This is a story that a reader Joe, shared with me a few years ago. With the stock market again gaining momentum, it’s a great reminder for everyone about what can happen when you ignore your time horizon and focus only on current market conditions.
In your early 20’s, you never know when you will need thousands of dollars for a down payment on a house/car or for an engagement ring. Don’t be over zealous about going full throttle in stocks outside of your retirement accounts. Lesson learned here.
Learning About the Stock Market
I was the opposite of the typical young professional that puts off investing until they’re in their 40’s. I learned about the stock market through my maternal grandfather. Sitting in his living room in the late 1980’s watching CNBC on a July afternoon is what I remember. We would wait for his stocks to come across the digital ticker, John Manville and IBM to name a few. It was a good time. I figured that I was getting a good education.
My grandfather was a self made guy. He was born in 1915 and only obtained a third grade education. He had to quit public school to help support his family. A mason by trade, he made his money developing land into single family housing communities in NJ during the early 1960’s. He would make a profit of $2,000 per house on a fifteen thousand dollar home and in most cases held the note for the new homeowner. In the 1970’s he bought land and oversaw the building of a 314 unit apartment complex with his brother/partner. He put all that he had earned into the project and the income served as an annuity during his retirement years.
Those days when I would watch the CNBC with my grandfather I didn’t realize that the money he had invested in stocks was only a very small portion of his money (play money if you will). The bulk of his net worth was in real estate and the next highest percentage was in tax free municipal bonds. He was mortgage free, owned his car, supported his young family years ago, retired, and had an income that anyone would appreciate. He was in the last quarter of his life and didn’t have to worry about selling stocks in order to buy a car or a house.
My Experience Buying Stocks
When I turned 21 and got my first job out of college, I was contributing to a 401K (mostly invested in stocks) but at the same time I would put a large percentage of my discretionary dollars into the stock market in an individual brokerage account. At the time there were no ETFs and the technology sector was running wild. I majored in finance and figured I had this stock market thing licked. I bought my fair share or Warren Buffett favorites, Coke, Gillette, and even the Berkshire Class B shares, but that was boring. I sold out of them after a few years and modest returns.
During this time I had been listening to my friends as they would follow their tech stocks. Those stocks would jump a few points at least one day per week. Technology was the thing to be in, buzzwords like B2B was all the rage. I’ll never forget stocks like Etoys and CMGI. Watching all this excitement and profit left me feeling in the dark, so I decided to buy some Intel, Etoys, and Cisco Systems. Needless to say, my market timing stunk.
Being Forced to Sell
As I needed money to buy a car and purchase a first home, I had to sell stocks at a loss. I was putting way too much money into retirement (to reap those exciting returns), and cutting myself short as far as budgeting.
All in all, my holding period in my individual account was less than ten years. I had no business being in the stock market for that short duration. I was selling at the wrong times. I watched my portfolio swell tremendously during the late 90’s to see it come crashing at the end of the decade after the dot com bubble. I never had the money invested long enough thereafter to see it regain.
Then there were the 10 years in the stock market that produced no returns (1998-2008). I have been investing since 1996 (the year I graduated). I needed to be out of the market five years ago to have had any kind of positive returns (Caveat: given that my returns mimicked the market’s). That didn’t happen. Ten years is a long time to see no returns. There is nothing wrong gaining a few percent per year in laddered CD’s.
Long Term Investing in the Stock Market
The stock market is truly for your long term money. You need to back that money out slowly over time into something more stable. Investment advisors are correct when they tell you that you shouldn’t be in the market unless you don’t need that money for five years (I say more like ten years.) I wasn’t wise enough to know what was coming down the pike in my life. I wish I had someone tell me more about being cautious financially and what life events were to face me.
Joe’s story is a great reminder, not only for new graduates, but for everyone who has forgotten about market volatility during recent years.