There are a number of additional warnings signs that an investor should look for when analysing their portfolio. Each one of these warnings signs signal that it is time to do something. In other words, you need to take action and you need to do it immediately.

Warning Sign #1: Not keeping up with the market

This is the most important warning sign. If your portfolio returns are not as good, or better, and the overall market (i.e. S&P 500), then you are doing it wrong! It is too easy to simply buy an index fund to receive the return of the market so there is no excuse not to get at least that level of return.

If you are under performing the market then make changes immediately and ensure you at least get that minimum level of returns.

Warning Sign #2: All your assets are moving in the same direction

In a perfect world, your portfolio will have some assets that go up and some that go down – all at the same time. If all assets in your portfolio are heading down in the same time then those assets are too correlated. Granted, in times of extreme market action (think 2008/09) then everything can go down at the same time. However, most of the time there should be assets that are going up even when others are going down.

Assets to look at that can be uncorrelated with equities include precious metals and bonds.

Warning Sign #3: One or two of your assets are a large chunk of your net worth

If only one or two of the assets in your portfolio make up a significant portion of your portfolio value then you are not diversified enough. Your next step needs to be either to sell some of that asset and buy some other assets or put more money into your account and spread it out to other assets.

It is important to note that it is alright to have one index fund make up a large portion of your portfolio. Index funds are inherently diversified. What I am getting at here is if one or two stocks are the majority of your portfolio.

Warning Sign #4: The volatility in your portfolio is forcing you into emotional decisions

If watching your portfolio move up and down is leading you into making decisions that are rash and not based on sound decision making logic, then I would suggest you are holding the wrong stocks, bonds, or other assets. Your investor profile is not correct and you should spend some time determining exactly what type of investor you are and then buy assets that fit within that framework.

To determine your investor profile, go to IFA.com and take the Risk Capacity Survey.

Warning Sign #5: Your are paying a high amount in fees

From time to time it is important to look at the assets you hold and confirm what the fees are for holding onto those assets. If you have dividend growth stocks, then check your brokerage account to ensure you are paying low commissions.

If you have index funds, index ETFs, or mutual funds, check the MERs and ensure they are low, low, low. For mutual funds in particular, watch for higher than average MERs especially if the fund is not meeting the market returns. If it isn’t sell it and buy something better (but be cautious of taxes if it is in a taxable account).

Warning Sign #6: You do not have an investment code or philosophy

This is a back to basics kind of warning, but every investor needs to have a code or philosophy that guides their decisions. Take a look at The Dividend Guy Code for an example.

Warning Sign #7: You don’t remember why you own a particular asset

If you are looking at your portfolio and there is an asset in there that just does not seem to fit or worse, you do not seem to remember why you own it then that spells trouble. Everything in your portfolio should have a specific purpose.

For example, I hold small-cap value stocks in my portfolio to provide additional returns with some additional risk.

Summary

Warning signs from your portfolio can come out of nowhere. It is important to review your portfolio with your eyes on the above signs to ensure that you are protected as much as possible. Investing is a balance between risk and reward, and watching for these warnings signs will go a long way to help managing the risk piece.

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Each week I spend some time presenting links to these information sources here in this weekly post. Here are this weeks posts – let me know if I missed any using the comments.

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What is Dividend Capturing

Dividend capturing is a timing strategy that puts an investor in and out of stocks at specific times. Essentially, an investor buys a dividend paying stock at a specific time, collects the dividend payment from that stock when it is paid, and then turns around and sells that stock the next day.

The thinking is that the investor walks away with the dividend payment, and any gain the share price had while it was held. Of course, if the share price went down you would lose, but the dividend payment is supposed to offset that small loss.

When Do You Buy to Capture the Dividend

The key to enacting the dividend capturing strategy properly is to buy the shares of the company as close to the ex-dividend date as possible (see this post on what ex-dividend means), most importantly before the ex-dividend date. If you own the stock before it goes ex-dividend then you ensure that you receive the dividend payment when the company pays it.

An Example of How it is Supposed to Work

Of, let’s say you buy 100 shares of a company for $10 per share. You pay $1000 to acquire these shares on January 23rd, which is three days before the stock goes ex-dividend. This stock pays a $0.50 per share dividend and because you owned it prior to ex-dividend you will receive the dividend payment of $50 into your account.

The day after the dividend money is in your account you sell the shares, which happen to now be $10.50 per share. In addition to the $50 you received in dividends, you also have made a $50 capital gain on the share price appreciation. Your profit now becomes $100 ($50 dividend + $50 capital gain = $100 gain).

However, as we know share prices do not always rise. Assume that instead of rising our stock declined to $9.50 and we still sell it after that dividend payment hits our account. We have now lost $50 on our shares but are actually even because of that $50 dividend payment we received ($50 dividend – $50 loss = even) . With me?

