Your investments: Don’t try to change the laws of investing

You can’t turn a stock into a bond or vice versa. When investors start trying to change the laws of investing, bad things happen.

New York Stock Exchange R370 (photo credit: BRENDAN McDERMID / REUTERS)
New York Stock Exchange R370
(photo credit: BRENDAN McDERMID / REUTERS)
In a recent column I wrote for, I was lambasted for questioning the wisdom of using dividend stocks as a replacement for bonds. It didn’t help that the headline writer changed my original title to “Time to dump high-dividend stocks?” Nothing like a little shock value to get a lot more article views.
In fact, the chief income strategist of a popular investment newsletter was so taken aback that he invited me onto his radio show. I explained that: No. 1, I am not the headline editor; and No. 2, I have nothing against dividend stocks (as I have written in this space numerous times). But when investors use them as a replacement for bonds, I get scared.
When investors start trying to change the laws of investing, bad things happen.
As I wrote: “When you start seeing headlines like, “5 dividend stocks for a successful retirement” or “Retirement strategy: Buy any dips in dividend winning stocks,” warning signs should start to flash. A basic rule in investing is that nothing goes up in a straight line forever. I am not against dividend stocks; it’s just that when they become the panacea for all investors, I get worried.”
It is what it is Why is it that investors try to transform an asset or system into something that it isn’t? Just like trying to fit that circle into a square peg, you can keep on trying, but as time goes buy you will continue to fail. Much like your investments, if you try to use an asset for something that it isn’t, you will most probably fail. Sure, you may have some short-term success, but most investors are in it for the long haul, trying to grow their money over time and hopefully realizing there may be periods where markets drop.
I can’t tell you how many investors call me and say they will sell as soon as it is obvious that they should sell. Well history and statistics from behavioral economists teach us that that strategy will set you up for big losses and severe portfolio underperformance. Statistically, investors buy when stocks are high, and they sell when they are low – the exact opposite of what you should do. For most investors, you need to have your eyes wide open going in. If you invest in stocks, you are looking for long-term appreciation. But you must understand that markets can drop – and drop hard.
Trying to change nature I often need to remind my clients that they can’t change the role of a certain investment into another role. Carl Richards wrote in The New York Times: “Investors make a similar mistake every time they try to make stocks feel safe like bonds or try to get bonds to generate big returns like stocks.
Stocks, bonds and even cash are what they are. That doesn’t stop us from trying to change their nature though. More often than not, we end up disappointed because they fail to meet our expectations. “ The point is taken My point in the article is exactly that.
You can’t turn a stock into a bond or vice versa. Sure, over the short term they may have overlapping characteristics that make you think you can replace one with the other.
Unfortunately, investing time is the great arbiter, and investments revert to their mean.
Richards continued: “The closest thing we have to a universal rule in finance is that risk and expected return are related.
Once we’ve got a diversified portfolio of investments, we must take greater risk to get a higher return. Risk is mainly a function of how wildly the investment you own fluctuates in value. In other words, in order to get a higher return, we need to deal with something going up and down. Sometimes a lot. That’s the deal we make with the markets, and there’s no real way around it. Every time I see someone trying to figure out a clever way to break this rule, it ends up breaking them.”
If you want to be a successful long-term investor, don’t try changing the laws of investing.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates.
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Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.