 is $86,959.44 (already achieved). The target for year end 2014 is $100,643.33 (now an accelerated target since 2013 is already acquired). We know the target for every year over the next 40 years and we know this now. Since we know the target for every year going forward, we know how to plan for it, we know how to adjust as we go, we know how to accelerate as we go.

    Anyone want to take a shot at telling me how to plan like this using an Index? ... Anyone? ... Anyone? ... If not, why should I even care what the Index is doing?

    Comparing your results to an Index, 12 months after the fact, since you couldn't plan ahead because you didn't know what the end result was going to be, is akin to throwing stuff up against the wall and hoping most of it sticks.

    Some of you will still insist on making the comparisons though. So my question is this. If you don't beat the Index, what are you going to do? ... Nothing? Then what's the point? ... Are you going to switch strategies? If so, are you going to invest all of your money into the Index? ... If not, what's the point?

    As stated above, I think it comes down to insecurity, or reassurance, or ego gratification. Otherwise, I don't get the point.

    The danger of making comparisons!

    In a recent article written by Bob Wells, someone commented on my strategy vs the S&P 500 Index. That person looked at Project $3 Million and determined that it only produced a 7% return in 2012. I don't know what the S&P did in 2012. I think it was around 12%, maybe more, I don't keep up with it. I know the portfolio was up 20.6% year over year, but some of that was helped by cash contributions. That person told me I would have been better off in SPY.

    Well, garbage analysis in, garbage analysis out!

    The person discounted the objectives of the portfolio. Didn't know how or when the cash distributions were made, and didn't understand that we were averaging up our positions in a strong market environment.

    He came to an erroneous conclusion, one that would have had him, and me, if I listened to him, switching strategies, a strategy that is so successful, it's exceeding the pre-determined goals.

    When you look at the performance of the Index at year end, it's very simple, it ended last year at one point, it ended the next year at another point.

    My portfolio doesn't work that way, yours probably doesn't either. Cash is coming in or going out, changes are being made, most people don't know how, or wish to make the effort, to determine an accurate comparison between an active account vs a passive account.

    Project $3 Million has cash deposited in the account twice a month. Most of those funds don't have an entire year to perform as the Index does. Am I supposed to think the funds being deposited later in the year are going to keep up with the market in a year where the market is doing well and had all year to perform? ... "Crazy Thinking!"

    The cash being deposited is being added to existing positions. We are averaging up. All dividends are reinvested. Most dividends don't have all year to perform and those dividends are also helping the existing positions to average up in price. When you average up, your profit percentage comes down. And I'm supposed to think that's an apples-to-apples comparison to the Index?

    How am I supposed to outperform the market "every" year when I'm averaging up? The goal isn't to beat the market every year. The goal is to focus on the objectives we have established and the strategies to carry it out. In the long run, the market won't keep up with us.

    The person who told me I would have been better off in SPY didn't understand another concept. Suppose I did have 100% of the portfolio in SPY on January 1. Cash was being deposited into the account twice per month, every month, and that cash was put to work by building positions. We would have been building SPY. We would have been averaging up! Since we were adding cash, and averaging up, we wouldn't have matched the market even though we were the market. Think about it! ... Yet people will still want to make those comparisons. ... "Crazy Thinking!"

    What about re-balancing? Re-balancing overweight positions is thought to be a prudent portfolio management tactic. If you choose your selections carefully and they enjoyed the success you envisioned, you may have to sell part of that successful position as a risk management technique. Where does the cash from the sale go? The cash from an overvalued position usually goes into an undervalued position. Outperformance to underperformance with the hope that the company is temporarily underperforming and the market will eventually realize the true value and make that position successful. It just takes time.

    Well, if we are selling something that is outperforming the market, and buying something that is temporarily underperforming the market, how do I outperform the market every year? ... Then what's the point of comparing your results to the market?

    Do we really expect we are going to buy companies with a temporary beaten down share price and the market is going to immediately reverse course on the day we buy and head higher? It takes time. How can we expect to beat the market every year when we are buying underperformance?

    The person telling me I would have been better off owning SPY didn't take the portfolio objectives and Mission Statement into account.

    Primary Objective:

    Income replacement! ... The objective is to start earning an income stream now to replace the income that will be earned throughout the working years. The goal is to achieve $10,000 per month income in retirement. The income stream will need to continue to grow to stay ahead of inflation. A portfolio of $3 Million with a yield of 4% will accomplish that objective. Hence the title of this portfolio ... Project $3 Million.

    Mission Statement:

    To earn an income stream that is reliable, predictable and increasing.

    The Portfolio Value Goals vs Results:

    2010 - $52,053.79 ... $54,949.47 ... up 23.2%

    2011 - $62,746.55 ... $70.221.20 ... up 27.8%

    2012 - $74,355.59 ... $84,710.50 ... up 20.6%

    The portfolio is ahead of schedule. Why would I worry about what the market is doing? Shouldn't I be focused on my goals? The strategy is working.

    In my opinion, by comparing your results to the market or an Index undermines what it is you are trying to do. Why would you want to undermine something that is more successful than you planned for?

    This series of instablogs on Market Strategies has been about trying to get people to understand that stock selection performance should not be the focus, your strategy should be. Then you own the stocks that support your strategy. If your strategy is sound, and I know mine is, you'll beat the market in the long run. I know that!

    The Mission Statement talked about a reliable, predictable and increasing income. Here are the total dividend results:

    2009 - $684.38

    2010 - $1,693.33

    2011 - $2,404.02

    2012 - $2,808.46

    That too is working!

