Investing Stages

[KenBob]

I think there are three phases that an investor experiences that will affect the investing style.

The accumulation phase is when the investor contributes money on a more or less regular basis to the portfolio. Dividend growth is more important than income, since the higher growth rate will translate into higher capital and dividend amounts in the future. This phase can tolerate more risk, since the regular contributions can be used to recover from problems. Small cap stocks are more appropriate for this phase.

The reinvestment phase occurs at times in the investor's life when regular contributions are not possible, but income distribution is not required. This phase can occur during a temporary job loss, paying for college tuition, part-time employment, etc. For this phase, growth is still important, but there is much less tolerance of risk. Small cap stocks would not be appropriate for this phase.

The distribution phase is living off your investments. For this phase, there is also a low tolerance for risk and income becomes more important than growth. You want the growth rate to compensate for inflation, but greater income allows less capital to be expended.

[Kerim]

Sounds about right. I guess we can hope for few or no phases where we are not able to contribute, but I guess the world is an uncertain place.

One wrinkle I would add is that so long as regular contributions are possible (for the most part, at least), there can be a long stretch where you are adding new money from income (the "accumulation phase," as you describe it), while your dividend reinvestment has also become a meaningful stream of money (the "reinvestment phase," as you describe it, but without the job loss). Right now, each month I'm reinvesting (on average) about one half of the amount of new money from income that I'm putting in. I'm looking forward to the day when the reinvestment stream get bigger than the "fresh money from income" stream. Still years and years off, but I can just make it out on the horizon.

[cannew]

For those investors who follow the DG strategy your probably correct, but for the average investor (if there is such a thing) the three stages may be:

1 Get excited about investing because of what one reads or hears from others. Buys or select stocks based upon Current News, hot stocks, recommendations, and/or Get Rich books.

2 Becomes more experienced and begins to recognize that the best companies are those that grow or have great growth prospects. But they believe that it's the size of the pile or price growth is the key to success. They look for forecasting methods, stock charts, and other ways to project future earnings and growth. Buying Low and Selling High is the way to achieve their ultimate goal.

3 After many success & failures they may find an investing strategy which passes the test of time. Hopefully they will achieve their final goal.

For me #3 has proven to be DG, the income it generates and it's growth that counts. I don't buy & sell, rather buy and add at a value price.

[KenBob]

I realized that the dividend reinvestment phase must be handled differently while managing my fiance's portfolio. She has a moderately large inheritance, but a relatively small salary, so regular contributions are not possible.

For awhile, I was reinvesting some her dividends into small cap stocks, like I would my own portfolio. However, I had that uncomfortable nagging at the back of the head that something was wrong. Then I realized that I was putting her into more risky stocks with a much smaller ability to recover. Now I am moving her out of the small stocks whenever the price rises or it look like the risk is increasing.

Investing is a learning process.