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Investing vs. Trading

October 6, 2010

One of the main reasons I prefer dividend investing is the inherent long-term nature. Picking individual stocks is a more comprehensive process than buying the hot mutual fund or simple index investing. The time invested gives me a better idea where the companies are going and will help me identify any troubling trends, should one arise in the future. Of course no investor can be perfect, and I expect to make some mistakes. That is why I want to buy a basket of 25 or so stocks, so no one holding will derail my overall portfolio.

A dividend investor is less concerned with the daily or monthly variation in stock prices. My primary concern is the likelihood the dividend payment is maintained, secondary is the potential growth rate of the dividend. This long-term approach also helps keep costs down. I currently pay $8 per trade. My current strategy is to invest in blocks of $1,000, so my fees are under 1%, which is definitely less than what most mutual funds charge EACH YEAR. I pay the fee twice, when I buy and sell. A fund investor pays that much annually.

The fact that a company pays a dividend at all is a clue to its stability and thus more likely to survive a downturn in the overall economy. When I buy a stock, I hope to hold it forever. Instead of constantly trying to find the next Microsoft, Apple or Google and hitting the jackpot with quick price appreciation, I’d be happy with a boring stock like McDonald’s, which has consistently delivered steady growth and recently hit an all-time high. Did I mention it also pays a pretty nice dividend?

Taking that even further, following a list like the Dividend Aristocrats, further narrows the field of dividend stocks to the cream of the crop. These are companies that have increased dividends for at least 25 years in a row. Talk about stability!

Things can go wrong with any company however, so it is equally important to have selling criteria. A cut or elimination of dividends would be a huge red flag and make me seriously reconsider any investment. Other considerations would be: a sharp increase in costs or drop in revenue, increased competition or government regulation, or perhaps a questionable merger or acquisition.

Contrast my strategy with trading – trying to profit on short-term swings in price. I really believe this is a form of gambling. Like betting in a casino, it is a losing proposition. The odds (in this case also factor in your trading costs) are not in your favor.

Day-trading was huge during the late 90s/early 2000s, but today you basically hear nothing on the topic. The stock market is too unpredictable from day-to-day for anyone to be able to predict what happens. Conversely, long-term (I’m talking 10+ year timeframe) the stock market goes up.

What is your investing strategy? Do you have a long-term or short-term outlook.

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