    The end objective for Project $3 Million is to have $3 Million yielding 4% which should generate $10,000 per month in income. It's that monthly income that is the objective.

    Project $3 Million has a current yield of 4.0%. If I switched to SPY as was suggested, SPY only yields 2.07%. Project $3 Million would have to become Project $6 Million to generate the same income. ... Now tell me why is an Index a better option?

    I'm beginning to think "Crazy Thinking" is turning into "Insane Thinking."

    Again, this instablog isn't against "owning" an Index. Some people have no choice, others choose to. I have no problem with that. Project $3 Million has a small part of the portfolio in Index Funds.

    This instablog is about not "comparing" your results to an Index once you commit to owning individual companies. Once you make the commitment, I think you should burn that bridge and make what you are trying to accomplish, work.

    I think it is more beneficial to establish meaningful goals and focus on achieving them. I think one should find a way to compete and compare against themselves, always trying to improve, without something undermining what it is we're trying to accomplish.

    We strive to set new monthly and weekly income goals. We keep track of our dividend records. That's a lot of fun!

    Learn to compete against yourself.

    Benchmarking is the essence of getting you to undermine your confidence and abilities. It attacks your sub conscious creating doubt when you don't beat the benchmark, and creating false motivation when you do. The benchmark will take body shots at you, trying to wear you down. The Market wants those fees. They need you to lose faith in your strategy and let them handle your business. Stop making those bad judgment calls and stop benchmarking.

    When we stop worrying or caring what the market or others are doing, what I refer to as a bad judgment call, and we start focusing on our goals, we'll graduate from the rookie portfolio manager at the top of this blog and become that successful portfolio manager. It's all up to you.

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Comments (63)
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  • Chowder
    Wwwau! so good post written in 1 day after excellent previous one - are you journalist?
    I agree with main idea "This instablog is not about owning or not owning an Index if that's your choice. It's about not comparing your results from other investments to it."


    Nevertheless I would like to add the following points:
    1) If you think that you can beat the Index - compare your resources with Wall Street computer and intellectual power presented in excellent book "Quantitative Equity Investing: Techniques and Strategies" by Frank J. Fabozzi, Sergio M. Focardi, Petter N. Kolm (it is not an easy reading but at least must give you the right impression of your competitor with whom you deal in ~ 80% cases for big caps).


    2) Remember Wall Street still has profit if you own index although it is not as big as usually - see
    In some cases (small portfolio <30K$ and short time horizon - see it makes sense IMO to invest in index because your expenses in this case are smaller than brokerage fees for reasonable diversification.


    3) "This portfolio's goals were established at the end of 2008. The pre-determined goal for the portfolio value at the end of year 2012" You should have investment goal but 4 years are too short IMO to define that you are on track with DGI. I think at least 7 years is needed to avoid fluctuations in performance (well.... 2008-2012 were hopefully special i.e. bad for DGI so such half-of-period might be OK). BTW many SA contributors reports their portfolio performances on annual and even monthly basis - I LOL from their short vision....
    "We know the target for every year over the next 40 years and we know this now."
    Again IMO annual target isn't important. I hope you not cancel the project if market & dividends drop down in 20XX and you will miss your annual target.


    To be continued.....
    27 Feb 2013, 10:10 AM Reply Like
  • "If your strategy is sound [it]'ll beat the market in the long run."
    Not always. To rephrase "Common sense does not make science" I can say "Sound strategy does not make profit" until it is statistically (unfortunately, the only way with stocks) proof - it was point of my comments to your previous blogpost and main reason of the "Dividends Heritage Project" ( and


    Anyway, I agree with main idea of this blogpost.


    27 Feb 2013, 10:29 AM Reply Like
  • Ignorance is bliss!!!! I didn't know I should compare my portfolio to an index.....I compare my portfolio to itself YoY. My total portfolio growth last year was 17% and dividends grew YoY by 11% ( taking dividends and interest deposits and adding new positions or adding to existing).... BTW, I only lost 18% in '08.... Not because I knew what I was doing, only was fortunate I was invested highly in cash preservation investments. Have been learning and moving to DGI since market crash in Aug 2011.... That's when I purchased most of my equity positions. Since then I have been learning at the masters feet and not counting on "beginners luck" any more!!!!
    27 Feb 2013, 10:44 AM Reply Like
  • I never compared my portfolio to an index, but on the other hand I started to compare it to itself to late: This should be the starting point followed by some strategy like chowders...!
    28 Feb 2013, 02:03 AM Reply Like
  • chowder, part of your genius is pinpointing exactly where the typical investor's weakness of thought lies; the other part is speaking truth directly to that weakness. My husband and I have been going back and forth about this very topic. We have bemoaned the results of the index investment in his 401k over the last 13 years, and right now we have roughly equal amounts in an S&P 500 fund and in individual stocks we have chosen. It has been a fraught decision though whether to pull the plug entirely on index investing.


    As you said, "I thought most people become self directed investors because they were dissatisfied with the performance of an Index and wanted to better themselves." This is exactly why we have moved away from index investing... but the norm is so firmly entrenched in index investing, to go against that tide seems virtually heretical. Insecurity, as you point out. What if our investing judgment isn't sound enough to deliver the goal we're aiming for? What if I'm exiting index investing at precisely the time when it would have been the smarter move to stay? I'm always striving to improve and yet also wary of my personal "unknown unknowns" of investing.
    27 Feb 2013, 12:36 PM Reply Like
  • Author’s reply » Big Thunder ... >>> What if our investing judgment isn't sound enough to deliver the goal we're aiming for? <<<


    First of all, make sure that what you are aiming for is believable and achievable. The next step is to read, read and read some more. Then you have the SA community to count on.


