You Had It Right the First Time

We all strive to be right more often than we're wrong. (Well, I'm not so sure about politicians.) And while this is a noble pursuit, in our desire to achieve it, we can sometimes make more decisions rather than better ones. In other words, we try to make it up in volume, erroneously thinking that more decisions equals more chances for success. And nowhere is this more evident than in our investments.

Though diversity in one's portfolio is immensely important, quantity is not quality. Yet we as investors have a tendency to jump on every opportunity that peeks its little head over the biotech hill. I realize that commissions on stock trades are lower than ever, but honestly, folks, it's time to stop and take a breather.

Turning over a new leaf
While purchasing a greater number of securities may indeed give you more opportunities to hit one out of the park, it also gives you more opportunities to weigh down your returns with subpar picks. If you're one of those folks who's constantly replacing your "old-world" investments with the "hip and now," consider very carefully that -- outside the world of deodorant and Mentos -- fresher is not always better. Indeed, according to Wharton professor Jeremy Siegel, in the world of investing, the idea that the bold and new defeat the tried-and-true is a flawed one.

The history lesson
Not buying it? Let's talk a little history. Just about every investor in the land is familiar with the S&P 500 (AMEX: SPY  ) , that venerable list of stocks believed by Standard & Poor's to be most representative of the U.S. economy. Many folks, including myself, track our investment returns against this benchmark in order to evaluate our comparative performance and keep us honest. After all, The Motley Fool has long believed that, if you can't beat the market, you should simply invest in it via an index fund.

Though various S&P benchmarks have existed since 1923, this particular index didn't actually become a list of 500 companies until 1957. Now, beyond that little pearl of wisdom, you should know that the index isn't static. Rather, companies are strategically added and removed by the S&P's eight-member U.S. Index Committee when it believes some tweaking is necessary. In short, these folks replace the stocks they find to be "has beens" with the slick "next generation" firms that are more representative of the current economy.

So, would you care to guess how many times such a change has become strategically necessary? Ladies and gentlemen, hold on to your Pop-Tarts. Since 1957, the powers that be have added about 1,000 stocks to the original S&P 500 (removing one each time, of course, to maintain the specified total). Holy guacamole. That's 200% turnover in just under 50 years. We must have quite a schizophrenic economy.

But here's the lipstick: Who do you think would have performed better -- the investor who bought the original S&P 500 and stuck with those old-world rags, or the investor who purchased the constantly updated S&P? Siegel set out to answer that question in his new book, The Future for Investors, and you guessed it: The sagging basket of old-economy stocks beat the freshened up new-economy version by about 1% annually. While that may not sound like much, over 50 years it can amount to millions of dollars. Even more significant, though the old adage says greater risk equals greater reward, that's not the case here. The original S&P beat the new version while exposing investors to less risk. In short, without lifting a finger, you enjoyed greater returns and suffered less volatility, and if that's not the best of all worlds, I don't know what is.

Built to last
Clearly, activity doesn't equal results. After all, some of the best and brightest minds in the investment universe were swapping S&P 500 stocks, yet investors would have been better off making no changes at all.

Of course, you do have to start somewhere, and the obvious challenge lies in finding those original investments. For my part, I prefer to let dividend stocks do much of the heavy lifting. That's also the approach I recommend in Motley Fool Income Investor.

History shows that dividend-paying stocks have outperformed non-payers, and that dividend reinvestment expands that level of outperformance exponentially. The fact is companies that possess the cash flows that make dividend payments possible tend to be the ones that survive over those 50-year periods. And if you truly want to be successful over the long term, the longevity of your investments should be among your most important screening criteria. While its growth potential may be large today, I honestly can't tell you with any degree of certainty whether or not Chinese Internet portal Sina (Nasdaq: SINA  ) will be around 50 years from now. But I can tell you that PepsiCo (NYSE: PEP  ) will still be selling soda and chips, and Johnson & Johnson (NYSE: JNJ  ) will still be pushing Band-Aids and Pepcid.

The Foolish bottom line
The real trouble with choosing the firms that don't make it those 50 years is that you have to be right at least twice with the investment: when to buy and when to sell. Though selling can become necessary in any arena, you're far less likely to face it when you stick to the tried-and-true. Thus far, this theory is proving out in the pages of Income Investor, where our portfolio has managed to beat the S&P 500 and carry an average dividend yield of 4.6%. If you'd like to take a gander at the 50+ dividend-paying stocks that have made the cut, I'll provide you with a complimentary guest pass. (It won't cost you a dime. You have my word).

One final comment: If you find yourself sitting on a properly diversified portfolio of companies you believe in, don't be afraid to simply build out the best positions you already own. After all, you were probably right the first time.

Mathew Emmert tries to be right both the first and the second time, but he makes no promises beyond that. He owns shares of PepsiCo and Johnson & Johnson. Sina is a Motley Fool Stock Advisor recommendation. The Motley Fool has an ironcladdisclosure policy.


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