Do you ever notice how folks tend to overcomplicate things? Let me give you an example. I was walking downtown the other day when I spotted some tourists looking bewildered at a map. A nice young lady had presumably stopped by 20 seconds before I arrived to assist. I noticed the faces of the tourists were a bit contorted as they struggled to follow the many flailing hand signals and turns the lady was advising. In their eyes, it was clear as mud.
I interrupted and asked where they were headed. The Capitol. "Sure," I said, "Walk this direction and you’ll run into it in 4 blocks." Relieved, they folded the map and began walking in the direction I pointed. The nice young lady looked at me displeased, and that was that.
Investing is another fine example. Each day I scroll through various articles where writers advocate a unique strategy in order to get a leg up on the market. One author touted his strategy buying on or near the ex-dividend date. Another author unpacked his unique technical approach to capture gains. A third recommended selling this, holding that, and re-buying the first at certain support levels.
It’s enough to make your head spin.
All of this taps into the notion that buy-and-hold investing is flawed. Or that there are alternative strategies worth exploring in order to optimize returns. So let me offer a simple response from a fairly disciplined buy-and-hold investor through this post.
Ceding the Point
Let’s say that someone has developed a proprietary technique they claim will outperform the market in all cycles. Let’s say this individual or group has demonstrated results and multiple testimonials. Let’s say that despite overwhelming evidence to the contrary, I believe that this group will continue to outperform well into the future. **There’s actually only one investor who comes to mind here, and his name is legendary: Warren Buffett.
My estimation is if you want to perform like Buffett, you would need to at least meet his 6 hours of reading each day to stay apprised of all market developments. Are you willing to spend 6 hours per day reading financial reports, business news and other financial journals? I’m guessing not. I love money as much as the next guy, but I am not willing to exhaust myself in the small chance that I may outperform the market. No thanks. I’d rather be cycling, walking my dog, or dining on a nice meal.
Heck, and this comes from a person who loves reading so much, I go to the bookstore on Saturdays just for fun!
Even if you read or researched that much, it would still not guarantee success. In fact, it is often those conceited few who believe they know it all who lose big. And some of these folks wield disproportionate influence.
Okay, okay. I guess I’m not so good at actually ceding the point. But my counter is that even if you developed such a magnificent and resilient trading strategy, the excessive time/hassle to maintain it would not be worth the "potential" reward. Is that partially why passive investing has taken off as much it has?
Passive Income or Passive Investing
Passive investing ensures market returns, but nothing additional. For those of us who enjoy researching individual companies and digging into the fundamentals, that is a hard sell. I myself am not a passive investor in the sense that I do not just dollar cost-average into index funds (save for 401(k) accounts). I purchase individual securities all the time for a variety of reasons. But I do employ a "passive income" investing approach that keeps me dedicated through simply buying, holding and reinvesting shares of high-quality companies.
For dividend investors and most retirees, what matters most is income. Income, income, income. As long as these individuals receive their dividend checks deposited to the brokerage account, they are happy. Even those of the Financial Independence and Retire Early (FIRE) community are only able to depart the workforce early if they have enough money coming in to pay the bills. Relying on capital appreciation is a lot less dependable than expecting a quarterly payment from a Dividend Aristocrat or investment grade preferred shares.
But the key component of passive income is that the money is supposed to be working for us, not the other way around. As the Wikipedia blurb above says (emphasis mine): “Passive income is an income received on a regular basis, with little effort required to maintain it.” The phrase "little effort required to maintain it" is quite an important element. We want to maximize the effects of compound interest in the most efficient, expedient way possible. And the best way to do that is to buy and hold and reinvest dividend growth stocks. Take a look at the two charts below which compare basic compound interest versus dividend growth compounding:
(Image Source: Arbor Investment Planner)
If you accept the premise demonstrated above - that dividend growth investing accelerates the already incredible effects of compound interest - you can see that the best way to profit is to do nothing but buy, hold and reinvest. It's only an added bonus that this method is less stressful, less costly and more tax efficient than other alternatives. The simplest, most efficient solution is often the best.
The intent of the young lady who tried to assist the tourists referenced in the introduction was pure. I have no doubt about that. Nevertheless, she confused them by getting too technical and providing so many steps that they were more confused than when they initially stopped.
Similarly, some of us believe that we possess a theory/strategy/technique that gives us an edge on others and the market. Our intent is pure - to find a way to profit and share that information with others. However, the simplest, most efficient option is the most lucrative. Even if there were a magical equation which could be replicated indefinitely (there's not), it would be highly unlikely to be worth the painstaking effort to maintain it.
Passive income is supposed to generate a side effect of do-nothing. But do-nothing is not sexy, and our resistance to inertia comes from the fact that others must be outwitting us by studying the charts and/or scheming various dividend capture strategies. Let them. It's a waste of time.
Buy-and-hold investors recognize that it only takes one rolling snowflake to start an avalanche.
Disclosure: I/we 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.