    >>> What if I'm exiting index investing at precisely the time when it would have been the smarter move to stay? <<<


    You handle this the same way you eat an elephant, one bite at a time. Each year move 20% or some other number you are comfortable with out of Index Funds and into high quality companies.


    As you gain knowledge, you will experience, and then you'll gain confidence.
    27 Feb 2013, 12:48 PM Reply Like
  • "the same way you eat an elephant, one bite at a time."


    Chowder, I'm definitely stealing that line from you! :-)
    27 Feb 2013, 01:14 PM Reply Like
  • Thanks chowder. Makes absolute sense. I've been learning, learning, learning this past year and realize that experience is a teacher I'm still mostly lacking (though that's not to say I've read everything I want to read -- the O'Shaughnessy book is on hold for me at the library right now).


    It's been interesting to see how each stock you pay attention to has something to teach you.
    27 Feb 2013, 03:18 PM Reply Like
  • RAS, Chowder is clever, but Creighton Abrahms (like the tank) gets credit for the quote.


    1 Mar 2013, 07:01 PM Reply Like
  • Author’s reply » Chump, is that who said it? I never knew that. That concept was used in sales school many moons ago in teaching us how to set a series of short term objectives all in support of obtaining the long term goal.


    The Tank said it. I'll remember that. ... Ha!
    2 Mar 2013, 02:16 AM Reply Like
  • Yeah, he's credited with it. I first heard in 1986 in a class on time management and use of a Franklin Planner. I figured it was Ben Franklin, but later learned it was the Tank.
    7 Mar 2013, 06:05 PM Reply Like
  • Chowder -- I love your work, your writing has been extremely helpful to me, but this one leaves me a bit skeptical. You say:


    "If you don't beat the Index, what are you going to do? ... Nothing? Then what's the point? ... Are you going to switch strategies? If so, are you going to invest all of your money into the Index? ... If not, what's the point?"


    If I build my personally selected portfolio, and compare it to the index and discover that over the past 5 or 10 years that I have failed to match even the index, then yes, I would take a hard look at my "strategy" and either make adjustments or throw in the towel and switch to index funds.


    Why is this unreasonable? You seem to be suggesting that it is better to put blinders on and pursue your strategy regardless of whether it performs better or worse than any other. (And indexing is simply that -- another possible strategy.)


    Comparing one's strategy to other strategies is the only way to know if we're doing as well as we could be. If my "strategy" is to put all my retirement savings in a garbage bag in the basement, don't you think it would behoove me to compare that to keeping the money in CDs? And if all of my money was in a money market account earning a tenth of one percent, should I be content that I am making money each month?


    It is great that Project $3 Million is making money and is exceeding your targets, but unless you compare it to other things you might do with the money, you have no idea if you might do even better with another (simpler?) strategy. If you don't care to reach your goals faster, simpler, cheaper, or with less risk or volatility, then of course you needn't compare your strategy to any other -- so long as it is on target (which you seem to be). But that fact in no way invalidates the incredibly natural and valuable process of comparing your strategy to the others out there.


    If I am one of 20 people doing the exact same easy and fun data entry work at a company, I should be content to make $100,000 per year with great benefits, right? But what if I found out that most of the other 19 people were making $150,000 per year with the same benefits? That 100,000 is great, and it will get me comfortably to retirement. But the comparison to my co-workers suggests that, maybe, I am leaving something on the table that I might want to look in to. I don't see the harm in that.
    27 Feb 2013, 01:45 PM Reply Like
  • "Why is this unreasonable?"


    It's not unreasonable to compare one strategy to other strategies, if they all have the same goal.


    It is unreasonable to compare a strategy to something (like an index fund) that has a completely different goal.


    The goal of an index fund is to achieve the market return. If you have a different goal, then it doesn't make sense to compare your strategy with an index fund.
    27 Feb 2013, 02:06 PM Reply Like
  • I think most people would say that their goal is simply to maximize returns within their own risk tolerances. Some people think the index is the best they can hope for, while others think they can do better picking individual stocks. In that sense, they do share the same goal -- to do as well as they can.


    So, if my goal is to maximize my wealth, and if my portfolio of individual stocks is under-performing the indexes over a long period of time, I would be wise to consider switching. Looking at the index to measure my performance is not a weakness or a distraction, it seems to me the very height of common sense.


    (I want to be absolutely clear -- I have a DG portfolio in which I pick my own stocks. I love the strategy and I believe that I will do better than the S&P 500 over time with those stocks. My only beef is with the notion that it is a bad idea to compare your DG results to the index.)


    EDIT: Moreover, anyone sophisticated enough to confidently build their own portfolio of stocks ought to be able to understand the ways in which an index differs and the strengths and weaknesses of comparing their returns to the index. If a person can't factor these things in, they probably have little business being in stocks in the first place.
    27 Feb 2013, 02:44 PM Reply Like
  • The S&P 500 has approx. 100 members that do not pay dividends. At all. So, why would you compare a dividend *growth* investment strategy, with a bunch of companies only 80% of which pay dividends at all, and pays no attention at all to dividend *growth*?


    Comparing an apple to an orange is not a useful comparison.
    27 Feb 2013, 02:52 PM Reply Like
  • I do understand your point, and I fear that my response will sound like blasphemy to the DG crowd -- of which I am a proud member, but here goes anyway:


    All I want is enough wealth to live on comfortably for the rest of my life and with luck leave a nice chunk to the kids. I think that may be true for most. But I really don't care if that wealth comes as a growing stream of dividends from a portfolio of DG stocks lovingly collected over the decades or if it comes from a pile of stocks that pay no dividends at all but have appreciated in value a lot or if it comes from a lottery ticket, or if it comes from a mix of all three.


