The Good, the Bad, and the Ugly: The Best & Worst Investment Decisions I’ve Ever Made
July 10, 2013With some of the recent stock market volatility, a common question seems to be emerging from the employees I speak to in workshops, webcasts, and consultations: where is the best place to invest these days? Believe it or not, even as a financial professional who has been in the industry for nearly 19 years, I still don’t know the answer to that question. The truth is, like many of you, I’ve had my share of good investment decisions and bad ones. What I can tell you is that we learn from experience so allow me to share my experiences with you in the hope that you don’t repeat my bad decisions and perhaps follow in my good ones instead.
The Good
Perhaps my best investment decision wasn’t the purchase or sale of a single security but rather the decision to invest for retirement right away. I began my career at the age of 22 as a 401(k) enrollment specialist so as you can imagine, drilled into my head was the importance of investing early in order to take advantage of compounding—something Einstein has been credited with calling the eighth wonder of the world. Compounding is like a snowball, and while you don’t see the immediate benefits at first, having been investing in my 401(k) for the last 19 years, I can really see the benefits today. As a simple example, if I work until I’m 62 (the year I’m eligible to draw Social Security early) and save $10,000 a year at an annual compounded interest rate of 6% my balance will exceed $1.5 MM—not bad for a $400,000 lifetime investment.
To improve my chances of realizing this outcome, I’ve made other good investment decisions, namely the decision not to panic and pull out when the market corrects (like it did in 2008). I generally DON’T watch the stock market as I really am more interested in where it is 20 years from now and not today. I DO periodically review my asset allocation to make sure I maintain a well-diversified portfolio and don’t concentrate in any particular area.
In all my years, I’ve never had someone regret saving too much for retirement. But virtually every day I run into someone who wishes they had started saving earlier. What’s nice about investing so young (and presumably for such a long time) is that it allows me to be a little more aggressive, giving me the opportunity to earn a little more, and also giving me more time to allow market corrections to recover.
The Bad
A bad investment decision I made recently was a failed attempt to predict what might happen in the market following the most recent presidential election. In a show of poor judgment, I allowed my emotions to dictate how I invested a portion of my retirement assets. While leaving my 401(k) completely untouched, I attempted to maneuver some of my IRA investments into certain positions in anticipation of an increase in tax rates and the backlash from a failure to avoid the so-called “fiscal cliff.”
While I suppose there are some that may argue that both may still come to pass, for the time being, the stock market has continued to move forward as the U.S. economy has shown signs of recovery. Instead of stepping back and reassessing my investment strategy with a long-term perspective, I reacted emotionally to the short term and missed much of the market gains from earlier this year. Only time will tell how much this activity may cost me, but it is a reminder that unless I plan to devote more time to managing my portfolio, it’s probably better for me to just leave it well enough alone.
The Ugly
What’s most surprising about my bad investment decision is that it’s not the first time I’ve let emotions guide my decisions. My worst investment decision occurred in 1999 during the now infamous dot com era. The stock market was going up like crazy, and with the Internet becoming more mainstream, you didn’t have to look far to find articles on how to make millions in this “new” economy. Better yet, the Roth IRA had just been introduced so anyone could become a tax-free millionaire or so I thought.
In a display of greed and ignorance, I opened a Roth IRA and contributed the maximum $2,000 that year. With it, I bought a handful of dot com stocks. Over the course of the next several years, I proceeded to watch each one of them fall flat to the ground until I cashed out with less than $100 in 2001. To add insult to injury, because this occurred in a retirement account, I couldn’t even write off my losses. It was a very ugly investment experience.
But don’t cry for me [Argentina]. Such hard lessons are the things we learn from. Here is what you can do to avoid a similar fate:
1. Diversify.
If I am really worried about taxes, or inflation, or changes in interest rates, the best thing I can do is spread my investments over different types of assets that may do well in all kinds of market conditions. For example, capital gain assets like stocks and tax-free income assets like municipal bonds may be better alternatives than ordinary income assets like corporate bonds in a high income tax environment. Real assets like real estate, precious metals, and commodities generally provide a hedge against inflation. International investments may offer a hedge against a weakening U.S. dollar. Short-term bonds may be less affected by changes in interest rates than long-term bonds. By spreading things around, you cover your bases.
2. Take the emotion out of your investment decisions.
The two emotions that led to my bad and ugly investments decisions were fear and greed, respectively. Do not be an emotional investor. Investing, by my definition, is for money you don’t intend to spend for at least ten or more years so instead of watching the news and freaking out or getting too excited, develop a long-term investment strategy and make your decisions according to it.
Emotional investors have a tendency to get in when they should be getting out and vice versa. Re-balancing your portfolio to align with your long-term investment strategy generally forces you to do the opposite of what your emotions may tell you—having you buy what is under-performing and sell what is out-performing. The good news is that most 401(k) plans offer automatic re-balancing as a feature so if yours does, take advantage of it.
3. Go long.
As I said earlier, my best investment decision was the decision to invest early and by definition, that means keeping the money invested for a long time. Anything can happen in the short term, but if history teaches us anything, it’s that it has a tendency to repeat itself. For help developing your own basic long-term investment strategy, visit https://secure.financialfinesse.com/go/2986.