A reader question:
“After reading your book (The Wealthy English Teacher: Teach, Travel, and Secure Your Financial Future) and being on the Dividend Monk’s site I was excited to see what Hallam would say about quality dividend stocks (strong fundamentals, history of increasing dividends, etc) in The Global Expatriate’s Guide to Investing: From Millionaire Teacher to Millionaire Expat. However it seems like Hallam dismissed them quite quickly, saying that they didn’t earn as well as index funds. Was wondering about your thoughts on that. Did he do it to simplify the book? Or is there a debate on that topic?
My answer: I’m not entirely sure about Andrew Hallam’s thoughts on dividend paying stocks. If he makes his way over to the blog, maybe he could leave a comment, or send me an email? But, I will take a guess at it and welcome a correction if I’m wrong.
The Stupid Money
Yes, it’s true that the average individual stock investor does not do as well as someone who invests in index funds. But the average investor invests with “stupid money” as the professionals like to say, which means that they do the exact opposite of what they should do: put in more money when the markets are flying high, and sell when the markets hit rock bottom. Remember when I talked about the principle of fear and greed in my book? So, someone who invests in index funds and just puts in a set amount each month and doesn’t worry about whether the market is high or low will do better than the “stupid money” crowd who can’t control their emotions.
The Smart Money
However, if you invest like a professional and control your emotions, you are investing with “smart money” and it is then that you have a chance at beating the market with things like dividend paying stocks.
Index Fund Investing=Easy
Andrew Hallam is perhaps being quite realistic in his book, since it is essentially a book for beginners and he maybe thinks that people will have a difficult time controlling their emotions and also that they just want a simple plan that they can easily follow. Index investing is so simple that even someone will very little knowledge about investing can succeed at it.
Dividend Stock Investing=Hard
In my book, I also offer that simple plan with ETF investing, but I do realize that there are a few people who will get inspired, do the research and be disciplined enough to do well at dividend stock investing, which is why I included that section. If you are someone like me who is interested in reading annual reports, keeping an eye on dividend increases and cuts, and likes to read the financial news, then perhaps dividend investing is for you. But, it certainly is not for the average uninformed financial illiterate! Those people are much better sticking with index funds (and remember: mutual funds are evil!)