The Best Financial Lesson I Ever Learned

money, this that and the mba, blog swap, short road to retirement, retirement, investing, blogThe rule of thumb is that bonds are for retirees.  I am 35 years old and I love bonds.  When I was really young, I remember receiving savings bonds for my birthday.  I had no idea what they were at the time.  I was told by my father that they were going to be worth “a lot” of money some day.  Every year I would get these pieces of paper that were going to be worth “the number listed at the top left corner”.

Fast forward to the 90’s and the Internet boom.  The Internet boom created a huge jump in the stock market.  Millionaires were being made overnight.  I became interested in the stock market in 1995 and bought my first mutual fund, The Fidelity Select Technology fund, because I figured technology was the future of the world.  To buy the Select Technology fund I sold the $3,000 I had in savings bonds that were given to me over the years.  In a little over three year’s time, the money I put into the Select Technology fund grew to $6,000.  At that point I thought, “Forget those stupid bonds that take almost 20 years to double, I am going to invest in these stock mutual funds.”  I figured if I could double my money every 3 years, I could be a millionaire in no time.

I got a full time job and started my first 401k plan in January, 2000.  I got a list of mutual funds that I could invest in within the 401k.  The first thing I saw was a list of bond funds. My first thought was, “Forget those things, they don’t grow fast enough”.  Then I looked at the returns of the bonds funds and thought, “DEFINITELY forget those bond mutual funds, 7% returns, what a joke!”  My eyes shot down the page to find the ones with the highest returns.  I noticed that I could invest in the same fund I already owned, The Fidelity Select Technology fund.  I saw the return and thought, “Holy Crap, this thing doubled in one year!”  At this point my savings bond money that I used to buy the Select Technology fund grew to $12,000.  I remembered the Human Resources representative who introduced me to the 401k plan talked about 401k diversification.  I thought, “Give me a break, I have doubled my money twice since 1995, why invest in anything else.”  I set my contributions to 100% for the Select Technology fund.

In 2000, I lost more than 1/3 of the money I put into that fund.  I asked my colleagues what had happened.  Every one of them said, “Don’t worry about it, it will come back.  You will get your money back in no time and will start doubling your money again.  Technology is the future and the technology mutual funds will benefit the most.”  So I kept putting my 401k contributions into the technology fund.  By the end of 2001, I lost another 1/3 of my money.  At this point, I decided to sell that fund in my 401k plan.  I kept the shares that I bought with my savings bond money because I still had a gain in them.  In 2002, I sold after the value of my shares fell to $2950. I couldn’t believe that after 7 years of holding those shares, I actually lost money in that investment.  I became really discouraged by stock mutual funds.

In early 2002 I was having lunch with a coworker, Terry, who was retiring.  I asked him how he was retiring after the stock market had just crashed.  He said, “Only half my money is in the stock market, the rest is in bonds. I have been investing for almost 40 years.  I learned that over time, there will be hot mutual funds that have huge returns, but when the tide shifts, those hot funds are the first ones to crash.  Remember this, when the stock funds don’t do well, the bond funds do well.  When the stock funds do well, the bond funds usually still do okay. Put half your money in stock funds and half in bond funds, and you will do just fine.”

I followed Terry’s advice in 2002.  Since then my 401k has grown nicely.  My bond funds have returned about 7% per year and my stock funds have returned about 4% per year.  During the craziness of 2008, when the market crashed again, my colleagues were in a panic because they lost 40% of their money.  They told me they sold their stock mutual funds because they couldn’t sleep.  They asked me if I was selling my funds like they were.  I said, “Nope, a wise man once told me how to invest so I can sleep at night.  I have been sleeping just fine”.

 

PHOTO BY: 401k
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Comments

  1. That’s one of the best advice anyone can hope to receive. Benjamin Graham advocates a similar approach. Combine that with a solid re-balancing strategy and one day we can all retire like a boss ???

  2. Excellent point about re-balancing, especially with the volatility of this market. I know people who pay thousands of dollars a year to have a broker re-balance their portfolio. I am a big advocate of index funds since fund managers have such a difficult time beating their benchmarks.

  3. That is excellent advice. I didn’t start my 401k until about 4 years ago and I have tried to keep a balance between stocks and bonds. So far so good. Diversification seems to be a good thing!

    • @ Analytical – Starting better late than never is good. Keep up with it and you will be happy in retirement that you did. You never want all your eggs in one basket or unfortunately you will end up like many of the folks at Enron.

  4. My mom has her money in bonds – ALL of her investing money – which can be a bit slow and laboured. I think she just doesn’t want to have to spend any time investing.

  5. I’ve heard that this actually works. I know a few people who have experienced growth in their investment portfolios by splitting between stock and bond funds. I started doing this myself about two years ago, and so far, so good. Thanks, Christopher.

    • @ Anthony – Now that we are more than ever going to have to save for our retirement, it is essential that we make sure that the money that we put in there is going uppppppppppp…way up…enjoy the weekend my man!

  6. Hi Daisy, there are bond funds that grow quickly. I posted an article on a bond fund that outperformed the stock market from 1991-2010. Check it out. http://www.shortroadtoretirement.com/2012/03/possibly-greatest-mutual-fund-of-all.html

  7. I am in my mid-late 20s and I have 30% of my retirement portfolio in bonds and 70% in stock. I know that tends to be a little more conservative that what most experts advocate, but I didn’t flinch during the whole stock debacle after Lehman crashed (well, I flinched, but I didn’t take any money out), in fact, I kept putting money in. That’s how I figured 70/30 must be an allocation I can live with and sleep on.

