Allowing For The Possibility Of Risk

by: Roger Nusbaum

In my post yesterday about the 4% rule I said the following:

I don't think that the person who reads this and thinks I can get 4% in dividends no problem has a good grasp of the risk they would be taking.

In the comments of the Seeking Alpha version a reader left the following:

My dividend growth portfolio has a current yield of 4 percent, and I don't see the additional risk over one yielding 3 percent. Maybe I am just lucky.

My reply:

Do you allow for the possibility that you are taking more risk than you realize? No consequence for risk taken does not mean the risk wasn't taken.

An extreme example I have used on my blog to make the point; a person who put 100% into Amazon on the IPO and sold on October 1, 1999 made 4371%. He took insane risk with no consequence but he still took the risk.

The thing with Wall Street calamities is they tend to be different from past calamities. I have no idea what could possibly cause presumably safe dividend stocks to have an historic meltdown and I really don't expect them to have an historic meltdown but that does not mean it cannot happen.

When I worked at Schwab there was guy there who had retired from GE with a lot of stock, I don't know exactly why he was working at Schwab but he did seem to enjoy it. He actually had it all in GE so he said. He had unyielding faith in the company and the stock and back then (late 1990s) there was no effective way to refute his opinion, it was the bluest of the blue chips.

GE is down just over 50% from its 2000 high. My former colleague did not allow for the possibility that he was taking on more risk than he realized.

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