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