    I happen to believe that my best shot at the kind of wealth / lifestyle I want comes from the DG portfolio, growing stream of income approach. And so that is what I am doing. Like chowder's Project $3 Million, my DG portfolio seems to be working out pretty well so far. Like him, I've got clear goals that I have set myself and, thankfully, the portfolio is meeting those goals so far.


    But the DG portfolio, and its increasing stream of income are not my *goals.* They are only a means to meeting my real goal -- financial security. I am not emotionally attached to the approach. I just happen to believe that it is the best alternative before me right now. And I will stick with it as long as I believe that to be the case. Maybe that takes me happily right through retirement. Maybe not.


    So sure, you can call indexing and DG "apples and oranges." I get that they are not the same thing; I understand the differences. But they are two of many possible paths to try and achieve the wealth (financial security) I want. And it is worthwhile, I believe, to keep an eye on those various paths to security. It makes no sense to me to say that "DG investing" is my *goal* and to hence conclude that it is a bad idea to compare DG investing to other approaches.


    While it is important to know that you are comparing an apple to an orange, it does not make the comparison meaningless. Sometimes you need to decide whether you want an apple or an orange. I think my DG apple is the greatest, and I am sticking with it. But that does not mean I shouldn't keep my eyes out for a juicy orange!
    27 Feb 2013, 03:20 PM Reply Like
  • MintyFresh32,


    I personally don't consider wealth and financial security as exactly the same.


    Wealth may be "3 million".
    Financial security is $10k per month that also increases at least of the rate of inflation.


    These are NOT the same (hence apples and oranges).
    27 Feb 2013, 04:27 PM Reply Like
  • curreyr --


    Ok, I can get with that. But is your one and only goal to the exclusion and disregard of all others "$10k per month that also increases at least at the rate of inflation"? Or would you also consider having the flat $3 million? I am not saying that they are the same thing -- I understand that they are different. But if you would also consider having the flat $3 million, then you are already comparing apples and oranges.


    Using your definitions, financial security could be achieved through the income stream OR the pile of money. I'll happily take either, if offered. So while growing my DG apple, I will not willfully put on blinders about the possibilities other strategies might have to offer. That is all I'm saying.
    27 Feb 2013, 04:43 PM Reply Like
  • MintyFresh32,


    I believe the point of the article is that with "project $3m" the goal is the "$10k per month that also increases at least at the rate of inflation".


    IMO, the project is mis-titled since the $3m indicates a wealth goal where the actual goal has little to do with the "wealth" number.


    Here's a "for example":
    A person in 08/08 has a $3m wealth, that generates $9k/month.
    The wealth goal is met, but the income goal isn't.
    By 03/09, they have $1.8m of wealth, but (due to dividend increases) now generates $10k/month.


    I'm personally not retired yet, but I don't have a "number" goal, I have an "income + raises" goal.
    27 Feb 2013, 05:21 PM Reply Like
  • To the other aspect of "Using your definitions, financial security could be achieved through the income stream OR the pile of money."


    Yes, but then it's what "strategy" you will employ to meet the financial security goal. It could be "rental property", or "4% withdrawal", or "DGI", or ...


    I think the point of the article is that *your* strategy might *require* certain aspects (e.g. rental rates mirror inflation, or ~4% + inflation annualized returns, or ...). So, why compare to an index?
    27 Feb 2013, 05:43 PM Reply Like
  • Author’s reply » @Minty ... >>> If I build my personally selected portfolio, and compare it to the index and discover that over the past 5 or 10 years that I have failed to match even the index, then yes, I would take a hard look at my "strategy" and either make adjustments or throw in the towel and switch to index funds. <<<


    I used to think the same thing, so I understand where you are coming from. Here's what I learned.


    Strategies are no different than selecting stocks. You need to do you due diligence ahead of time and find out what strategies have worked best over a long period of time.


    The last thing you need to find out is that you selected the wrong strategy 10 years down the road.


    I'm a hard head! I have to screw up before I get it right. Years ago, I read a book about the most successful fund managers and I studied their various strategies. My mind wasn't right when it came to absorbing those strategies. I started off right but then the tech boom came and I switched strategies to chase tech and telecom start ups. Tech, and the Index, was crushing my dividend portfolio. Whew! Comparing my portfolio to the market caused me to switch and the switch nearly killed me when the market crash came along.


    Yes, I owned the Index at the time too. It also crashed and of course, I panicked. Meanwhile, back at the ranch, the companies I had set up with DRIP's, although seeing share price drop, they just kept plugging along.


    SDS continues to remind us that 10 years isn't enough time to measure strategies. You don't have enough various market conditions to get a true picture. So, you look at what has worked over a long period of time and then you commit to it. When you commit to something, a funny thing happens. Your mind opens up and you find ways to make it successful. If you keep looking over your shoulder, you're going to compound your doubt. Doubt clouds judgment.
    27 Feb 2013, 08:13 PM Reply Like
  • Author’s reply » @Minty ... >>> if my goal is to maximize my wealth <<<


    I hate the word maximize. ... Ha! Ha!


    You can't define it. You can't measure it. How do you achieve something you can't define or measure?


    What's the target? How do you hit it? How do you even know you achieved it? No matter what your number is, how do you know you maximized it?


