The following is a guest post by insightful reader JayCeezy. He is a veteran investor who shares his perspective on investing, retirement, and risk tolerance. With the sequester now in effect, it will be interesting to see how the economy and stock markets perform with an anchor on its back.
How To Lose A Million Dollars.
Kidding. It was a lot more. Fortunately, I’m over it and have moved on. Hardly ever think about it. No, sir.
I love the subject of Personal Finance, and enjoy books, podcasts, newsletters, and especially Yakezie network blogs. There is a future-based element of fantasy to the subject, reaching the financial independence to allow us to say and do what we want, instead of what we have to. And now and then, I need a break from PF blogs where everybody is smart, a critical thinker, successful, resilient, goal-oriented, a winning investor, and great-looking.
You, dear reader, are all of those things, or you wouldn’t be reading Financial Samurai. So, let’s change it up for a few minutes; sit back and vicariously experience a few stories about how someone (ok, me) metaphorically burned the roof of my mouth on a hot slice of PF pizza. Make sure you keep a cold mug of Schadenfreude nearby.
Black Bloody Monday, 1987
Wow. That was a day. At the time, I considered myself well on my way to becoming a seasoned investor who could take a punch; but was revealed as a dilettante with a glass jaw. After a 40% runup for the year, on October 19,1987 the Dow fell 22%. I distinctly recall hitting a ‘happy hour’ after work, and overhearing two guys who appeared to be finance pros commiserating. “A lot of people are going to make a lot of money off of today.”
“Yeah. Bartenders,” I thought to myself.
Over the course of the next two brutal months, I lost the equivalent of four months’ salary; it was inconceivable to my callow mind. I lost my nerve, and sold my fledgling mutual fund that had seemed like such a smart investment a few years earlier.
• Punchline: Oh, and the Dow finished positive for the year.
• Lesson: Don’t panic after something bad happens. The bad thing already happened. It is too late to panic. Go to a ‘happy hour’, and smile through the tears. Accept that once you think you are a seasoned investor, you are at least five years away from being seasoned.
(picture: Kevin Bacon in ‘Animal House’, 1978)
Buying An Annuity With My IRA Rollover
After leaving a job with my 401(k), and attempting to avoid paying taxes and penalties for early withdrawal, I was referred to a financial professional. I expressed concern for both safety and tax avoidance, and she suggested an IRA rollover. It all sounded great as I signed, and I wondered if maybe I was taking advantage of her helpfulness. I asked her how she would make any money off this, since I did not see a commission line item. She replied, “Don’t worry about that, the company takes good care of us.” Imagine my relief! Nice lady, she didn’t want me to worry.
I said ‘OK,’ because it sounded great with all these tertiary benefits like Life Insurance and a guarantee of return of principal. But those of you still reading along know what came next. It was a ‘shark attack,’ in which my IRA rollover was expensed 1.45% annually for unnecessary “annuity tax protection.” IRAs are already tax protected. There was an early withdrawal penalty if I moved the money in the first eight years. And a 12b-1 ‘marketing fee’ of 0.5% per year, unnecessary because the marketing had been complete when I signed the contract. All this on top of a .95% annual administration expense. But that was fine print I didn’t read until years later when the stock market went up but my IRA rollover didn’t.
• Punchline: I calculated she made over $6,000 from my investment, spending 30 minutes with me. $12,000 an hour, nice work if you can get it!
• Lesson: Don’t consider Life Insurance an ‘investment’, and don’t keep an IRA in an Annuity. Guaranteed ‘Return of Principal’ is a perceived benefit one will pay dearly for, with little practical value. And most embarrassing of all, Note To Self: read the fine print before signing anything.
Note from Sam: I encourage everyone to see how they can reduce their 401(k) fees as they add up tremendously over time. I went from paying $1,700 a year to now less than $500 a year on a ~$400,000 401K.
Employer Misappropriated My 401(k) Funds
I had built up the equivalent of eight months’ salary in the 401(k) in five years, as the first employee in a small business. The company owner and I crossed paths at a client site I had been working at for four years; he didn’t recognize me, and I had to reintroduce myself to him. He then acted like he owed me money, to use a figure of speech. Little did I know, it was literal and not figurative behavior. He had made personally made over $250,000 off my work by that time. Wow.
I had been receiving annual 401(k) plan summaries, but it turns out they had been falsified. I know, right? I contacted law enforcement, and they directed me to the Department of Labor to obtain documented evidence. I contacted DOL, and they would not get involved for disputes less than $100,000. Catch-22. I alerted my fellow employees to the situation, and we agreed to team up to get our money back from this fictional 401(k) plan.
