Is 'Grow with index investing, then switch to dividend stocks' the right answer? My thoughts on investment goals as someone managing 70 million yen
Hello, this is Step!
When you are investing, do you ever think:
“Is it better to grow my assets with index investing while I’m young, and then live off dividends in my old age?”
“Should I switch to high-dividend stocks once my assets have grown to a certain point?”
Do you ever wonder about these things?
I personally had an opportunity to think about this recently.
The trigger was a video about portfolios for retirement, based on the classic book ‘A Random Walk Down Wall Street’.
The idea is to reduce risk as you get older and prioritize ‘interest and dividend income (income gains)’ such as bonds and high-dividend stocks.
Certainly, there is a sense of security in having dividends that come in regularly.
That raised a question for me.
“If I ultimately want to live off dividends, wouldn’t it be better to build my assets by holding dividend stocks from the start?”
This time, I’ve been thinking about that.
1️⃣ Maximizing assets or maximizing cash flow?
I believe there are broadly two purposes for investing.
Maximizing the assets themselves.
And,
Maximizing cash flow.
If it’s the former, index investing becomes a strong option.
Furthermore, during the asset-building phase where you can take on greater risk, there are also methods that utilize leverage.
On the other hand, if you prioritize annual income, assets that generate income gains, such as high-dividend stocks, become candidates.
Of course, this is a simplified story.
Index investments also include dividends, and high-dividend stocks can also appreciate in value.
Even so,
if you think about ‘what you want to maximize’,
I think the portfolio you choose will change.
2️⃣ What about ‘Grow with index funds, then switch to dividend stocks’?
A common approach is:
‘Increase assets with index investments while you are young’
↓
‘Switch to dividend stocks once your assets have grown’
This is the method.
This is by no means a strange way of thinking.
However, you need to significantly restructure your portfolio along the way.
For example, if you grow your assets to 100 million yen through index investing and then switch to high-dividend stocks, taxes may be incurred upon sale.
Of course, it is possible that switching even after paying taxes is more efficient when considering subsequent cash flow.
So, I don’t mean to say that ‘switching is a loss’.
What I want to consider is,
‘If the final goal is decided from the beginning, isn’t there a way to build a portfolio that suits that goal from the start?’
That is what I mean.
3️⃣ In my case, my goal was not ‘living off dividends’
I myself have never held dividend stocks.
My goal when I started investing was,
to grow my assets significantly.
In 2018, when I started investing with about 1.8 million yen, I set a goal of ‘100 million yen in 10 years from the start of investing’.
Because of that, I have also used leveraged products.
And now, my assets exceed 70 million yen.
Having come this far, my way of thinking about investing has also changed.
Now, I have stopped buying new leveraged products and am purchasing 1x index investment trusts.
In other words, I have moved from the stage of
‘taking more risks to increase assets’
to the stage of
‘protecting and growing while keeping risks low’.
That is the stage I have moved to.
Even so, I have no intention of switching to dividend stocks.
That is because my goal is not ‘living off dividends’.
4️⃣ Sell only what you need, when you need it
So, what will I do now that my assets exceed 70 million yen?
What I am considering is
the method of selling only the amount of assets I need when I need it.
That is the method.
Instead of receiving dividends every year, I withdraw only what I need, when I need it.
For me, this approach aligns better with my investment goals.
Of course, dividends have the major benefit of providing regular income without needing to worry about stock prices every day.
I also agree with the idea mentioned in the video that it allows you to ‘sleep soundly at night’.
5️⃣ ‘What to aim for’ is more important than ‘what to buy’
In investing,
‘S&P 500 is good’
‘All Country is good’
‘High-dividend stocks are good’
‘NASDAQ 100 is good’
people tend to focus on choosing products.
But there is something to consider before that.
‘What do I want to achieve through investing?’
Do I want to maximize my assets?
Do I want to obtain a regular, stable cash flow?
Do I want to secure living expenses for retirement?
If the goal is different, the portfolio you choose will also change.
That is why I believe,
‘Which is the right answer, dividend stocks or index funds?’
that the question itself is not very meaningful.
What is important is,
‘Which one is right for your own goal?’
that is.
There is no such thing as ‘this is the only correct answer’ in investing.
That is precisely why I believe it is important to think about a method that suits your own purpose and situation, rather than just imitating someone else’s correct answer.
I have also written in detail about this way of thinking in this article.
6️⃣ The ‘risk control’ I have valued
As I increased my assets from 1.8 million yen to over 70 million yen, what I have always thought about is,
‘How much risk should I be taking right now?’
that was the question.
I do not need to take the same risks now as I did when I had 1.8 million yen, compared to now that I have over 70 million yen.
That is why I have stopped making new purchases of leveraged products.
The risk one should take changes depending on the stage of asset formation.
That is what I believe.
7️⃣ You want to decide your investment goal at the beginning
If you have a clear goal from the start, such as,
‘I ultimately want to live off dividends alone,’
then I think building assets centered on dividend stocks from the beginning is also one way to do it.
On the other hand, like me,
‘First, I want to grow the assets themselves,’
For those people, there are options like index investing or, in some cases, using leverage.
It is not a matter of which one is superior.
Because the goals we aim for are different, the paths we choose are also different.
I believe this is one of the essences of investing.
Are you aiming to maximize your assets?
Are you aiming to maximize your cash flow?
First, decide this.
Then, choose a portfolio that suits you.
I intend to continue growing my assets while protecting them, and withdrawing only what I need when I need it.
I want to continue investing in that way.
“A Random Walk Down Wall Street,” which sparked this discussion, is a classic investment book that has been read for a long time when considering index investing.
If you would like to think more deeply about this topic, such as what kind of portfolio to consider for retirement, I think it would be interesting to read it.
If you found this article helpful, please click “Like” or “Follow,” as it will encourage my future writing ☕️
👤 Author Profile
Started this investment style in 2018 with the goal of “achieving 100 million yen in 10 years and FIRE.”
Started investing with 1.8 million yen in savings and achieved over 70 million yen in assets in 8 years. I am still continuing to invest with the goal of “100 million yen in 10 years and FIRE.”