    There is always ... ALWAYS ... going to be something that outperformed you. I don't see how looking in the rear view mirror can help me obtain success. But then you have to define success. Success to me is the achievement of predetermined, specific goals, which Project $3 Million has defined.


    Achieving maximum results is not a goal, it's a dream or a wish.


    When you put a football team together, you have a strategy in mind, they call their strategies schemes. You define the schemes you wish to deploy and then you select the players (companies) that work best for those schemes (strategy).


    When the game starts and you find yourself losing to the opposing team (Index), you don't change your strategy, you make adjustments.


    You may lose this week, as will will lose in some years to the Index, but if you've selected the right schemes (strategy), and picked the right players (companies) for that strategy, you'll make the playoffs every year. You may not win the Super Bowl every year, but you will enjoy success as a team.
    27 Feb 2013, 08:29 PM Reply Like
  • Back to those military planning days, always have contingency branches and sequels to your plans and be prepared to execute to reach the objective (strategy). If they don't fit - innovate!
    27 Feb 2013, 08:45 PM Reply Like
  • Author’s reply » @curreyr ... >>> IMO, the project is mis-titled since the $3m indicates a wealth goal where the actual goal has little to do with the "wealth" number. <<<


    You are correct of course, but it was a motivational technique.


    At the time, I was establishing the portfolio for a 23 year old person. I needed something to grab his attention, and something that hopefully would keep him motivated.


    At age 23, I didn't think calling it the $10,000 per month retirement fund would work. I thought the $3 Million would capture his imagination. It did! He's committed now.


    Capture the imagination, the heart will follow. ... Ha!
    27 Feb 2013, 08:47 PM Reply Like
  • "The goal of an index fund is to achieve the market return."
    This is correct for some indexes ONLY. Now there are plenty indexes and ETFs with different goals (unfortunately DGI is not at the list as far as I know).
    27 Feb 2013, 08:53 PM Reply Like
  • Hi Chowder,


    In regards to the goals of achieving a balance of 3 million, and an income stream of 10k from the dividends, which goal do you suspect will happen first?


    Since the income replacement seems to be the most important, do you have a time frame, with goals set up like you do for the 3 million? Or, perhaps it is safe to assume that if you have 3 million, you should have about 10k give or take being generated from dividends.


    Thank you in advance.
    16 Jun 2013, 09:28 PM Reply Like
  • Author’s reply » Since the portfolio has a yield of 4%, both goals should be achieved simultaneously.
    17 Jun 2013, 09:10 AM Reply Like
  • Thank you. Perhaps I am overthinking this, but should the percent of dividend growth for the portfolio also be 8.25% in order to keep the monthly income goal and the 3 million dollar goal achieved at the same time?


    For example, say you buy 2000 dollars of a stock yielding 4%. You would have 80 dollars of income per year.
    If capital gains increase that 2000 dollars to 3000 dollars, you are still only yielding 4%, or 80 dollars.


    That means that the dividend growth rate, and/or reinvestments must keep up with the capital gains in order to have the income goal hit when the total portfolio value goal hits.


    Assuming this all makes sense, is there anyway to monitor that dividend growth rate to make sure everything is on track, and hitting goals?
    I guess I can figure out a system to see what my income needs to be each year in order to hit my goal of 10k a month, the same way I would if 3 million was my end portfolio value goal. Sionce income is really my main goal, I think I should be measuring my account more on this, then on the portfolio value.


    Your thought? (thank you in advance again)
    17 Jun 2013, 04:22 PM Reply Like
  • Author’s reply » I don't know if you are overthinking it or not. It's just that I have a different perspective. If I were to only focus on the dividend income, I might be invested in companies like FTR, PBI, EXC or even AT for example. Companies that are no longer creating high total return.


    If I try to balance total return with dividend income, and at the same time continue to put dividend growth first, I think it keeps me in high quality companies.


    It doesn't matter to me if the portfolio value or the monthly dividend income objective comes first, the person holding that portfolio will be in great shape.


    I'm using total return, or portfolio value if you will, as a tool to keep me focused on high quality companies as opposed to chasing yield, and to keep the young person to continue to fund his portfolio.


    The Project $3 Million portfolio was designed for a 23 year old. As young as he was, calling it Project $10K in income didn't grab his imagination. Having spent most of my adult life in sales, I needed to close the sale. Capture the imagination and you capture the mind and spirit. When I said $3 Million dollars, his eyes lit up! So I worked backwards from there to see what it would take to generate $10K in income each month.


    Whatever captures your imagination, go with it. This isn't that difficult. It's a matter of keeping it simple enough that one sticks with the strategy.


    The $300 per month in dividends doesn't impress this person. The $100K in value does. I use the portfolio value as a motivator and tool to stick with quality to insure the goals are met.
    17 Jun 2013, 07:07 PM Reply Like
  • Thanks Chowder! I appreciate the insight. I am the same age as your son, and have a very similiar portfolio, so it is interesting for me to see his play out in real life also. Thanks for making the portfolio public.


    I think I am going to set up goals for monthly/yearly income, so I can keep better track of my progression, and to use as a motivator. I only invest in high quality companies (BBB credit rating minimum from S&P) so I will be sure not to get too hung up on yield, and sacrifice quality for it.
    17 Jun 2013, 07:20 PM Reply Like
  • Chowder,


    Thanks for the very important reminder about the dangers of comparing results to an index.


    I think it is even more dangerous for self directed investors when first starting out because the new funds coming into investment accounts represent a larger percentage of the total portfolio.


