It's Official: Here's The BEST Way to Invest

It seems like every time I go on the ol’ Tweeter app and post something I like about dividend investing, I get some version of the following:

DON’T YOU KNOW THAT INDEXING/GROWTH INVESTING/DEEP VALUE INVESTING/OPTION TRADING/WHATEVER IS SUPERIOR????

(I wrote that in all-caps because if there’s one thing I’ve learned over the years, it’s that people are passionate about the way they approach this craft)

At times, I’ve gotten sucked into the discussions these posts generate, and launched into an impassioned defense of my approach. I regret just about all of these debates, mostly because most folks are only interested in arguing. They’ve already decided their version of investing is best, and nothing I say will change their minds. Thankfully I realized this rather quickly, and have neatly sidestepped these debates ever since.

Still, I’ve kept an open mind over the years, and I’ve often lurked as others have had these arguments. I’ve read thousands of opinions from hundreds of different investors on Twitter alone, never mind places like Reddit, or on other newsletters.

And, only after all that time and work, am I prepared to offer a definitive opinion.

So here goes. Here is the best way to invest. 

The best way to invest

Let’s get right to it.

Surprisingly, at least for a dividend investing newsletter, I’m going to start out with something that’ll probably result in a few raised eyebrows.

The best way to invest isn’t dividend investing. 

It isn’t growth investing, either.

It’s not deep value (or regular value) investing, nor is it momentum investing. It’s not merger arbitrage, odd-lot tenders, or other special situations. It’s not exclusively buying small-caps or micro-caps, either.

The best way to invest isn’t options trading, or low beta investing, or an all-in-one ETF.

It’s not any non-stock market investing, either. The best way to invest isn’t renting real estate, or investing in private mortgages, or purchasing a business from some boomer just jonesing to hit the golf course.

Okay, Nelson, we get the point. Can you just tell us what the best way to invest is?

Absolutely. The best way to invest is a method that will allow you to stay invested long enough to hit your financial goals.

If that means that you want to retire on a steady stream of dividend income or rent from a portfolio of properties, then so be it. If you want to relentlessly chase growth or tiny micro-caps in an attempt to end up with the largest nest egg, knock yourself out. Or, if you get pleasure in amassing hard-to-find LEGO sets, and want to fill your garage full of them to sell to collectors 30 years from now, then by all means. LEGO away, friend.

No matter what strategy you use, the best results are accumulated only after years and years of compounding. So it’s far more important to pick a strategy you can pull off over the long-term, rather than choosing one that you’ll abandon when the proverbial you-know-what hits the fan. Staying invested is far more important than stellar returns over a year or two.

A focus on what’s not overly important

I firmly believe that the way you invest isn’t hugely important in the long-term picture of your financial life.

I personally know folks who have gotten wealthy by:

• Investing solely in Canada Savings Bonds, GICs, and other ultra-low risk options

• Investing in real estate — residential is most common, but I know folks who have diversified into commercial, industrial, or self-storage

• Investing in farmland and enjoying the tax breaks that come with operating a farm

• Investing in boring, blue-chip Canadian stocks

• Investing in boring, blue-chip U.S. stocks

• Investing mostly in boring, blue-chip stocks, but using conservative option strategies to goose income

• Investing in high-risk (but high reward) small-cap and micro-cap stocks

• Investing in the sexy new growth sector (like cannabis in the mid-2010s)

• Investing in various high-risk options strategies

In short, I’ve had the opportunity to stumble across hundreds of people who are comfortably in the so-called 1%, and basically the only thing they have in common is that they’ve arrived. They all have unique stories of exactly how they got there.

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What I realized is it really isn’t important exactly how you invest. The important thing is you are investing. Your money must be put to risk, or else it’ll never grow. It’ll just lose ground to inflation over time. Even if it’s put to work in super low-risk stuff.

(I’ll also say that the people I know who got wealthy from government bonds and GICs — and yes, it’s more than one — also did most of their heavy investing in the 1970s and 80s, when rates were high)

The other thing that’s incredibly important for average Joe investors is their savings rate. An aggressive savings rate can erase a lot of sins.

For example, let’s look at two investors. One has a low savings rate, and puts aside $5,000 per year. The other lives frugally, makes smart decisions, and makes good money. He puts aside $30,000 per year.

The first investor has the magic touch, and beats the market consistently over time. He achieves a 12% annual return. Over 25 years, he ends up with just over $830,000.

Our second investor, meanwhile, isn’t nearly as good. He achieves a mere 8% annual return, significantly less than his more skilled friend.

The high savings rate more than bails him out. After 25 years, the investor with a far lower annual return ends up with more than $2.5M.

Yes, ideally, you want to both maximize both your savings rate and your rate of return, but at this point we have to ask ourselves an important question…

Just what’s the point of investing, anyway?

For the most part, people invest for the following reasons:

• They’re fascinated with the game (guilty!)

