When I made a bit of money in 1980 on the sale of a regional magazine that I had started publishing in 1969, I looked for a reliable investment where I could put the proceeds to good use. That was a chore. I ended up buying some Treasuries (in 1980 they were yielding unprecedented amounts), I bought a vacation home, and I set aside some money to start another business.
After all these years — and even though the business I started was a financial publication called The Moneypaper, which should have given me a heads up — I still haven’t discovered an absolutely reliable way to put money to work. However, there are a few lessons I’ve learned since my quest began in the early 1980s, the most important of which is that time and patience are an investor’s most important assets.
To succeed as an investor, you need to have a long-term outlook. As the legendary value investor Benjamin Graham said: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
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Saving and discipline
Perhaps, it’s best to acknowledge that saving is really difficult. Doing whatever it is you want to do today is much more compelling than saving for something in the future, which seems like a long way off. After all, it’s not unreasonable to upgrade to the latest smartphone. It takes wisdom to put off immediate pleasure, and, generally, wisdom comes with age. Yet your fortune depends mainly on time, and time is in limited supply when you have age. So, the earlier you learn this lesson, the better.
Successful investing demands discipline to continue to adhere to your predetermined strategy even when every fiber of your being is demanding that you allow your emotions to dictate. A disciplined approach to investing will force you to ignore what other people are doing. You won’t change course based on short-term events. You will be committed to the companies you own and hold them forever, or until the underlying business is no longer what you admired in the first place. Instead of reacting to market conditions, you will make a considered judgment before you take any action.
Time and again we see the volume of transactions spike at what will turn out to be a market bottom, or a market top. Of course, it is understandable that you will feel concern when you see the price of your stock decline sharply. You will want to get out before the stock price collapses and the company goes bankrupt. Whether those concerns are realistic is not the point. Your concern is to preserve whatever is left. While that is possibly a reasonable way to react, it is also probably not going to be a successful move for you as an investor.
When emotions win, investors lose
History shows that most investors buy high and sell low, which is certainly not in their best interest. With so much noise from the financial media, both novices and professionals are likely to fall victim to their emotions and stray from their discipline precisely when they need it most.
On the other hand, successful investors are able to take advantage of the opportunity provided by these less-disciplined investors. These are the few who have the financial wherewithal and stamina to withstand the loud and consistent advice of the pundits and market commentators.
If you’ve been reading my articles, you’ve noticed that I favor dividend reinvestment plan (DRIP) investing. DRIPs make it easier for even the smallest investor to establish a disciplined approach to investing. Investing through DRIPs can make regular systematic saving automatic, and it can make it more difficult to react emotionally to market conditions (panic selling and irrational exuberant buying). DRIP investing, utilizing dollar-cost averaging, is a strategy that accomplishes all of that and more.
A better way: How DRIPs work
The beauty of investing through a DRIP is simplicity. DRIP investing is based on investing dollar amounts, not buying share amounts. You decide how many dollars you intend to invest on a schedule that you set up in advance. By investing a fixed number of dollars on a regular basis, regardless of the share price, you end up buying more shares when prices are low and fewer shares when they are high, which is the classic goal for investors.
With DRIPs, you buy and you keep buying. Each month or each quarter or each year, you add to your holdings by making a certain dollar-amount investment and reinvesting your dividends. No matter what happens to the economy, you keep adding to your positions. This takes the emotion out of your investing decisions. You’re not trying to out-guess the market, hoping to move in at the bottom and get out at the top. Market timers usually enrich their brokers and the IRS more than themselves.
There are nearly 1,300 dividend-paying companies that offer the opportunity to buy shares directly through a DRIP. Many of them do not charge commissions or fees and will set up schedules to withdraw funds from your bank account to automatically fund your DRIP account in order to regularly buy additional shares (or fractions of shares, depending on the stock price) on the company investment dates.
My get-rich-slowly DRIP portfolio
Here is a 10-stock DRIP portfolio that could stand as a core portfolio for those who are seeking to get rich slowly, while minimizing the risk of falling prey to their emotions as they build wealth over the long term. You can click on the company names to find out the specifics of the company’s plan.
You’ll see that five of these companies charge fees for each investment — as much as $5 plus 6 cents a share (Costco Wholesale, ticker: COST). You should avoid making small regular purchases in such “high-fee” DRIPs. For instance, if you were to invest $500 into your account at the transfer agent for (COST), at current prices, your transaction cost would be about $5.24 — or about 1%. An investment of a smaller amount would result in an even higher percentage transaction cost. On the other hand, if the investment amount were larger, say $1,000, the transaction would be only 0.5% of the investment amount. Therefore, it’s more efficient to build your holdings in such companies by making larger investments — even if you must, therefore, invest less frequently.
Hormel Foods (HRL)
RPM International (RPM)
Altria Group (MO)
3M Company (MMM)
Johnson & Johnson (JNJ)
PepsiCo Inc. (PEP)
NextEra Energy (NEE)
Costco Wholesale (COST)
AbbVie Inc. (ABBV)
Union Pacific (UNP)
For more information on direct investing plans please visit our website at http://www.directinvesting.com.
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