Endless PF Debates, Wrong Context

As I mentioned in my post, Do You Have The Right Personal Finance Community, I wrote about how I spend a great deal of time surrounding myself with like minded investment class people and while that has helped me learn and grow it doesn’t come without some aggravations. Those aggravations are in the form of endless debates between different factions of investors and their strategic approach.

Debate 1: Dividend Stocks vs Growth Stocks

The one argument I see repeatedly on different community sites center around whether someone should invest in growth stocks or dividend stocks. There are zealots out there that strongly feel one is better than the other but often they are missing the forest from the trees.

First, there are TWO stages in an investor’s life.

Stage 1 – Accumulate and Grow

In the accumulate and grow stage of your investment life, preferably started while very young, the goal is to accumulate and grow your investments as much as possible. If you start investing at age 20 then hopefully by the time you hit your late 50s or 60s you have accumulated enough wealth to move to stage 2.

Stage 2 – Preserve and Spend

In stage 2 preserve and spend, preferably started at retirement, you want to preserve as much of the capital you have accumulated and spend the interest and/or dividends of your nest egg. If you have too, you can also sell some of the capital as well but that will begin to deplete the ‘preserve’ part of the equation.

The obvious questions to ask is what type of investments do I have in Stage 1 over Stage 2 and why do I need to switch?

In stage 1, it makes sense to invest in growth stocks, skip bonds or maintain a tiny position, and let the nest egg grow as much as possible. Market crashes would impact your portfolio but with enough time they can eventually recover. There were major stock crashes in 2001 and 2008 and there is highly likely to be one over the next few years in my opinion.

In stage 2, it makes a whole lot more sense to shift to buying bonds and dividend stocks and not rely on volatile growth stocks to attempt to squeeze out more money any more than going to Las Vegas to juice your portfolio. There are ways to squeeze additional income via covered calls from your portfolio if that is something that is really needed during retirement.

I think many people will change their tune on the whole “growth stocks only” philosophy as soon as they experience a major market crash but only time will tell.

The wrong context here for many of these debates is that it’s impossible to know every single person’s situation so saying growth stocks vs dividend stocks is absurd without understanding a complete holistic view of someone’s personal finance situation.

Debate 2: Indexes vs Individual Stocks

The other debate I see often is the endless debate about just investing in indexes like ETFs is better than individual stocks or vice versa. I think this debate is largely a difference between how much time someone wants to spend on their portfolios. If you’re not an analytical type person then indexes may be the way to go, you will essentially let someone else do all the stock picking for you and just sit back and relax. If you like to do your own analysis or prefer to invest in value stocks then stock picking may be the way to go.

The fundamental contextual problem with this debate and the first one is that there seems to be a tendency to employ ‘binary thinking’ during these discussions where it is either ALL or NOTHING. In other words, you should be ALL in growth stocks or ALL in dividend stocks. You should be in ALL index investing or ALL stock picking. It’s laughable because there are no rules that state you should do either.

For me, I own indexes, individual stocks, growth stocks, dividend stocks and a slew of other investments. I don’t live in a binary world so neither do my investments.

There are other debates too around US vs international stocks or cash vs no cash and so on but I’ll save those for another day.