When I first started investing in 2012, I was primarily a dividend growth investor. Prior to that, all my previous investing experience was in funding retirement accounts (401k and Roth IRA), so you could say that I was limited to investing in index funds. Nevertheless, because of the financial crisis, it was all too clear to me the ramifications that a downmarket can have on a portfolio’s principal value, or “total returns”.
I was still far too young, so even seeing all that red ink on my computer screen wasn’t too demoralizing. Somewhere in 2009, I remember logging into my retirement accounts and witnessing that my portfolio was worth half of what I had put in… I chuckled, and thought, “Investing is some pretty rough stuff!”
Dividend Growth Investing
But because of that experience, all those negative returns led me on a search to find an alternative investment that could somehow cushion the blows of a depressed market. Obviously, investing in a conventional savings account or CD wasn’t going to cut it in this environment; the interest rates were too low…
Enter dividend growth investing. I had stumbled upon a strategy that more or less doesn’t care about the market’s mood because the passive income just keeps on flowing in, regardless. Further, if you invest in large cap blue chips, those stocks provide a built-in defense mechanism — When prices go down, yield goes up! So, you could make a valid argument that dividend growth stocks have a floor to how low prices can go… Unlike that start-up company that goes bust, the odds are less likely if you buy high quality dividend growth stocks. For starters, a company can’t pay dividends without legitimate, real earnings! Further, should prices stumble, there’ll be many yield-hungry investors waiting in line to deploy fresh capital.
So, definitely, in a time of doom and gloom, I was certainly seeing the appeal of dividend growth investing. For those reasons, I decided to build up a dividend growth portfolio myself.
Real Estate Investing
Despite my best efforts to keep racking up those dividends, around mid-2012, I started to ponder the thought of investing in real estate. Don’t get me wrong, I was having a wonderful experience with dividend growth investing, and the strategy was definitely living up to my expectations; I was growing and increasing my passive income stream at a monthly rate.
But like with everything in life, being open-minded is a wonderful thing. When you’re young and just starting out, I think you do owe it to yourself to dabble a bit, and figure out of what other strategies might also work on your quest to building wealth.
Even in my own backyard, I could see how discounted homes were relative to their all-time high peaks. And even though I was doing well with dividend growth investing, I just knew that it made no sense for me to turn a blind eye to real estate. Even with ZERO experience, it was apparent to me that many self-made millionaires got there through investing in real estate.
So, I did research and asked around for ideas. Naturally, I got a lot of mixed opinions, and was left even more confused than ever. From the skeptics, I would get remarks like, “Boy, you sure you want to be playing with fire right now? Aren’t you aware of all the foreclosures floating around? My good buddy just lost his house… It’s a dangerous game!”
If I didn’t hear that, I would get, “My home is worth half of what I paid for. F___ real estate!”
Should remarks like that have made me shake in my boots? Luckily, I was too green and naive to pay heed to those words, otherwise my real estate career never would have gotten off the ground…
When you get varying opinions and feedback that are at opposite ends of the spectrum, the most probable reality is something that lies somewhere right smack in the middle.
With investing (in general), it’s probably not easy as pie… and it’s not as far-fetched or crazy as you’ve heard either. The most important thing is to get educated by those who have been successful doing what it is you are attempting to do. Find a mentor who has “been there and done that” and learn how to avoid the pitfalls and mistakes along the way.
Now that the markets are back up, you don’t hear those doom and gloom stories anymore. No, instead, you’re getting chatter on the daily about, “Man, it’s so easy making money in the stock market. Whatever I buy just keeps going up!” That, or, “Just buy ANY house! Look back in two months and you made $50,000, easy.”
For a lot of people who are just getting their feet wet for the first time right now, they’ll have to tread carefully, otherwise when things tumble, they’ll become the aforementioned jaded investors who will no longer have anything good to say about that particular investment strategy…
You won’t be doing yourself, or anyone else a service by getting in too late, failing, and then proclaiming to the world, “Stock/real estate investing doesn’t work!”
