It’s not too late, it’s never too late. Colonel Sanders didn’t start KFC until he was over 65. Look how big KFC is now.
Attempting to build a dividend stock portfolio when you are already in your 40s or 50s may be disappointing, especially when you see the kinds of magic compounding numbers I share about investing when you are in your 20s.
So you may not have 40+ years to allow small amounts of money to turn into millions. But you can still have at least 25 foreseeable years of compounding left in you if you are in your 50s, or even more.
Life expectancy has increased with the innovations in technology and medicine, and more and more people are living well into their 80s (big retirement companies like ING are shoving this down our throats with their commercials). It’s no mystery.
And so while I’m far from being an expert at your problems at 50, I do have expertise in helping hundreds of thousands of readers with starting to invest.
A particular question I received from a reader really caught my eye, and inspired this post. Hopefully it will help other people like him to kick excuses to the curb and make progress towards their goals.
I happened to stumble upon einvestingforbeginners and have really enjoyed reading your articles/blogs – very informative and helpful.
I have $20K I would like to invest and want to begin building a dividend stock portfolio. I’m 49 years old, so unfortunately, I don’t have the benefit of an early start like someone in their 20s or 30s. That said, I have a few questions:
· What vehicle would you recommend I use to begin purchasing (brokerage firms, etc.)?
· I expect to have about $300-500 per month in savings to contribute on a go-forward basis – once I build the initial portfolio, would you recommend I use a lump sum approach for future purchases or just contribute on a monthly basis (dollar cost averaging) to grow the portfolio.
Any advice you have would be great appreciated. I look forward to hearing from you.
The first question is easy. I’ve covered it many times before and the best resource for you is probably this blog post: 8 Top Stock Market Brokers for Beginners.
The next question regards a dilemma between lump sum investing and dollar cost averaging.
For those who don’t understand the terminology, lump sum investing means saving up a large sum and then investing it (usually saving for a year and then picking the investment). Dollar cost averaging means investing consistently every month.
Now there’s some upsides and downsides to either approach. With lump sum investing, you will win if you can time the market right. For example, if the market is up most of the year but you invest your lump sum when it’s down, you’ll have won because you bought low. Conversely, if you invest the lump sum when the market is at an all time high and the market crashes for the next year, you’ll have lost.
I’m humble enough to admit that I’m no guru on the future of the market. No more so than do I know what the winning Lotto numbers will be, or even which baseball teams will outperform their line.
However, I do know a couple of important generalities… namely, that the market has tended to return an average of 7% / year for a very long time (over 100 years). I also know that more stocks have survived than have gone bankrupt.
With these two generalities, I can be confident that a diversified portfolio with a long term time horizon will compound my money at a favorable rate. Even though I have no skill with market timing or a crystal ball.
After that lengthy discussion about market timing, I hope you can see the draw with dollar cost averaging.
Positives and Negatives
Dollar cost averaging eliminates the need for market timing, because it has you putting money in regardless of what the market is doing. Rain or shine, in peace or chaos, a dollar cost averaging strategy consistently adds money to your dividend stock portfolio.
While this has the advantage of negating market timing effects, it also has the effect of forcing you to buy low and sell high automatically. Because a dollar cost averaging strategy is usually set at a dollar amount (for Piccolo: $300- $500 a month), you will be forced to purchase more shares when the market is down and purchase less when the market is up. It’s a great buy low, sell high strategy even if you’re just buying the S&P.
One other fantastic benefit to dollar cost averaging, especially when building a dividend stock portfolio, is that you will simply collect more dividends than a lump sum purchase. Stocks usually pay out their dividend 4 times a year, which means if you are waiting 1 year to invest a lump sum you could be missing out on 3 or even 4 dividend payments.
Of course, there is a negative to dollar cost averaging. The negative is opportunity cost, and it’s only apparent after the fact. Sure the market could be going down at the moment, but 50% of the time it recovers for a “minor correction”, and 50% of the time it becomes a gloomy “bear market”.
These terms, analysis, and conclusions are always made only after the fact, and it’s a confirmation bias, overconfidence, and lack of awareness by the individual investor that traps him into thinking he could’ve avoided a crisis, played a recovery just right– basically beat the market with a superior sense of market timing.
Market timing is a dangerous trap, and it’s one you must avoid.
Start Investing in Your 50s Advice
I’ll end with a little advice, especially for the “late start” dividend stock portfolio builder. Money doesn’t care how old you are. It’s not grading you. Nobody is.
Just because you came late to the party doesn’t mean you can’t enjoy the inherent fun of it.
Investing is fun. Watching your money grow is fun. Collecting those dividend checks is fun.
Even a shorter time frame can lead to great sums.
Let’s look at someone who is Piccolo’s age. Say a 50 year old invested $500 a month for the next 25 years.
By age 75 (and assuming just average 7% / year returns), the investor would have $393,740.08.
What if he followed, say half of my newsletter picks, and instead earned 10% / year? $621,590.64.
That’s some serious dough, and it assumes an initial investment of $0.
What could a 75 year old do with a dividend stock portfolio of $393,740.08 that’s likely increasing every year? He could spend the $12,000 a year in dividend checks (3% yield), and get a new car every year, go on multiple expensive vacations every year… all without reducing the principal.
Do you realize how much that can change your life? Most people never accumulate and keep more than a few thousand dollars in their entire lifetime, and you could be receiving more than that with an annual dividend check.
The possibilities are endless, even if you have a late start. The only person in your way…