# Explain this young-investor ideology



## Edgar (Mar 24, 2014)

I have heard/read many times that young investors should focus most of their attention on capital gain stocks rather than dividend stocks. I have tried to wrap my head around this, and the only justifiable explanation that I can think of is "Young investors should be willing to take more risks for greater gains rather than investing in slow/steady growth stocks (blue chip dividend paying stocks)". Am I entirely missing the mark, and if so, can someone explain.
Thanks,


----------



## Pluto (Sep 12, 2013)

the idea is that in non-dividend paying high growth stocks you can make way more money in a short period of time. But it is also riskier, and your high momentum portfolio can blow up on you very quickly - faster than it took to go up. In that case, they argue, it is a strategy best employed by the young because they have more years to recover from the implosion. 

some years ago I read an article about a lady who was a teacher in Toronto who when she was young just bought conservative dividend paying Canadian bank stock from time to time with her savings. years later she ended up with a multi million dollar stock portfolio. 

Just do what you feel comfortable with. Also it is not an either/or thing. you can do a little of both - a portion conservative, and some riskier.


----------



## peterk (May 16, 2010)

A "young" investor should be only concerned with the total growth of his money, as they have no need of regular investment income to live off for many years to come.

An "old" investor may have urgent need of regular distributions of interest/dividends, and thus in theory is willing to sacrifice some total return in favour of a regular, known income.

Whether dividend stocks or growth stocks will give you a higher total return though is of course a question debatable until the end of time...


----------



## Butters (Apr 20, 2012)

In Canada all of our good stocks have dividends expect one or two

Perhaps this could relate more to the US side

All being the same, I'd rather buy a big bank with no dividend. But the next best thing is to buy a bank and drip it. 

Dividend can be good. Keeps the company focused.


----------



## Woz (Sep 5, 2013)

The dividend is secondary to the company’s fundamentals for me. All else being equal, I’d much rather invest in a company with a lower PE than a company with a higher PE that pays dividends. 

Just because a stock doesn’t pay a dividend doesn’t mean it’s a risky growth stock. Just look a Berkshire, they’ve never paid a dividend and they're the quintessential value company.


----------



## CPA Candidate (Dec 15, 2013)

I don't think the standard wisdom is necessarily right. Just because you may not need cash income doesn't mean dividends aren't important. Dividends are a realized return and represent cash that can be reinvested at opportune times or simply act as a portfolio rebalancing tool. Surely no one that let dividends collect in cash in their accounts is unhappy about it in the past few weeks. Dividends tend to keep investors from making impulsive moves into flavor of the month stocks because they would lose the income stream Do you want a bird in hand or two in the bush? As we've seen lately, capital gains are fleeting.

I honestly think an aggressive approach where a young investor goes after more speculative growth stocks in search of huge capital gains will end badly 9/10 times. Don't let the odd millionaire speculator lead you to believe that this is a sound idea.


----------



## cheech10 (Dec 31, 2010)

Total return is what matters, and capital gains are a more tax efficient way of realizing gains than dividends: lower tax rate, and greater ability to defer tax if you have a long time horizon.


----------



## lonewolf (Jun 12, 2012)

I think it is just a ideology brokers used to get the less experienced to buy stock. Go after the easy prey.

Experience/practice is needed to become better @ something. Practicing with poor technique is not going to form good habits for athletes or speculator/trader. If bad form is used no matter how much practice someone gets it is just not going to make them better it is just going to develop bad habits. Step by step logical progression towards developing better form must be practiced. Someone that has never played baseball is not going to play well in a world series baseball game.

Speculator/trader needs time learn & develop good technique. Why put a lot of money on the table until your got an edge that allows you take more off the table then you put on the table. The younger a person is the odds are higher they are less experienced. The less experience the easier it is for the wolfs of wall street to take your money. The wolfs love promoting the young to put their money on the rigged table.


----------



## savvybuck (Feb 12, 2014)

In order to understand you must take the example into extremes.


Dividend investing would be equivalent to buying a farm which basically pays out all it's earnings each year to you, the owner. That money would then be taxed.

Capital gains investing would be equivalent to buying a farm which pays out no money to you. Instead, the farm uses that money to buy more farms and to potentially make more money each year.


----------



## lonewolf (Jun 12, 2012)

Maybe I m just to old school, The old saying goes if you want a cow buy (lend money for) a bond not a stock. There is no way the governments are going to be able to repay all their debt @ some point someone is going to buy (lend money for) a cow that will die on them. With the amount of debt out there maybe it does not matter if the speculator goes for dividends or interest because they are both high risk now.