Sounds like a pretty nifty strategy at first doesn’t it? However, there are some pretty big problems with the strategy.

Why NOT to be a Dividend Capture’er

The problems with the dividend capture strategy numerous, but I have tried to summarize what I believe to be the main problems with it.

Spread
The spread will kill you – the spread is the difference in price between the asking price and the actual buy price. You rarely get a stock for exactly what you want and that difference in price erodes any profit you might make. The spread makes it very hard to make money over the short period.

Fees
In my example above, I never once discussed fees. In the scenario with the share price going up our profit is actually reduced because we would have to pay commissions for the buy and for the sell. Assuming that we pay $4.00 per transaction, our profit is reduced from $50 to $42.

In the second scenario where the share price declines, the picture is worse. Instead of simply breaking even, the investor now loses money because they have to pay the $8 in commissions. The $50 dividend payment no longer fully offsets the reduced share price. The investor is now actually down $8.

Taxes
The final negative to this strategy is taxes. Sure, if the strategy is enacted in a tax-protected account then taxes do not have an impact. However, if this strategy is done in a taxable account then taxes will further erode any gains you have above the spread and fees you have had to pay.

Summary

Even with that nice dividend payment you get while holding the dividend stock, the additional expenses you need to pay offset any potential benefit with this strategy. Why not just select a good dividend stock and hold it and collect a number of dividend payments for years to come? This way you reduce your fees, the impact of the spread due to short term trades, and taxes you pay.

Thanks for reading this edition of the Best Dividend Stock Investing Posts of the Week.

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Investing is hard right? There is so much to learn and every time you turn around it seems like there is a better way to manage your portfolio.

Add on top of that the desire to buy high quality dividend stocks using stock market research tactics and it feels like you are never done.

I suspect that most people fail at investing. They make very silly mistakes that lead them to sub-par performance and a portfolio that constantly trails behind the overall returns of the market. The trick is understanding what these mistakes are and acting on them.

What are those most common mistakes? I believe there are really five key mistakes that investors make that lead them to investment failure.

1.  Impatience

Impatience is an emotional response to having to wait for something to happen.  Think about this scenario:

You bought a dividend growth stock last year with the hopes that the stock price would rise by 5 – 10% in the year.  However, as you look at the stock now, it is flat for the year.  What do you do?

The impatient investor sells the stock and moves on to the next one.  The patient investor checks the research to determine if it is still worth holding and if everything looks good, waits it out.  If the asset is sound, the returns should come.

Take Away: Let your investment portfolio do its work.  Don’t force things.

2.  Poor, or no, Asset Allocation

Asset allocation is the most important investment decision you can make.  Good investment returns depend highly on a sound and diversified asset allocation.  If your portfolio holds a smattering of assets thrown together with no reason then you might be in trouble.

Take Away: Understand your risk profile and build a diversified asset allocation

3.  Paying too much in fees

One of the most popular posts on this blog is the Tyranny of Investment Fees.  In that post, I summarize John C. Bogle’s view that investment fees actually compound like investment returns, only by taking money away from you at a faster and faster rate over time.

I have always enjoyed reading, but I never thought I would be reading as much as I am now. What has changed? The Amazon Kindle 2 and the ease and ability to carry around a bunch of books at once. This device is amazing. Compared with the Apple iTouch, iPhone, or even the Sony Reader, the Kindle is about as ugly as a rhino but it is hard to dispute the impact the ease of getting books delivered wirelessly is. This fact alone has me reading more books than I have ever done before.

The real beauty is that an investor has access to personal finance and investing books through the Kindle store. I now can satisfy my crazy appetite for investing books without having to carry them around. I travel a lot so having these books in one little device has been good for my back! Here are some that are on my Kindle right now, and some I will add as I make my way through those (not affiliate links):

1. The Investor’s Manifesto

2. The Little Book of Main Street Money

3. The Perfect Portfolio

4. The Bogleheads’ Guide to Retirement Planning

5. The New Coffeehouse Investor

6. The Four Pillars of Investing

7. The Ultimate Dividend Playbook

8. The Intelligent Investor

9. The Dhandho Investor

10. Your Money and Your Brain

Please note these are not affiliate links as Amazon does not allow that for Kindle books. However, if you are interested in a Kindle, please feel free to click here:

Don’t get me wrong – there are a lot of things that need to be improved about the Kindle. Especially the fact that not all books are available, due in part to publishers unwillingness to publish Kindle versions ahead of hardcopy versions. In addition, depending on which region you live in, not all books will be available for you. Reminds me of the MPAA and their protectionist attitudes with mp3’s. The MPAA has lost that war, and I suspect that book publishers will too as pirated versions of eBooks are becoming available.  I have not gone down that route as there are just enough available in my region to satisfy my appetite.   In an event, I believe ebooks are here to stay and the experience will only get better as we all figure this out.

This post originally appeared on The Div-Net

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