Today a rant about the strange myths of investing.
Just yesterday I had another one of those who claim that dividends are what "compounding" is all about, not growth. Only with dividends does the investment outstrip the demand. They even cited education and Warren Buffet. He can't be wrong with his millions in dividends, can he?
You constantly read about dividend strategies and that you will need them in old age or to pay your rent at some point. Free Money. Financial Freedom. Realty Income, even though their dividends plus growth lags behind a Worl Etf. So flexible, even though you're tied to a dividend day. More growth than without dividends, even if otherwise the companies would be the same if you just reinvested them in said company. Taxes and trading costs, who cares. And compared to partial sales: but you keep your shares. And if they grow, you make more profit than if you had made partial sales. And in a crash, you have cash flow as if nothing had happened.
Now the question: this free money has to come from somewhere, right? Or the misconception. Because in purely technical terms, a dividend is a partial sale (only induced by the company). If dividends were to generate added value, this would also have to be a partial sale plus re-investment. Of course it doesn't. But people believe it does. Why? And what are other myths that are actually nonsense.
Dividend snowballs: I wish it weren't true, but there really are people who believe that a transaction that negatively impacts the value of an investment is somehow magically positive in the same amount of withdrawal if you reinvest that withdrawal. 1000 Euro share value minus 1% is unfortunately 990 Euro share value and a dividend of 10 Euro. Reinvesting these 10 euros leaves you with an investment of 1000 euros. Wait, no, of course not. Taxes and trading costs. You have lost money. And since taxes are incurred by the company and yourself, more than if you had done nothing at all. Dividends reduce the investment (even if you reinvest them). People confuse the effect of growth (which should at best exceed the dividend) with the effect of the dividend. 1000 Euro share value + 1% growth = 1000 Euro share value + 1% growth - 1% dividend + 1x dividend reinvest.
The only interesting thing is that companies pay dividends or not. So there are definitely companies that have more growth + dividend deduction than companies without dividends. But this is not an effect of the dividend. Go figure.
Growth does not change either, as the dividend does not add value. Compounding comes from growth alone.
The number of shares does not change the growth either. 1 share worth 100 euros that grows by 10 % is the same money as holding 0.75 shares in a share worth 100 euros that grows by 10 %.
Flexibility is also nonsense. Partial sales do the same and are more flexible. With dividends, you have the trading costs when you build up the portfolio (you have to reinvest the dividends), and when you sell as and when you need to save. On the other hand, selling without the detour of dividends gives you the flexibility of time that you don't have with dividends. Dividends are paid (and reduce the value of the investment) regardless of what the market is doing. And no, they do not protect you in the event of a crash. 1% of a 50 euro share value is not the same as 1% of a 25 euro share value. Strange that you have to explain this to "educated people".
That's where you end up if you think about it for three seconds: pure dividends are a simplification of de-investment, not saving. Apart from motivation and better companies that pay dividends, a dividend avalanche is complete nonsense.
What else I can think of in terms of misconceptions worthy of Merkel:
Market predictions on "worthless speculation assets" like coins: talking to people who are invested in crypto, they all have a strong opinion on where some coin is going right now. Without any basis. They see a bull run, then a bear market, then a strong sign of a decline (after the fact). Why this should be happening right now: Silence. Or reference to what the coin is doing on a daily basis. You could be looking into a cloudy crystal ball.
After 100k it goes up faster: A confusion of the onset of a noticeable compound interest vs. the investment amount. If you were to save 10k per month or win 100k somewhere, the point where it no longer depends on the savings rate would still be 7-10 years later. Go figure. Nevertheless, hundreds of YouTube videos by mathematical dyslexics on this topic.
Value of a collection: Unfortunately, family affected myself. The collection is worth so much!!!1111!!! Stamps are the little man's shares!!!1111!11 Pick them up. Unfortunately, contact with reality only comes for the heirs when they no longer want to keep umpteen albums. Worthless fuss. If you want to do something good for your heirs: Hard Cash. Meissen porcelain, circulation coins from a vacation, collector's dolls: as long as it is not in its original packaging and has never been scratched, it is worth less than the money that was spent on it. And even if it is: It yields less return than if the money had been invested. So when it comes to succession: invest, don't spend.
What do you think about this?