There is a certain age where investors are going to be @ a peak time to invest, its not to young or to old its just right. This game is not for everyone for some the time will never be right.


----------



## Just a Guy (Mar 27, 2012)

It's been my experience that there are no hard and fast rules...otherwise everyone would be rich.

There are going to be capital gains plays that go nowhere, there will be dividend players that crash...people will always try to make up rules to make them feel better and justify their choices.

The market is a game, if your lucky (and maybe a little smart) you may do well...then again, you may not.


----------



## Fraser19 (Aug 23, 2013)

As a young guy I have always thought the idea of taking more risk when I am young, so I can recover the losses is awful advise. I try to buy good investments that will make a reasonable return for decades. I would rather get 6% every year instead of 10% one year 11% the next year, -30% the following year and so on.

The idea of taking risks with time so I can fix it when things go wrong is a horrible idea, I like building, not rebuilding. This is why I buy mostly good investments that pay a respectable dividend, that I can also expect some growth from.
Although I do at times put a small amount into a battered company from time to time.

I personally like the idea of dividends, I feel that they offer good protection in many ways. For example lets say a recession hits, my DRIP will buy a much greater amount of shares (assuming the dividend does not get cut) or if I need money I can turn off the DRIP and take the dividends, instead of selling the stock at a loss.

So final statement for me is, I like dividends. Also I am 25.


----------



## lonewolf (Jun 12, 2012)

Companies have borrowed money hand over fist to buy shares in their stocks. It is easier for them to pay dividends when they are holding more stock in their company. Interest rates rise or margin calls if the stocks are bought on margin could have a snowball effect of them selling stocks to raise money to pay IOUs. Where is the money going to come from to pay all those dividends when stock prices are falling & the companies are not making money in a down economy?


----------



## Cal (Jun 17, 2009)

The best investment plan is the one that works for you and your personal situation/goals etc...


----------



## donald (Apr 18, 2011)

The way i look at it(what i did)was build a capital base 1st(Important)mine happened to be mutual funds,when i went self direct i was able to diversify in multiple sectors and was able to weight my positions accordingly(100k-10 individually companies)and than build from there and diversify between new york listed and tsx listed(and have the proper securities in the proper place)
Instead of looking at 'picking' stocks 'blindly' imo you start:
1)enough capital
2)build your porf thinking about not individual companies but more broadly(economy at large)
3)once you start building off base you than can diversify between defensive(low beat/income stocks)and more speculative plays(tech ect)
I look at investing as building a portf tha has many things going on and each company has it's 'role'
Focus on the fundamentals of building a porf(how to model it)
I would rather tilt my porf defensive and build out from there than the other way.


----------



## newuser (Sep 16, 2014)

Fraser19 said:


> As a young guy I have always thought the idea of taking more risk when I am young, so I can recover the losses is awful advise. I try to buy good investments that will make a reasonable return for decades. I would rather get 6% every year instead of 10% one year 11% the next year, -30% the following year and so on.
> 
> The idea of taking risks with time so I can fix it when things go wrong is a horrible idea, I like building, not rebuilding. This is why I buy mostly good investments that pay a respectable dividend, that I can also expect some growth from.
> Although I do at times put a small amount into a battered company from time to time.
> ...


You are wise as a 25 yr old. When I was 25, I put my money in all sorts of risky investments. After 15 odd years I have ended up with a portfolio not much different than if I had just invested in blue chips, since my losers pretty much drag down my gains on the winners.

I think the advice to take risk when younger is perpetrated by sellers of said risky investments. If no one took the risk, then a lot of companies would die at the funding stage. So it is more of a public service to the capitalist free market that younger people take the risk.


----------



## andrewf (Mar 1, 2010)

lonewolf said:


> Companies have borrowed money hand over fist to buy shares in their stocks. It is easier for them to pay dividends when they are holding more stock in their company. Interest rates rise or margin calls if the stocks are bought on margin could have a snowball effect of them selling stocks to raise money to pay IOUs. Where is the money going to come from to pay all those dividends when stock prices are falling & the companies are not making money in a down economy?


When companies buy back shares, they are cancelled. They're not sitting in a margin account waiting to be sold on a moment's notice.


----------



## donald (Apr 18, 2011)

Think of it like building a hockey team(you need offence/defense/goal scorer's/4th line grinders/shut down players etc
In a weird way your like a hockey team owner and your new positions will be your drafts(future) and where you are weak.
You would never see a professional sports team build a team with all offence example


----------



## Just a Guy (Mar 27, 2012)

My personal philosophy is that invested money is spent money. I can't depend on it being there tomorrow. If I can't afford to lose it, I shouldn't invest it in the first place.

