Investing Dimensions

My post from the other day about the 4% rule drew out the usual suspects in the Dividend Zealot crew at Seeking Alpha which surprised me as these guys have come to hate me (maybe a sort of reverse confirmation bias?). As I was reading through the comments a thought occurred to me at a slightly more macro level of the nature of the debate.

As best as I can tell the DZ crew believes that a portfolio should consist of mostly or exclusively (depends who is talking) companies that grow their dividends. This should, they feel, get the portfolio to the point where the yield alone covers the 4% so that no shares ever need be sold to meet the withdrawal need.

If a portfolio last year was at $500,000 and then grew to $550,000 and $20,000 was withdrawn then I don't think it matters how it got to $550,000. Both dividends and gains are taxable or it came out of an IRA so the distribution is taxable. Likewise if a portfolio last year was at $550,000, dropped with the market to $500,000 and $20,000 came out then again I don't think it matters how it got there.

My own preference is a diversified portfolio that includes dividend stocks along with growthier stocks; really having holdings with all sorts of attributes providing a combo of yield, price appreciation and exposure to multiple (repeated for emphasis) attributes. As I read the comments a new term popped into my head that might describe this which is dimensions. Building a portfolio in the manner that I believe the DZ crew is talking about is one dimensional. There are all sorts of single dimensions that work over long periods of time and of course data can be mined to support every single one.

The point is not whether any form of one dimensional investing can work because, again, they all can work so it about the risk taken in betting on one dimension. If they can all work (depending on the person) then they can all fail. The does not mean something is likely to fail in fact DZ philosophy is far less likely to fail than many other single dimensional strategies. I think the big psychological divergence between what I am talking about and defenders of single dimensional investing is not allowing for the possibility that something somehow goes horribly wrong with the strategy. Paraphrasing 0ne of my favorite quotes from the show Deadwood, it is a conversation they cannot hear.

If Seeking Alpha chooses to rerun this post I am sure there will be plenty of comments attacking this line of thought but the post is not for them, it is intended for people less entrenched in one concept to serve as reminder that "obviously great strategies" can foul up for reasons that are not reasonably foreseeable.

Not being able to allow for the possibility that something could go wrong is a behavior that has repeated many times before in investing history. There probably will never be a problem with this particular dimension but that does not make the behavior any different from previous single dimension strategies.