The employer then paid them all their money but not mine, solving their problems and isolating me from them. Back to fighting alone. I hired a lawyer; something I never in my wildest dreams thought I would have to do. I thought if I lived my life right, I wouldn’t have any problem like this that couldn’t be reasoned or discussed. My employer knew he was wrong and owed me money and had lied; he just didn’t want to pay. I settled when the cost of going to trial was revealed to be twice the amount in question, with no guarantee of results or subsequent collection.
• Punchline: I paid the lawyer 40 cents of every dollar, which wasn’t the full balance owed.
• Lesson: Nobody is looking out for you. Not your employer, not the government, not the legal system. Don’t worry about insulting someone with a simple request for information about your own money. Sometimes trust will be broken and the issue will not be what is right, but what the other party can get away with.
Friends Who Ask To Borrow Money
Four were friends, none are today. Two of the four paid me back. 25% of the money was paid back. Not huge amounts, but certainly not small. Funny thing is, none of these guys were best friends. I rationalized that they didn’t ask close family or closer friends, because they didn’t want to be embarrassed. I liked all these guys, wanted to help them out with no other agenda, and still miss their friendship to this day.
“Asking” is different from “offering” to help a friend or family member. Sometimes money is the only solution to a problem, and it is nice to be able to help others when you can. Much different feel than when you are the ‘mark’ they come to with the request.
• Punchline: Not until years later, did I find out that in all cases they used the loans from me to pay others to which they owed money.
• Lesson: Once someone asks to borrow money, they have decided the friendship is already over. If you say ‘no’, you will no longer be friends. If you say ‘yes’, you will keep the appearance of friendship for longer, but in reality you are no longer friends.
Let’s do this quick, like removing a band-aid. First home, I built up an equity in 15 years, paying off the home. Nice neighborhood, but something odd happened. In two homes on my street, grandparents who had been in the houses for decades had adult children move back in and bring their teenagers with them. The teens started selling drugs out of the homes. You can guess the rest.
We then moved to an idyllic small town I had fallen in love with as a teenager. It is home to the largest tennis tournament in the U.S. as far as participation is concerned, and my wife and I had been visiting it together for 15 years, wondering “Why do these people get to live here, but we don’t?” So, we ‘just did it’ and bought a home there at the top of the real estate bubble.
Long story short, we had some difficulty with malicious neighbors, and double-standards for HOA (un)enforcement. We woke up every day with a pit in our stomachs, and didn’t see any hope for improvement. Seven years later, we sold at a net loss of…wait for it…the entire equity amount of my first house. Coincidence? Doesn’t matter! It is a drag to have zero real estate equity after 22 years of home payments.
• Punchline: Sometimes falling in love as a teenager is just really infatuation. Actually, every time.
• Lesson: It is totally worth it to get out of a home/investment at a loss, if you would not buy that same home/investment today at the price you can sell at. And do not let your teenage grandchildren move in with you.
At a certain point, a man puts away childish things.
I had some cool ones. Some had been given to me in a generous family spirit. Some had been acquired through countless hours of trading, buying, and selling. Some had been momentary impulse acquisitions. And some had been fortuitous pedestrian items that the market only years later determined to have nominal value. But they were a lot of fun, and not everything is measured in dollars.
I decided to divest. Part of my ‘downsizing’ and ‘simplification’. One bronze age comic book, that was never what one might call a contemporary success, was ‘X-Men’. I bought a copy of Giant-Size X-Men #1, read it once and put it in plastic, and stashed it in a box for 32 years. It cost me 50 cents, and I sold it for $500. Five years later, the guy I sold it to had it graded and sold it on eBay for $5,200.
Punchline: In 1998 I had an offer of $600 for a pristine copy of a Howard Stern PPV; I thought I could do better, and it would go up in value forever. Today they go for less than $10.
Lesson: Sometimes you are going to leave money on the table. Not everything is measured in dollars. You don’t know you are in a bubble until it is too late. And something is only worth what a buyer is willing to pay.
Stock Market downturns: 2000-03 (-50%), 2007-09 (-57%)
OK, I hope you get ready. Because this is the big one. After five years of 20%+ returns in the late 1990s, I was actually kind of relieved to see a bear market for the next three years. I had been sitting next to guys telling me about these ‘great stocks,’ yet they had never heard of a P/E ratio or could name three stocks in the Dow 30. A contrarian sign, no doubt. The S&P 500 P/E was over 32. It all seemed normal. The dot-com bubble burst, and 9/11 destroyed lives along with hope for a post-Cold War lasting peacetime and confidence in a predictable future. A lot of time and effort and tears and pain went by. Oh, and the markets cratered, too.
