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Income Investing

The 7 Golden Rules for the Lazy Investor

Written by Brian Hicks
Posted May 15, 2008

By Warren Buffett's own math, matching the gains of the U.S stock market over the last century is going to be quite a tall order.

In his most recent annual report Buffett once again pointed out that in order to equal the U.S. market over the 20th century, the Dow will need to close at roughly the 2,000,000 mark on December 31, 2099.

That means that the Dow will need to gain about 1,987,000 points to match the incredible gains in the years known as the American Century.

It was in those years that the Dow advanced from 66 to 11,497 at the close of 1999. That's a compounded annual growth rate of 5.3%, an impressive achievement to say the least.

But let's face it, does anybody really think the Dow will close at the 2 million mark? Of course not.

After all, a full eight years into the new century we have only added about 1500 points. And at that pace we would have to be extremely lucky to crack the 2 million mark over the next 92 years, as Buffett is quick to point out.

But that begs the obvious question: How can investors hope match the performance of the last century when it's clear that U.S. equities as whole are not likely up to the challenge?

The answer is two-fold.

One they need to be very good stock pickers over the long haul, which is exceedingly tough for most retail investors. Or two they need to juice their returns with the dividends of income stocks.

That's because as every dividend player knows, income investing allows you to win two ways— first with a cash payout and second through price appreciation. That makes the 5.3% compounded annual growth rate of the last century much more achievable. It's the dividends that make the difference.

Income Investing: The Lazy Investor's Approach

The best part is you don't exactly need to be a mutual fund star to exceed those results. In fact, the truth is that you need to be just opposite—you need to be a lazy investor.

That's no typo. You really can accomplish more in the markets in the long run by doing less.

Of course, seasoned lazy investors themselves have known this for years. That's why the truly rich don't spend their days glued to the financial news. They're too smart for that.

They realize that while most investors think trading is where the action is, investing in high-yielding income stocks is just as rewarding provided you do nothing but basically ignore them.

Sure, it's lazy but it works. The name of the game, after all, is profit and income stocks provide them like clock work.

But that is not the only advantage to be had with a "lazy investor" portfolio. The other benefits of the income investments include:

  • Safety- If preserving your money is at the top of your list, income investments are preferable because of their low risk.
  • Diversification- If the balance of your portfolio tilts towards growth, income investments can help you diversify your risk by acting as buffer to unpredictable market swings.
  • Access-income investments usually offer investors ready access to their funds.

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The Seven Golden Rules of Income Investing

Here then are the seven golden rules that every successful lazy investor lives by. Follow them and you can build a million dollar portfolio the easy and boring way. It just takes time and patience.

1. Ignore the News-Warren Buffett doesn't bother to watch CNBC, why should you? The financial news, after all, isn't any different than your own 6 o'clock news. Drama may draw viewers, but it is a nothing more than a distraction to long-term holders. Smart lazy investors set their portfolios and forget them, ignoring the shrieks of financial press.

2. Be content to take a single- Sure homeruns are exiting, but a string of singles is just as good. Building true wealth takes time, but it's completely achievable. For instance, did you know that a 25-year-old could turn a $3,000 a year investment into $1 million dollars in 40 years with only a 10% average annual return? They can, and the smart ones do.

3. Reinvest your dividends- When an investor receives dividends, they have two choices. The first is to take the cash and spend it, the second is to immediately take those funds and purchase more stock. The smart investor chooses the latter. Dividend reinvestment programs are an automatic way to build wealth and are as lazy as it gets.

4. Remember the Rule of 72-Compounding is one of the powerful forces known to man. That's where the Rule of 72 comes in. The rule says that to find the number of years it takes to you double your money at a given rate, you just divide the interest rate into 72. For example, if you want to know how long it will take you to turn $12,857 into $25,714 at 9 % you divide 72 by 9 and get 8 years. But what if you actually saved $12,857 a year at 9% interest for a period of 24 years, how much then would you have? The answer is about $1,076,154. Not bad huh? Lazy investors know that it's the turtle that wins this race—not the hare.

5. Avoid taxation- Inflation is bad enough, but taxation is even worse. As a result, smart lazy investors avoid the tax man. That's why municipal bonds are often a part of every lazy investor's portfolio these days. They pay more than U.S treasuries and are free of federal taxes. That leaves more money for the lazy investor to reinvest, fattening up thier portfolios.

6. Protect your Principal-Successful lazy investors know that chasing yield and yield alone is much too risky. So instead, they search for dividend stocks that have a long and solid history of earnings. That helps to protect their portfolios against downturns when dividends are either cut or eliminated.

7. Lazy Investors Don't Procrastinate- Time, after all, is literally money in this case. Smart lazy investor's don't wait to act.

So don't let Mr. Buffett's market math discourage you from investing in the markets. His point after all was that this century's markets were going to be a bit different from the last. Beating them then is going to take some different strategies.

That is why the lazy investor's approach to the markets is looking pretty good these days for investors looking to build wealth with few risks. After all, if you're already booking a 7% or better dividend with your investments, you're beginning the race with a pretty big head start.

Buy it, hold it, and watch it grow. Those are the rules the lazy investor lives by.

Your bargain-hunting analyst,

steve sig

Steve Christ

Chief Investment Analyst

The Wealth Advisory

PS. If becoming a lazy investor sounds appealing to you, I have developed a 5-stock portfolio of income investments that can send you on your way wealth. It's a mix of dividend stocks and municipal bond funds that pay income ranging from 6.23% to 9.14%. Of course, that beats the day lights out of anything your going to find in CD's. Moreover, there are no penalties for early withdraw. To learn more about The Wealth Advisory click here.

It will be the best $49.00 investment you will ever make.

 

 

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