    These new funds will skew a portfolio's average towards 0% (which can be useful if the portfolio is showing a loss for the year ;)


    For many years, my friends at work have an annual competition to see who's portfolio performs the best during the year, and I soon came to the realization that if I have a good year, I can lose simply by investing new funds in the later part of the year, as it drags my portfolio performance average down.


    It didn't take long to decide that I would not let that friendly competition alter my retirement plans.
    27 Feb 2013, 02:03 PM Reply Like
  • Great article and thought provoking - though you fell prey to comparing yourself to the market at the end...:


    "If your strategy is sound, and I know mine is, you'll beat the market in the long run. I know that!"


    I always prefer a DIY spirit, whether it's home repair, changing your car oil yourself, installing a new dishwasher... the satisfaction gained from accomplishing the goal is worth it. My adivce?: cancel cable, the amount of free time is amazing and the $1,200 a year savings is almost a "free" DG position (at least for me)...


    (Now let me fall prey to it as well: They charge 1% (1.5%?)... that gives me an extra 1% to under-perform them and break even in comparision to them!!! lol)
    27 Feb 2013, 06:39 PM Reply Like
  • Author’s reply » @Zalach ... >>> though you fell prey to comparing yourself to the market at the end...: <<<


    I can see why you think that. I wasn't clear enough in my statement.


    I said, "If your strategy is sound, and I know mine is, you'll beat the market in the long run. I know that!"


    I added that for those who are concerned about beating the market.


    As for losing cable? Blasphemy! I don't watch network TV. If someone put a gun to my head and told me to name one primetime show on network TV or lose my life, I'd have to start praying. I haven't got a clue. I do watch my sports though.


    That little avitar next to my name represents the Arsenal Gunners in Premier League Football, soccer to you sports heathens. ... Ha!


    I watch my European sports every week and I can't do that without cable. I pay $15 per month extra for just one channel, but that's the channel I watch most.
    27 Feb 2013, 08:41 PM Reply Like
  • Author’s reply » Okay, thanks to Minty and Zalach, let me see if I can state this another way.


    If we are purchasing "high quality" dividend growth stocks, most of those candidates are going to be listed in the S&P 500. If you are buying "high quality" they are going to be the most financially sound companies in the S&P 500.


    If you are buying the best of the S&P Index, doesn't it make sense you will outperform the Index over time? After all, if you are managing your positions properly, you may hold a company whose share price is broken down, but the company isn't. When the company starts to break down, you are out of that position before the S&P 500 discards it.


    It's those large well established companies that have carried the Index all these years. Best in breed is what they are called.


    And that's another reason why comparing to the Index is a waste of time. You are already the best of that Index. You just need to know how to add and subtract your positions and we'll be showing some examples of that going forward.
    27 Feb 2013, 10:17 PM Reply Like
  • I thank you, chowder.
    27 Feb 2013, 10:25 PM Reply Like
  • To be fair, that is $15 well spent...! I did a year abroad in Germany and fell in love with soccer... Was lucky enough to be there to watch Klinsman shoot that winning world cup goal in '94!!! Best party ever!
    28 Feb 2013, 02:53 AM Reply Like
  • Chowder, another great instablog. The DGI detractors always point out that a well constructed DGI portfolio underperforms an index in the up years, conveniently not mentioning that the indexer might still be recovering from the last cratering (think 2008). I sleep well at night knowing I'm marching steadily ahead surpassing my annual goals with my boring DGI portfolio, thanks to the help from SA leaders such as yourself. Many thanks.
    28 Feb 2013, 03:06 AM Reply Like
  • I grew up in Santos, Brazil. Pele used to come down to the beach and play soccer with us kids. Sometimes we tried to make him play goalie!!
    28 Feb 2013, 08:04 AM Reply Like
  • Folks,
    Should we create (and more important maintain) DGI index based on CCC list? It is possible to create few public portfolios based on CCC list with different rules (e.g. whole list or sub-portfolios for each "C") but somebody with good portfolio software (not me) should handle them. I think these DGI index and portfolios might be a good benchmark for DGis.
    28 Feb 2013, 08:11 AM Reply Like
  • I do not feel a need for a DGI index, but would not discourage anyone who wanted to try to create one. It could be good for hours of discussion, debate and like that :).


    There could be several of them, in fact :), one for Champions, one for dividend growth juniors, etc, etc, etc.
    28 Feb 2013, 08:25 AM Reply Like
  • IMO the main value of DGI index will be in
    a) demonstration of diversification importance for DGis /I fill than many DGis have too concentrated portfolios),
    b) tool to compare DGI with other investment styles,
    c) better understanding of DGI limits (not to have too high expectations).
    1 Mar 2013, 09:35 AM Reply Like
  • Hey Chowder, read your post, to my understanding I think you have it backwards in a couple of areas re: active and passive management (indexing).


    From your post...


    "People who manage money for a living can't beat the market every year, so they know we can't either. Money managers want us to doubt ourselves and our abilities. They want us to change our strategy and buy the Index. They need us to doubt ourselves and buy the Index. That's how they earn their fees. They want us to let them manage our money so they can't outperform the Index every year either, but at least get paid for that underperformance."


    And back to Cranky...
    Actually, one would pay active managers and advisors to BEAT the market. They can't (mostly), so investors pay more for less in returns. No logic (or retirement) in that process.


    Portfolio and fund managers don't want you to buy the index. They don't make money off of that (unless you find a rare and sensible fee-only advisor). They want to put you into 'market beating' funds and active management.


