Wednesday, June 22, 2016

Multipronged Approach to Investing

I love Dividend Growth Investing. The main focus of my investing approach over the course of past few years has been Dividend Growth Investing. I am happy to subscribe to this model and still highly recommend it for investors looking for a reliable method of generating passive income. However, over the course of last year or so – as the bull market rages on in old age, valuations have been pushed to stratospheric levels amid the falling profits from strong blue chip companies. It is for this reason, I have decided to pursue a more multi-pronged approach to investing.

Regular readers of this blog may have noticed the change in my tone of the course of the past few months…I do not feel so hot about this market and the amount of purchases have dried up and my cash position has been building up steadily. Apart from a few pockets of companies, its become very hard to find compelling buys in this market as the debt-fueled share repurchase programs have made me question investing in certain companies.

Multipronged Approach to Investing

Strategy Falling in love with one single investment (or even an investment strategy) is not a very prudent behavior as an investor. Readers may be aware that we are already using a couple of different investing strategies in our portfolios. My wife’s portfolio uses a more passive approach to investing – using broad index funds via ETFs. My portfolio, on the other hand, focuses mainly on dividend growth investing and starting this month, a part of it will also be invested in index funds. This is a good diversification model. With dividend growth companies, I target some companies which I think will do well compared to its peers and let the investments compound over time. With the index funds, I let the market do what it does best; and allows me to instantly diversify providing me with a safety net, in case I had made a terrible mistake with my individual stock picks.

But the valuations have been stretched so much that some of the investments do not make any sense. If I want to invest fresh capital into the markets, I now have the option of either buying dividend growth stocks that do not yield much (thanks to income focused investors driving the stock prices up, and thus the yield down) — thus, risking dollars to make pennies. Alternatively, I’d have to simply add to my index funds, which also seems unattractive. The best option seems to stay in cash…but I like to put my money to work and for this reason, I’ve had to look elsewhere and look into different strategies.

I know that I am not the only one who is in a similar boat. I’ve been talking to other investors and blogger over the course of months and this seems to be more common than I thought. Just last week, Bryan from Income Surfer posted an article on this same topic. Jay from FI Fighter is another blogger that has went with the contrarian approach and sold his DGI portfolio last year and is currently making a killing in the commodities/mining market.

Investing Options

So, what kind of other investing options I am looking at?
  • Deep Value: They may not necessarily be mutually exclusive, but deep value investing and dividend growth investing go hand-in-hand. Looking for deep value stocks expands my horizon a bit from the DGI universe (the CCC list, the Aristocrats list etc.) allowing me to consider companies that may or may not pay dividends but are outside the focus of other investors and are probably mispriced. Such companies may or may not pay dividends.
  • Growth companies aka Non-Dividend Payers: Companies that are more growth focused and do not necessarily pay out dividends, but rather reinvest those profits back into the business to grow future earnings. I’ve always had a problem with this in the past – as I would have to sell the shares and exit an investment before I realize any profit. As I have said time and again, I prefer companies that share their profits with shareholders while I stay invested. But due to the current circumstances, I am reconsidering this option.
  • Options trading: This is something that I have occasionally tried in the past, but do not completely understand the trading and pricing strategies. Without completely understanding, I have tried options trading and have been burnt in the past. I will need to educate myself a lot before I (if ever) try this again.
  • Real Estate: One option that has been on the backburner is buying real estate. Although local (Ottawa, Canada) real estate isn’t as insane as Toronto or Vancouver, we feel that the Canadian real estate market is in bubble territory. When the bubble will burst is anyone’s guess. If the bubble bursts sooner rather than later, we might consider making a move in real estate investments.
  • Alternative investments: I have discussed plenty of other alternative investment options on this blog. I will be revisiting some of these options and taking them under consideration.
The biggest challenge I face with this multipronged approach is that I now have to go out of my comfort zone and learn new methodologies to evaluate companies. There is no question of evaluation with index funds – as you simply dollar cost average on a regular basis. Evaluating dividend growth companies is easy for me as I’ve been following this model for years. But now, I have to shift gears and think differently (put on a different hat, if you will) for the other investing methodologies.

What does this really mean? Mistakes will be made. There’s no denying the fact that once I start exploring a certain new approach, I will make a few mistakes. I am ok with that. Its part of the learning curve. I will be looking to learn from those mistakes and hone my skills over time.

So where does this lead for DGI in my portfolio? Am I abandoning DGI? Not at all. The core of my portfolio still consists of the dividend growth companies producing income quarter after quarter. These companies will continue to play an essential part of my portfolio generating and compounding my income.
Having said that, I am looking forward to learning new methodologies and try my hand at investing in different kind of companies that I normally dont invest in.

What are your thoughts on this approach? Do you use only one single method model of investing? Am I making a mistake by looking outside my comfort zone? Share your thoughts below as I value your opinion.

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