The Psychology Of Dividend Growth Investing: Defining Success

Apr. 10, 2012 6:54 PM ETGPC, KO, PG, SPY105 Comments


Everyone who invests in the stock market wants to be successful. You want to end up with more money than you had when you started, but there are many roads you can take in pursuit of long-term wealth. Some roads will lead to success; others will lead to failure. To know the kind of road on which you are traveling, you need to be able to measure your success along the way. However, before you can measure your success, you need to define what constitutes "success." In this article I discuss two definitions of investing success that have important implications for how individual investors think about and participate in the stock market.

Beating the Market

If you were to survey a wide range of individual investors, financial advisors, institutional investors, hedge fund managers, and the mainstream financial media, I think a common definition of investing success would be "beating the market." That is, having your portfolio achieve a total return that is better than that of a market index such as the S&P 500 (SPY). Beating the market is something that many people aspire to do, but I question whether it is a sensible and psychologically healthy way of defining investing success. Two examples will serve to highlight some problematic issues with this definition.

First, imagine that the S&P 500 index gained 20% in a year but your portfolio's total return was only 10%. You did not beat the market, but does that really count as a failure? Your portfolio is worth more than it was a year ago, the gain outpaced inflation, and you made more money than you would have made by sticking all your money in a savings account. One could reasonably argue that your investing was a success, not a failure.

Second, imagine that the S&P

This article was written by

I am a 40-year-old investor and a professor at a university. I have been following a value-oriented dividend growth investing strategy since 2012. I have written occasional reviews on Seeking Alpha about my portfolio and investing progress.

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