    The mutual fund industry is very clear about this they ask why you 'would only accept the market returns?'. Then most of them go out and underperform. And send you a very nice bill.
    2 Mar 2013, 07:15 AM Reply Like
  • Author’s reply » Cranky, I had my Series 6 license at one time, was going to continue with the Series 7. The company I represented wanted me to sell the funds with the most loads and fees, although they offered no loads, I think at the time. Anyway, our commission structure was based on the higher loads.


    I refused to sell them. I was called into the office and I explained to them I felt guilty trying to sell these loaded funds to little old ladies trying to get by. I was fired. ... Ha! ... That wasn't the first time I was fired for being defiant, so it was no big deal to me. I still had a little bit of credibility left with my clients.
    2 Mar 2013, 07:25 AM Reply Like
  • Good for you. I would not be able to sell high fee products. Canada has the highest mutual fund fees in Canada. More than happy to move Canadains into lower fee index based portfolios. Most investors are not even aware of the fees that they pay.


    It feels real good to make them aware, and suggest they stop paying those fees. Fees are one thing they can control.
    3 Mar 2013, 07:46 AM Reply Like
  • Chowder,


    On your project 3 million blog you say your goal is 8.5% compounded annual return. Does this include the $500/month that you are contributing, or are you only factoring in dividends you collected and capital appreciation when you make the calculation. If the later, what formula do you use to calculate what your actual return was (not including new contributions)?
    2 Mar 2013, 10:19 AM Reply Like
  • Author’s reply » PT Investor, I include everything. I don't care how it comes as long as it comes. There are going to be years when the market is down and it will be the contributions and dividends that will buffer the total return. This is key in my opinion!


    When the market is doing well, then the contributions, share price and dividends can help accelerate the results, as the portfolio is doing now. I have no objection to having the portfolio achieve the total result 10 years early.


    Just win babee! I don't care how, as long as it's legal. ... Ha!


    I don't factor actual return. It's irrelevant as far as I'm concerned. All that is important is hitting that $3 Million, regardless of where it comes from.
    2 Mar 2013, 12:19 PM Reply Like
  • Chowder,


    During the first few years I expect that the $500/month ($6000/yr) contribution you make will almost always but you over the 8.5% goal for the year. I'm guessing that is part of the reason your portfolio is a year ahead of schedule. But as your portfolio gets bigger that $6000/yr will become less important to your return. Do you plan on increasing your contributions over time? And if you find that your portfolio is falling behind on the 8.5% goal, what is your plan to address that?


    2 Mar 2013, 09:51 PM Reply Like
  • Author’s reply » It's not my portfolio, so I don't get to say whether more money goes into it or not. If the portfolio falls behind, I'll address it at that point. I'll have to see what the condition of the market is at that time and determine what options I have.
    2 Mar 2013, 09:59 PM Reply Like
  • Author’s reply » >>> But as your portfolio gets bigger that $6000/yr will become less important to your return. <<<


    I should have also mentioned that as time goes by, and the amount of dividends being created continues to grow, that those future dividends should more than make up for the monthly contributions.


    One of the intermediate term goals is to get the monthly dividend total up to $500 per month to match the current monthly contributions. At that point, you have $500 per month in cash and $500 per month in dividends all being reinvested at the same time.


    I think we'll start to see the early effects, at that time, of how compounding will take the portfolio forward.


    I need a market correction! I'd love to see the market pull back 15 to 20 percent. The amount of cash and dividends being reinvested would help a great deal going forward because we'll be able to purchase more shares for the same amount of money. The more shares we can purchase, the more dividend income we can expect to receive because dividends are based on shares, not share price, as you know.
    3 Mar 2013, 05:08 AM Reply Like
  • Chowder,
    Bravo for a great blog article. I appreciate and admire your directness and willingness to challenge conventional wisdom. Very refreshing!


    I was a manager for many years in a large tech company which used an annual "index" ratings process for employees, with forced distributions along a bell curve. It was the basis for promotions, bonuses (when they existed), raises, etc. Only marginally effective - literally marginal, as really only the top and bottom 10% could be considered even remotely reliable. Can you really distinguish performance as 69% vs. 71%? Ditto portfolio performance, IMHO. In the end, the only "index" that matters is performance vs. your own individual plan - which also underscores the importance of having a plan that reflects your own personal goals and assumptions. And then not deviating from it, as long as it continues to serve you. That's my new index.
    3 Mar 2013, 08:38 AM Reply Like
  • Chowder....THANK YOU!
    These posts have been a real educational experience. They have been highly informative articles and the comments have been just as constructive. I look forward to learning more from future posts in order to complete our family's project that is similar to yours.
    Thanks again, Josh
    3 Mar 2013, 03:06 PM Reply Like
  • IMO any investor can beat the market IF he (she) carefully select the market. For example in 2000-2012 I did beat the market of Congolese used furniture dealers with average annual 55% margin 8-).
    25 Mar 2013, 01:12 AM Reply Like
  • Wow! I got a lot of work to do and a lot of planning to do! Thanks a lot for this blog post! I wish I had started younger!! I will not let that stop me from moving forward and getting down to business.
    6 Apr 2013, 04:25 PM Reply Like
  • JUst FYI:
    I posted SA blog on benchmarking for dividend investors at


    24 Jun 2013, 03:03 PM Reply Like
  • Author’s reply » SDS, I find your articles difficult to understand because I can't decipher the formula's. ... Ha!


    Anyway, I had just posted a comment elsewhere on benchmarks and here is part of what I had to say.


    I'm one of those who says they don't pay attention to total return or benchmarking. This is true but only in the short to intermediate term. Over the long run total return is very important.