• They’re enchanted with the concept of using money to generate more money (also guilty!)

• They want future financial independence for themselves and their families (super guilty!)

• They want to end up with the largest pile of money possible at the end of their life. The money is a scorecard

I suspect that many of the people who are obsessed with finding the most optimal way to invest are motivated by having the biggest pile of money possible, but they just don’t admit it. I was, but after a while realized it was a pretty crummy goal.

What I realized is there’s an end to the game. The important part is having enough for freedom, and then the rest is kind of wasted. Once I realized that my family would be taken care of in my old age, I took my foot off the gas pedal a little bit. The focus went from growing the nest egg to making sure I didn’t screw up what I’d accomplished.

Most people end up realizing that, at some point, they have enough. At that point, they go into defense mode. They don’t save as much. They stop striving for that next promotion at work. Business owners fire their most annoying clients. Investment portfolios are dialed down to take less risk. The allure of income becomes more interesting, because it represents a real, tangible thing that’s generated from investing.

But, for a certain percentage of you reading, you’ll never have enough. A seven figure net worth is nice, but eight figures would be nicer. And then, why stop at eight figures, when nine figures are out there, just waiting to be achieved?

(These are the people who respond with answers of $5M+ when asked how much they’ll need when they retire)

I’m a little older now, as the grey in my beard and around my temples constantly reminds me, and one thing I’ve discovered in my older age is quite often the guys who want the largest pile of money simply give up. After a decade or two of high-intensity work — often punctuated with a side hustle and at least one semi-active investment — they realize that being the wealthiest guy in the graveyard isn’t very exciting.

Buffett’s life is a great example here. He was very interested in becoming the richest man in the world. So he pushed, and pushed, and pushed, and then one day he discovered his kids had left home and his wife was effectively leaving him. So he dialed it back a bit. He funded his wife’s rather extravagant lifestyle. He started giving his kids money (despite himself saying that’s bad) and spending more time with them.

Buffett realized the same thing most everyone realizes. The money just isn’t that important. It’s what you can do with the money that matters.

Besides, they’re all cyclical

Here’s another dirty little secret that you won’t hear a lot of people admit.

No matter what investing strategy you use, it’ll have periods of outperformance and periods of underperformance. It’s all cyclical.

Growth investing is the perfect example. Fueled by high growth companies, the S&P 500 and NASDAQ 100 have done exceptionally well since market lows in 2009. But this ignores the decade immediately before, when growth stocks underperformed virtually every other asset class on the planet after the tech bubble collapsed in 2000.

How about real estate? Okay. Over the last 20 years, prices in most Canadian cities have marched pretty much one way — higher. Even 2008, which decimated the U.S. market, barely caused a hiccup in Canada. But the 1980s were terrible, and values didn’t move much in the 1990s at all. In certain places — especially Western Canada — houses were worth more in 1980 than they were in 1999.

I’ll even go after the most sacrosanct investing style of all — dividend investing. Most boring dividend payers — the ones we like around here — have stunk the big one lately, especially when compared to the largest tech stocks. Dividends also underperformed in the 1990s and 1960s as investors flocked into the tech bubble and Nifty Fifty bubbles, respectively. But they did quite well in the 2000s, 2010s, and 1970s, as investors looked for a little bit of security in an insecure world.

I could list examples all day long, but I won’t. The fact is that every single strategy has periods when it performs well, and have periods when it sucks the big one. But, through it all, most strategies end up performing moderately well. The times they work more than make up for the times that they don’t, and results are satisfactory.

As Morgan Housel so succinctly put it, pretty good results for long periods of time are what really matters.

The bottom line

There is no one best way to invest. There is only one best way to invest for you.

No matter what strategy you choose, the important thing is to stick with it over the long-term. Combine that with a better than average savings rate — which does the heavy lifting for the vast majority of self-made millionaires — and you will eventually get wealthy. It’s only a matter of time.

Plus, no matter which way you invest, they all move in cycles. You might be smart enough to duck in and out at precisely the right time, like some sort of investing ninja, I doubt it. The fact is most people just aren’t that smart. Once they figure out their limitations, most end up picking a method they think is pretty good — like I did with dividend investing — knowing that they can stick with it.

Plus, each method has other tradeoffs. Getting an elusive 100-bagger is virtually impossible if you’re interested in a decent dividend. But the chances of each investment going to zero is considerably higher if you’re swinging for the fences. The entire world runs on tradeoffs, and y’all believe that your favourite method of investing doesn’t have some? EVERYTHING has tradeoffs.

The way you invest is far less important than actually investing. Diversify your portfolio to take advantage of each kind of investing. Or, do what I did, and put all your cash to work in companies that pay a dividend, ideally one that increases over time. The details don’t matter nearly as much as just getting started.

One more thing

If you’re interested in Canadian dividend investing — which I think is a safe bet, since you got this far — then you’re going to want to read this.

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