Navigating the Toughest Investment Climate in Memory

Plus a return of our discussion on dividend investing

Photo by Denise Jans on Unsplash

Welcome back, as always each Monday I round up 2-3 recent articles discussing personal finance, and I provide analysis to see if these ideas are worth your time.

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My Take on the WSJ’s Take on Dividend Investing

In a recent Wall Street Journal article, analysts from Ned Davis Research and Bank of America suggest that a straightforward dividend strategy—investing in the second-highest quintile of dividend-yielding large-cap stocks—has historically outperformed both the highest yielders and the broader S&P 500.

This approach (according to the authors) avoids the pitfalls of chasing the absolute highest yields, which often belong to companies in distress, while still capturing substantial income.

So, first I’ll start with what I like, which is that the authors advise people from chasing the highest dividend yield possible. Dividends are not ‘free’ money. If a company pays a massive dividend yield, it’s because they have few prospects to use that money to grow the company. Ultra high yield dividend stocks can be quite risky, so avoiding them is smart.

BUT…

And anyone, who has read The Rational Investor knows what I am about to say, if your goal is to maximize investment returns, why bother with dividend investing strategies at all?

Here’s a summary of my thoughts about dividend investing—which I have written about extensively in the past:

Most investors love dividends, and the data proves it. A 2019 study titled Consuming Dividends showed that people are far more comfortable spending dividend income than money from their paycheck — even supersavers who actively plan their finances tend to treat dividends as spendable income.

This is driven by a behavioral bias. To us, dividends feel like “free” money, while capital gains are seen as off-limits. Many investors build entire financial plans around this perception, despite the fact that spending $500 from a dividend is no different than selling $500 worth of shares. That comfort is powerful, but it’s also misleading.

The research on investing throws cold water on this widespread belief — sometimes called the “free dividend fallacy.” Dividends aren't free money; they reduce the value of the company that pays them and trigger taxes investors wouldn’t face if they relied more on capital gains. Worse, dividend investors often sacrifice diversification and total returns by excluding nearly 40% of the global stock market that doesn't pay dividends. For rational investors, the focus should be on growing and managing total wealth, not chasing a paycheck from your portfolio.

If you want a deeper dive into the research on dividend check out this article:

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Navigating the Toughest Investment Climate in Memory

I found this article from MarketWatch interesting which reviewed a survey conducted by by J.D. Power which found that 56% of investors they surveyed consider the current investment climate the most challenging they've ever experienced.

Now, first of all—there’s almost certainly a lot of recency bias baked into a survey like this, so take the results with a big grain of salt.

But, it can’t be denied the chaos of Trumps on-again, off-again tariff and trade policies make investing extremely risky right now.

How can anyone feel confident about putting their money in the market, when we all know we are one tweet away from another nose dive?

What I found really encouraging though was that 40% of DIY investor in the survey said they would “probably” or “definitely” seek help from a financial advisor over the next year.

Which I think is amazing.

Once you understand the basics of investing and embrace a simple investment strategy of broad diversification and low investment fees—the biggest obstacle to hitting your financial goals is quitting on your plan when things get scary.

Where a quality financial advisor earns their paycheck is during times of major volatility.

When every instinct is screaming SELL, having someone remind you of your long-term goals and talk you down can make all the difference.

It’s easy to be a DIY investor in a bull market, but a smart person knows their limitations and seeks out help when they hit those limits.

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That will do it for this week's newsletter. See you next Monday with 3 fresh personal finance articles.

If you want to read my full library of long-form, researched personal finance articles, consider becoming a paid subscriber here or pick up a copy of my book, The Rational Investor.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.