    I'm not concerned in the short term because I prefer to buy undervalued companies and they are usually undervalued for a reason. It generally takes 3-5 years for an undervalued stock to have its value recognized by the market and increase to overvalued status. So, I like to see how my positions compare over 5 year periods.


    In my case, I believe that if I stick with quality, don't overpay by much and reinvest the dividends, I will outperform most benchmarks on 5 year intervals. That's good enough for me.


    My portfolio strategy is not designed to beat the S&P 500 every year. It's designed to beat it over 5 year periods.


    If I wanted to beat the S&P 500 every year, I would have to be a momentum investor and that's not the best strategy to embark on if the goal is dividend growth.


    Thanks for sharing your link.
    24 Jun 2013, 03:52 PM Reply Like
  • Thank you for all the knowledge you so freely share. I am working on m own project 5 million.
    Would you be willing to list your porfolio holdings so I can compare my choices?
    Thank you so much for all you do.


    29 Jun 2013, 02:05 PM Reply Like
  • Author’s reply » Jim, my holdings are listed under my profile, but here they are anyway.


    Current Portfolio:


    Utilities: AVA, D, LNT, PNY, SO, SRE, UNS and WEC
    MLP's: EPD, KMI, KMP, KMR and MMP
    Reit's: HCN, NNN, O and OHI
    Consumer: CL, DRI, GIS, KRFT, KMB, KO, MCD, PEP, and PG
    Telecom: T and VZ ... (FTR - Spinoff shares from VZ only.)
    Financial: None
    Energy: CVX, MHR, SDRL and TPZ
    Health: JNJ
    Tobacco: MO and PM
    Industrial: LMT
    Tech: ADP and INTC
    CEF's: ETO, DSM and VMO


    I also manage a portfolio for a 28 year old and it's called Project $3 Million and his holdings are listed here:



    I posted a new message today on that blog so you'll have to scroll down to the second message for the current holdings.


    I will be updating the Project $3 Million blog the first of the week. It takes me a couple of hours to type it out because I only use two fingers to type with. I'm pitiful! ... Ha!
    29 Jun 2013, 06:10 PM Reply Like
  • Chowder,




    Hmmmm, how does *that* fit into *your* portfolio?
    30 Jun 2013, 12:45 AM Reply Like
  • Author’s reply » MHR was a spec stock I bought years ago at around 29 cents per share. I never sold it.
    30 Jun 2013, 07:09 AM Reply Like
  • Ok. Just making sure no one hacked into your account :)
    30 Jun 2013, 10:59 AM Reply Like
  • Author’s reply » It is a relic from my day trading days. I bought it when the stock symbol was PRC and I thought I paid too much at 29 cents per share, or was it 26 cents. I don't remember the exact amount. I was picking up lots at various prices but the cost per share was 29 or 26 cents.


    It's only up about 500%, but I thought I would hang on to it and see what it can do. I don't even follow company news on MHR. I simply just leave it alone.
    30 Jun 2013, 02:16 PM Reply Like
  • "Comparing your results to an Index, 12 months after the fact, since you couldn't plan ahead because you didn't know what the end result was going to be, is akin to throwing stuff up against the wall and hoping most of it sticks."


    This smart observation had a big impact on me this year!


    As a result of it, my husband and I got cracking on an Excel spreadsheet and figured out, quarter by quarter and with inflation factored in, how much we needed in dividends to reach our goal for retirement. Our series of goals started with the third quarter of 2013, and we exceeded both it and Q4's. I then calculated the dividends I anticipate we'll be paid on stock purchases we've made in the last several weeks which have not yet paid us a dividend, and realized that with these purchases and modest dividend growth, we're already in line to meet all of 2014's dividend goals! That's without any purchases yet having been made in 2014! We are psyched, to say the least. Plan your work and work your plan -- we're doing it!


    This phase shift in thinking about our investments -- away from benchmarking against the S&P500 and toward benchmarking against the income goals we calculated would get us where we want to be -- has made a big difference for us. As the year is drawing to a close, I wanted to give credit where it's due. Your thoughts on benchmarking and strong emphasis on quality have become part of the foundation of our approach to building our retirement. Thanks, chowder!
    28 Dec 2013, 07:51 AM Reply Like
  • Author’s reply » Thanks for the kind words, and congratulations on achieving your income goals.


    I take a lot of heat over the public portfolio I manage. People always want to compare it to something after the fact.


    None of my portfolio's outperformed the S&P 500 this year, but they weren't designed to either. Too many people don't get it.


    I've been told I would have been better off buying SPY and my strategy isn't that impressive. They weren't telling me that in 2008, 2009, 2010 or even 2011. They are telling me that now, using hindsight after the S&P has had a great year.


    I set up Project $3 Million in late 2008, just as the Great Recession was gaining steam. I was told I was nuts at the time to even consider owning equities.


    I established a series of goals on where I wanted that portfolio to be at the end of every year over the next 40 years.


    The portfolio as of today is more than a year and a half ahead of schedule, but because I didn't beat some silly benchmark, I'm told it's a bad strategy.


    I'm ecstatic over the results, considering they were established five years in advance, during the worst recession of my generation, but the market chasers want to tell me I should have simply owned SPY.


    In my own portfolio, when the market was falling during 2008 and 2009, the dividend income was rising. People can't seem to relate to that. So be it.


    The question to me is:


    How much do you need and when do you need it?


    Once you know that, every decision you make should be made with that objective in mind, regardless of what the market is doing.


    It's nice to see that you get it. Thanks.
    28 Dec 2013, 08:50 AM Reply Like
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