But eight years later, employment was at 4.4% (I know, right?), and the future appeared somewhat hopeful. I had taken the first downturn as a buying opportunity going all-in, and on schedule to join my wife in an early retirement in 2008. How could something like a 50% Bear Market happen again, so soon? Well, in October 2007, the S&P 500 (75% of the entire US stock market) declined 57% over the next 16 months. Imagine looking at your life’s work of saving and investing, and seeing 43 cents for ever $1 you had just 16 months prior (I know, right?)
The most horrific day of this slow downward grind was the worst one-day decline since Black Monday two decades prior, and my portfolio shrank by the cost of a Rolls-Royce Ghost. For those of you eager to crap on my point, allow me to assist by saying that, yes, the Ghost is the entry-level Rolls. I know, alright? But still, I’m just saying.
Well, my wife is the greatest; she understood the potential consequences for us immediately, and went back to work to help us rebuild our savings (at her employer’s request, a win-win if there is anything positive out of this). That had to have been every retiree’s nightmare, to be out and pulled back in, but she did it without complaint. I had been planning an early retirement since age 16, when I looked around at people working most of their lives at jobs they were ambivalent about, and decided that I had to find an out. It was a pretty shameful thing, to go over our portfolio and see such devastation without any active decisions on my part; I just turned on the computer each day, to watch it crumble further.
How could this massive wealth destruction happen twice within 10 years? Fortunately, my wife was cool about it, very supportive; she didn’t blame me and said she would have made the same choices with the same available information. I took an example from her, put on my ‘big boy pants’ and kept going to work and saving. It was all I could do.
Two vicious bear markets, leaving the S&P 500 nominally lower in 2013 than it was in 2000, a dividend-reinvested return for the 13 year-period of just 1.9%, and forward-looking GDP growth at less than 2%. Ugh. For those who have not yet inferred the point I have implied above, the future is unknowable. It is good to plan. Past Bear Markets have lasted 19 years; can you endure another six years of sideways stock movement? If not, what might you do in the alternative?
When you are young and have some successes, life seems short. But then…it just keeps going. And maybe those early successes run into some headwinds. It is at that point, one (ok, me) realizes that life is long, and will be a lot longer for those with plans that crater under real-time stress testing. My attempts to control my reaction to the emotions of Greed and Fear had only led me to regret.
• Punchline: I spent thousands of unproductive hours in worry, anger, sleeplessness, feeling hopeless, and facing my failure in the form of hard numbers. I will never get that time and energy back. But I did my best at what I could control, and the world did not end.
• Lesson: Regret comes like a Monday dawn in winter; cold, wet, slow, grey, and the promise that the day will get worse. Everybody is a risk taker when the rewards come fast and easy, but the downside of failed risk is Regret. Once experienced, it makes one (ok, me) reconsider appetite for the possible consequences. At this point in my life, I will do just about anything to avoid that emotion of Regret. Markets can stay irrational a lot longer than you can stay solvent. Lastly, if the opportunity presents itself, get yourself a spouse who will have your back. By far my best investment, but that is a subject for another post.
You Won’t Know Your Risk Tolerance Until You Feel The Pain
Well, these are a representative sample of my PF blunders and buffoonery. Admit it, you kind of feel better about yourself now, right? Yes, I knew it; good. That is why I shared them. And also admit it; after reading the headline, weren’t you kind of relieved I didn’t rework the Steve Martin joke that makes it into every PF blog post about ‘a million dollars’? Yes, I knew it; good.
If we are lucky enough to play this PF game for awhile, we are all bound to incur losses. The Kübler-Ross model for Grief has five stages which go like this: Denial, Anger, Bargaining, Depression, Acceptance. I like to revisit those old neighborhoods now and then, but currently live in the “Acceptance” zip code. The losses are behind me now, but the lessons and humbling are still with me. Fortunately, I’m over it and have moved on. Hardly ever think about it. No, sir. And if you have learned nothing else from this post, please learn this: to make an umlaut over the “u”, type ‘Alt + 129’
And if you, dear reader, have any PF blunders you would like to share, as along as there is a lesson to learn I would like to hear them, too. Good luck to us all in 2013!
Editor’s note: The impetus of this post came from a discussion JC and I had on the “Recommended Net Worth Allocation By Age And Work Experience” post. Many readers argued that they were fine with having a majority of net worth in stocks. We wanted to provide the other side of the story.