I think most people measure the wrong things about their long term investing plans. Everyone says “start early, let time do the work,” but then success metrics don’t factor in time! Measurements also don’t factor in the investment objective as well as they could.
What’s happening is that people confuse investing with trading. With trading, you have a pile of money that you want to turn into a bigger pile, and do so now.
With investing, you consider your time horizon. Investing for dividends, the way I talk about here, you are also investing for income. So we should measure income and associated metrics.
When you think of income, what do you think of? How much you earn. Well, if you’re investing for income why then measure how much you have?
Let’s measure your dividend paycheck.
Then, as soon as you get your first paycheck you realize that you care deeply about getting a raise. If we measure paycheck, it also makes sense to measure your raise. You might measure that raise either backward-looking or forward-looking. Of course, the future is hard to predict exactly, so a forward-looking raise is really meant to be a reasonable estimate based on past behavior with some conservatism built in (in the hope that any surprises are positive surprises rather than negative ones).
The other measurement I like is technically called ‘yield on cost’ though I like to think of it as your ‘actual yield.’ I like this metric because it gives some indication of how time is working in your favor.
Here’s an example of how that works. Let’s say that 10 years ago, I invested $100 and earned a 1% dividend. I’d earn $1 a year. Over those 10 years, the dividend aristocrats raise their dividends, and now I’m earning $2 on that original investment of $100. Let’s also assume that just like the dividend, the value of my investment has doubled to $200.
Most people would look at that investment and say it’s worth $200 and you earn $2 so I’m getting a 1% yield. However, that only reflects today’s point of view statically. In my opinion, I saved $100 (10 years ago) and today it’s earning $2 a year, or 2%.
Why does this matter? What if I said to you that you could earn 6% every year plus capital gains. You’d probably jump on it. Well, if you purchased Apple today, with a dividend yield of about 1.6% and if they increased their dividend 10% a year for the next 15 years (a stupidly aggressive assumption, but work with me), at that point you’d have about 4x the dividend, but your cost doesn’t change. Put the money away today for the future, so that in the future you have a great return.
There’s a lot I’m skipping over. Inflation. The fact that 10% increases for a decade and a half is a crazy aggressive assumption (though the same works if you assume lower growth and
Another key point is that some of this
These Metrics Keep You Sane
One final point. The genesis of my book had to do with me helping my wife stay calm during some crazy market volatility (a lot of up-and-down).
When you track your paycheck, your
In fact, if the market drops, your raises get bigger! It gets to the point where you almost wish it goes down to juice those raises.
This lack of volatility in what you track will help you stick to your plan because it’s less “crazy making” in your head — worrying if you should sell, or buy more, or what if it drops more, or less, or “holy cow, look at the news…” None of that matters.
The industry says “don’t look” if you’re investing for the long term so that you don’t get affected by the emotion stirred up by (the totally expected) volatility. I prefer you to look, and learn, but look at things that align with your investing strategy and keep your eyes on the prize.
The prize being the paycheck your wealth brings home even when you’re not working.