My Own Experiences
When it comes to stock investing, I’ve made money and I’ve lost a lot of money as well. Early on, I was burned chasing high-yielding stocks, and I learned how difficult it can be trying to time the market in hopes of making a quick buck. Over the years, I’ve done my best to learn from my mistakes, but I don’t ever let a bad experience shun me completely from the game, or cause me to become jaded.
Why not? Because I know that stock investing is an emotional game that will take you on a wild rollercoaster ride. That, and the fact that there are too many successful stock investors for me to conclude that investing in the markets over the long haul doesn’t work.
With real estate, I’ve invested for both cash flow and appreciation. Right now, the appreciation moves I’ve made over the last 3 years have been paying off like crazy, and chances are quite good that I will become a net worth millionaire this year because of those investments.
For example, Rental Property SH #3 was purchased for $470,000 earlier in January of this year. To close escrow, we needed to bring $63,200 to the table. After renovations, our “all in” cost basis was ~$79,000. Since this was a partnership deal, each person was responsible for $39,500. Based off of current comps, Rental Property SH #3 would conservatively sell for $550,000 today. So, in 4 month’s time, we are already up over 100% on our initial investment capital (on paper)…
But again, it’s important for me to be mindful of those experiences as I try and process everything that has happened in such a relatively short period of time. In other words, just because I’ve made a killing on appreciation in this most recent bull run, it does NOT imply that investing for appreciation from this day forward, and even in the far-off future will ALWAYS be the best, most suitable strategy.
Often times, we get far too arrogant and consumed with our own success stories that we fail to consider the possible negative consequences, but instead, we keep on repeating the same strategy over and over again! Lather. Rinse. Repeat.
After all, if it worked before, it’s got to keep working into the future, right?
That can be a very dangerous thing! As I write this article at the peak of this current bull run, I can’t help but want to think completely the OPPOSITE of everything that I’ve been doing… As we move forward, one thing that I know for certain is this — Past performance is not an indicator for future success.
I’ve invested in a downmarket and an upmarket. Right now, I’m doing everything that is possible to resist the urge to keep on betting on even more appreciation. Everywhere I look, there are flippers coming out of the woodwork trying to put lipstick on a pig so that they can re-sell it right back to the marketplace littered with desperate all-cash buyers.
I don’t want to buy any more houses. I don’t want to take on any more debt (loans). Frankly, I don’t want to be playing this game right now because there are too many folks engulfed by greed looking to milk this seller’s market for every last drop that they can get…
But someone out there is going to get caught up in all this euphoria… They will over-leverage themselves to the tilt and then cry a river when this thing goes bust.
Greed can be insidious, but it’s ego and pride that will lead you to your demise.
The appreciation crowd is getting downright cocky these days… Since I’ve had a wonderful experience playing that game over the last 3 years, it’s impossible for me to deny the potency with this type of investing approach. However, I must remember to be ever mindful of my own thoughts and experiences so that they don’t lead me astray; it’s always important to take a step back from whatever it is you are doing, breathe, and try to process the results with a calm, rational mind.
As has been evident over the last few months, I’ve been focused mostly on stashing cash and rebuilding my passive income stock portfolio. Yes, I’ve made a few more “speculative” stock investments, and I won’t deny that it was greed that got the better part of me! Doh… I’m only human…
But I’m slowly realizing my true intentions, and moving forward, you’ll definitely see my investment moves becoming more “defensive”.
I realize how entirely easy it is to get sucked into the hype, whether you’re investing in stocks or real estate. But with the markets sitting at their all-time highs, now might be a good time to sit back and digest everything that has happened. In my own situation, I don’t want to fall into the trap of chasing after “one more deal” and becoming outright delusional, thinking prices can only go UP!
I’m happy… and I definitely feel grateful for all my investment success; now is NOT the time to keep trying to push my luck. There will be a time and place for appreciation plays in the future, I’m certain of it. Investing for appreciation is a tremendously powerful way of building wealth, no question… But it’s most potent when you can get in during a downmarket environment.
Be Mindful: Your Thoughts and Experiences Shape Your Investment Strategy…
I took a step back. I allowed myself sufficient time to process my thoughts. And right now, I’m mindful of my thoughts — They are telling me to IGNORE my past experiences (no matter how GREAT) as I continue to refine my investment strategy for the future.