    • @ WellHeeled – It is all about your comfort level. Some experts can give you numbers but when it is your money and you worked for it, I just can’t see myself being that aggressive. I am conservative like you, I just can’t stand seeing that portfolio go down! I wonder if these experts are as aggressive with their money as they suggest us to be?

  8. Great story – thanks for sharing it. It really goes to show you how diversification (or lack thereof) can bite you in the ass if you’re not careful. A balanced portfolio is key!

    • @ Robert – Diversifcation is the name of the game. All your eggs in one basket is a definite recipe for disaster. Diversification in revenue streams is key too!

  9. Great post Chris. Having a balanced portfolio is very important. I tend to be very aggressive, but I make changes whenever I deem necessary. I bet you’ve been pretty happy with the return on your bonds for the last few years. They beat the returns for stocks for the most part!

    • @ Paul – I have taken the conservative approach lately with my own investing, after the past few years seeing the losses. That is right bonds are mostly up when stocks are down. Glad I have many years till I retire to recoup some of those losses.

  10. Christopher, I think you have a very good strategy. In fact, as you grow older, try to increase investment in bond. Also, at some point in the future, interest rates will rise. When that happens, stocks will not do well. But, for now, FED keeps printing money to keep interest rates low. So, stocks are doing fine.

    • @ Shilpan – most advisors suggest that I should be aggressive at my age, but seeing the ups and downs so frequently now a days, I have just been focusing on stable returns for my retirement portfolio. Good recommendation!

  11. I’m glad I read this post. I don’t have a 401k at work, so I was getting ready to start a Roth IRA but I am clueless as to where to put the money. I actually had an impulse to buy a stock last week -my first- and I just went with my gut feeling and picked McDonalds.

    • @ Katie – If you saw my post the other day McDonald’s is the number 1 hamburger chain. I have invested in stocks before that I had some connection to or used the product. I think I need to get out there and invest in some Dunkin’ Donuts (DNKN) because I am there just about every day! Congratulations on your purchase, I hope it is the first of many! Get saving on your retirement. Come back on tuesday as I will be part of the Roth IRA Movement!

  12. I just rebalanced my 401(k) portfolio, and weighted it a little more heavily towards bonds. While they still make up just a fraction of my portfolio, I’m happy for the relatively safe returns.

    • @ Bryan – it is always good to sit down and reevalute your financial situation occasionally to make sure that you have the right asset mix that you feel comfortable with. I am happy with safe returns too, the volatility a little while back has got me on the edge of my seat!

  13. I love McDonald’s but I am not a fan of their new bakery items. McDonalds usually does a good job with new products, except for a few. Remember the McDLT? I wrote a couple of reviews of the bakery items on hubpages that includes nutritional information. If you are interested. Here are the links.
    http://jpelczar.hubpages.com/hub/McDonalds-Cheese-Danish-and-Banana-Bread-Nutrition-Facts-and-Review

    http://jpelczar.hubpages.com/hub/Mcdonalds-New-Muffins-Nutrition-Facts-and-Review

    • @ ShortRoadtoRetirement – I don’t remember the McDLT, but I do remember the Arch Deluxe which I thought tasted pretty good. There are just some things that I cannot go to McDonalds for and their new bakery items are one of those things!

  14. Kate, That’s an excellent reason to own the stock LOL!

    • @ Short Road To Retirement – I have been meaning to get back to the gym after eating those burgers back to back days when I wrote the hamburger article about Wendys passing Burger King!

  15. Another article by Chris on basics of finance 🙂 Its always better to diversify your portfolio since it lowers the risk

    Thanks for sharing this one.

  16. Another article by Chris on basics of finance 🙂 Its always better to diversify your portfolio since it lowers the risk

  17. Hi Chris,

    I have included this blog post at my website weekly roundup

  18. Christopher, don’t forget the initial profit on your 401K which equaled the federal and state taxes on the investment. So that’s a good return on day one! Bonds have been good as interest rates dropped, but inflation is not good for bonds and I’m convinced it will return. I got into the Fidelity Strategic Dividend and Income which is pretty high yield (like bonds) but uses company dividends. It always makes sense to diversify no matter what.

  19. Wow! I never thought about it this way! I made my first investment at 18 due to some scholarship windfall. I allocated 50% in Bonds and 50% in Stocks in 2008. Although my portfolio did not grow much, it definitely did not shrink.

    • @ Savvy – as long as it didn’t go down that is good. There are a lot of different philosophies out there. I tend to choose one and stick with it. If it is not working, I go back to the drawing board to reevaluate. I hate second guessing myself which is why I use one plan and stick with it.

      • I’m sort of like you. I’m conservative with my money.

      • @ Savvy – I just cant see to lose the money that I have worked so hard to make. It frustrates me, but sometimes we lose a little before there are gains. We just need to set thresholds, how much are you willing to lose before you pull the trigger to move your funds or stock.

  20. I haven’t started working yet as I am about to graduate, but I know for sure I am going to invest in my 401K and ROTH IRA. I want to max my ROTH IRA ($5,000) for 2012. But am wondering how much I should invest in the 401K beyond my employer’s company match. At what percentage did you start? Do you wish you would have invested more or less?

    • @ Savvy – I went in strong when I first got a job and had little expenses. I invested as much as I could comfortably live without. I set up an investment account where I put in money to purchase the company stock and other stocks. Remember there are penalties to withdraw from a 401k so if you need that money down the road you may want to put some in a liquid account like a money market where it is a little easier to get at. Great question!!!

  21. Actually neither can I, but my mentor in high school who got me started in mutual funds, actually advised me to ride it out. He has been investing for more than 30 years. Retired at 55 and is still retired at 78.

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