New to everything, need advise on strategy

[Dutchdreamer]

Hi all,

Lately I have been looking for better investment oppertunies than just letting my money sit on my bank account.

I am trying to save money for buying a house in the future.

Now I have done some reading and figured out that I want to invest in stocks focused on a high dividend. The money I want to use for this is doing nothing right now, I don't need it.

However, I have never before bought stocks or bonds. So I am very new to all of this. I noticed that the markets have soured up during the last year, so I have the feeling I am actually a little bit late to the party.

My plan is to invest 500 euro's each month. I will invest this in stock and bond indexes that yield a high percentage dividend.

What do you guys think about this strategy? Is it still advisable to start investing right now with this market? I am seeing that the Shiller P/E is pretty high right now, so that points out that I shouldn't buy stocks I guess.

However, if I use the strategy to invest 500 euro's every month I think it doesn't really matter how the market is behaving. If I keep investing money when the market falls, it evens out. Am I right about this?

[ChadR]

If this is money that you are going to need to buy a house soon, I wouldn't invest it in stocks or bonds. If you are investing in the stock market, you need to not touch it for at least 10 years. That being said, your plan is a good one. Time in the market is better than timing the market. Since I'm in the accumulation phase, I don't really care about the Shiller P/E. I'm investing money every month so if it's up or down this month isn't too much of a concern to me. Since I don't need the money for quite a while, getting in at a high market doesn't concern me too much. Though I am buying individual stocks so there is usually at least one of the stocks I like that is trading at a fair to undervalued price.

[Kerim]

Welcome to the forum, Dutchdreamer!

I agree with Chad -- if this is money you need for a house purchase in the next few years, putting it into stocks seems pretty risky. A few years is short-term in the market, and in the short term, anything can happen.

If you are nonetheless convinced that you should buy stocks, the folks here are mostly fans of relatively conservative dividend payers. Large, established companies with dividend yields generally in the 2 to 4 percent range (though there are some notable outliers).

You mentioned "high dividend yield" in your post. If you are talking about more speculative companies with high yields (6 or more percent-ish), then that seems even less prudent if you need this money in the next few years for a house.

(04-23-2015, 11:36 AM)Dutchdreamer Wrote: Is it still advisable to start investing right now with this market?

It is true that the market generally is at all time highs. But nobody can tell you where it is going from here. With a conservative approach like dividend growth investing -- where the plan is to hold for really long periods of time -- there is more of a margin of error with valuations than with short term trading or other approaches. So again I agree with Chad, time in the market matters, and I would not wait to start monthly purchases if you have a good plan in place and can weather short-term ups and downs.

(04-23-2015, 11:36 AM)Dutchdreamer Wrote: However, if I use the strategy to invest 500 euro's every month I think it doesn't really matter how the market is behaving. If I keep investing money when the market falls, it evens out. Am I right about this?

You've got this generally right. You're talking about dollar cost averaging. If you put the same amount of money into the market at regular intervals, then you take advantage of lower prices by buying more shares, which gooses your average when (if) prices rise again.

Best of luck to you, but please proceed slowly and cautiously. If you are new to the market, start slow and small, and please don't risk money that you need for a specific purpose in the next few years.
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[Dividend Watcher]

Ditto to both of the above replies. Don't risk your house money in the market if you'll need it in a few years.

Next off, ignore the Schiller P/E. It's a cute statistic but there are so many mitigating factors and influences that it makes it close to meaningless in my opinion. For a starter primer, see Chuck Carnevale's article here.

What I could suggest is to look at a short-term bond fund. Something with a weighted maturity of less than 5 years so you can get your interest rate above the minimal bank rate yet not be so subject to as huge swings should interest rates rise in the meantime. Other than that, I wouldn't go any further in risk assets. Remember, high yield = higher risk your money won't be there when you need it.

[Dutchdreamer]

Thanks a lot for your replies. It confirms some of the things I have been reading about today, so that is nice. I will definately not invest a large amount right now.

I don't have a clear plan about when I would like to buy a house, but I think it will be within 10 years.

It is just frustrating to know that I have money in the bank doing nothing while the European Central Bank is printing euro's like crazy making my money depreciate.

[crimsonghost747]

Welcome. I'm actually in a bit of a similar situation, got extra cash and want to buy a house at some point that is probably within 10 years. The way I play it?

a) cash reserve tucked away on a separate account that is large enough for the down payment for the house.
b) rest of my extra cash goes into stocks, not exactly a set amount per month but pretty close to that.

I've already reached my goal for the cash reserve, so no money is going into that one anymore. I'm accumulating these shares with the idea of buy & hold forever. Stable dividend payers/growers and a few companies with a higher and less stable dividend, just to increase cashflow into the portfolio. (might need that due to low job security.) The whole idea here is that I've got enough on that cash account so that I do not NEED to sell my shares when I eventually buy the house. When the time comes, I can evaluate between selling shares to pay off a larger part of the house at first versus keeping my investments and getting a bigger mortgage.

It's a balance between profit and risk management, and only you know what is the right balance for you. The last thing you want happening is that you will have to sell your portfolio at an unfavourable time because you absolutely need the money.

[daat99]

Like others said before me I would also like to say that I think you should avoid the stock market for short period like that.

On a more personal note I prefer dividend growth and low yield over high dividend yield.

I found it that companies that pay more than 5% dividends per year has a lot harder time to keep up the dividends during recessions.

If we'll look at David fish ccc list from January 2008 and December 2008 than we find the following:
8 out of 23 companies that paid at least 5% dividends reduced or stopped their dividend payments during 2008.
2 out of 115 companies that paid less than 5% dividends reduced or stopped their dividend payments during 2008.

So basically if we take 2008 as an example than paying at least 5% dividend resulted in 34% chance to reduce dividends while paying less than 5% had 1.7% chance to reduce dividends.

It is important to note that the price of a dividend company that reduces dividends is getting punished considerably so you can add a huge capital loss on top of the dividend cut.

This adds up to investors that were focused on higher dividends took a 34% risk for a major loss while lower dividend yield investor had only 1.7% risk of a minor loss.

[800peace]

There's a lot of learning ahead. There's several red flags, most of which have been discussed, but nobody as blunt as me. I'm only blunt for your benefit.

I don't think you should be in charge of investing your money. I've seen this 1,000,000 times... People start investing their own money and people learn hard lessons the expensive way. You should find an advisor with fees less than or equal to 1% of assets under management. I would advise a CFA or CPA, that is willing to build a dividend portfolio for you. Spend a few years studying and mock investing, and eventually cut your advisor out of the picture.

[doomsardine]

I think initially you should look forward for investing in the businesses which will definitely yielding out some good returns instead of looking for "high" dividend stocks. Just like food sector and related industries. Restaurant chains are doing well these days.