I don't look at what it's worth very often, and I won't lose sleep if it goes down.

So far, I've been very lucky and it's gone up quite nicely, but I'm diversified in owning businesses as well as having passive income from real estate. Each investment is expected to make money, but at worst break even, anything more is icing on the cake.


----------



## My Own Advisor (Sep 24, 2012)

Fraser19 said:


> So final statement for me is, I like dividends. Also I am 25.


+1 

Dividends are real, they are tangible for the shareholder and tangible signs the company is making money. You can't fake dividends for long.

In Canada, there are only about 40-50 companies "worth" owning directly, otherwise, index invest. Pick and choose from the 40-50, you might be right, you might be wrong but the more you buy and hold the better off long-term you will be. My $0.05.

If you don't want to pick and choose some Canadian stocks, index everything, rebalance once per year and simply enjoy life as your portfolio builds for the next 30+ years.

I'm with you Fraser19 when it comes to DRIPping stocks. I love it when the companies I own, pay money and the money they pay me makes more money every month and quarter. DRIPping stocks (and ETFs) is a beautiful thing really


----------



## Eclectic12 (Oct 20, 2010)

Edgar said:


> I have heard/read many times that young investors should focus most of their attention on capital gain stocks rather than dividend stocks...
> the only justifiable explanation that I can think of is "Young investors should be willing to take more risks for greater gains rather than investing in slow/steady growth stocks (blue chip dividend paying stocks) ...


I think you are close ... but have some assumptions where YMMV built into your statement.

I think the statement is more aimed an a young investor who is holding the stocks in a taxable account. The idea is that dividends pays some of the gains yearly and are taxed. If the young investor does not need the income, then it would be better to keep everything tax deferred until the investment is liquidated.


I mention assumptions as this can change the situation. 

This philosophy assumes that there is a non-dividend paying equivalent stock that will grow similarly. Trouble is, some segments like banks have dividends as a major component to attract investors. If you can find a major bank in Canada that doesn't pay dividends - I salute you.

Then too, I've seen people chase high dividend payers and have them go bankrupt - where the CG stock they were also interested in, turned out far less risky.


IMO, it's more important to understand what is being bought and to buy what one is comfortable with the prospects of a good return ... not a simplistic theory.


Cheers


----------



## Fraser19 (Aug 23, 2013)

My Own Advisor said:


> +1
> 
> Dividends are real, they are tangible for the shareholder and tangible signs the company is making money. You can't fake dividends for long.
> 
> ...


Yup, really I can't see a better way. Start young buy good stocks, let them DRIP and continue living life. I don't feel investing should be complicated. The last thing I want is to be glued to my computer screen all day trying to make quick trades. 

For me, most everything is indexed. I just cant come up with the capital at 25 to buy 9k work the CIBC to DRIP. So I index what I can't buy directly, and when good stocks come up at a value, I buy them too. Hopefully in the next few when I move to my next job ill have the ability to place larger trades.

I read investing books all the time and I just cannot understand why I would take big risks in stocks. I feel the biggest risk I can take is wasting the time that I have on my side chasing unrealistic gains.

Open up a RRSP calculator or a DRIP calculator. The absolute last thing I would want to sell myself short on is the last 5 years of compound growth. What I do with my money today will make a massive impact in 40 years. For me that is where the real risk is.


----------



## My Own Advisor (Sep 24, 2012)

Fraser19, I've found that once you're DRIPping a dozen or so CDN and U.S. stocks AND you're indexing a good % of your portfolio (say 50%), then you really have the best of both worlds.

The portfolio (mixture of stocks and low-cost ETFs) is largely on autopilot. You rebalance by adding more money and buying what "dips" in price and keep the DRIP taps on regardless. This way, if the market corrects, which it has, you:

a) go shopping for oil and gas stocks on sale,
b) go shopping to buy indexed equity ETFs on sale,
c) do both, and/or
d) still gain more dividend and distribution income via the DRIPs.

It is a winning strategy but I've learned just to leave things alone, the portfolio works better and the dividend income goes up each month the less you tinker with it 

I need to write a post about that!


----------



## banjopete (Feb 4, 2014)

I think you nailed it Fraser19, with such a long time horizon for you and the fact that you care this much at your age, it will work out. When you're a crusty old bugger you can tell everyone your secret but I suspect your biggest one will be just to start early. Time makes all the blips and wins or losses along the way forgettable if you simply save more than you spend and invest it moderately wisely.


----------



## PoolAndRapid (Dec 3, 2013)

..


----------



## HaroldCrump (Jun 10, 2009)

^ moderators pulesse ban this spammer :frown:


----------

