As I've mentioned before, I do my own taxes, and having just finished that anguishing exercise a couple of weeks ago, I've been thinking about my retirement nest egg. Just the other day I rebalanced a portion of my portfolio, taking a little money off the "aggressive growth" table and moving it onto the "value" and "cash income" tables.
It was my dad who got me started doing my taxes, and who insisted I start saving some money as soon as I started my first full-time job, at $135 a week. He was old school, and always did his own taxes and his own investing, right up to the bitter end, when he died in 2002 at age 91.
My dad was not a banker or financial analyst. He was one of those old-fashioned “country” lawyers who could see past the con job that someone was trying to pull, cut to the heart of the matter, and see a problem through to its logical conclusion. He didn’t make big money, but he eventually became a “millionaire-next-door” type by living frugally, paying his bills on time, and putting something aside for the future.
You might think his investing approach
from 50 years ago wouldn’t be relevant today.
And I guess it isn't, if you want to be a day trader or bet on the next new social media
stock. But the fundamentals haven’t changed from his time to ours – not if
you’re trying to build up a decent nest egg and secure a comfortable retirement.He always advised me to make sure my insurance policies were in place, and to keep some money in a safe, secure, federally insured bank account. But then he’d say, whatever your long-term goals, you should invest at least some of your savings in the stock market. For despite its pitfalls, the market is one of the few time-tested routes to financial security.
So as I've gone about about picking stocks or researching mutual funds or ETFs, or discussing a plan with my financial adviser, I try to remember these five basic principles. Or, what my dad might have called . . . words to the wise.
1. Don't get scared . . . out of investing because you think the stock market is rigged. Contrary to what many people believe, over the years the equity markets have been democratized – by Merrill Lynch back in his day, and in modern times by discount brokers like Fidelity, Schwab and Vanguard. There has been a huge increase of financial information available in the media, so the stock market is relatively open and transparent, particularly when compared to debt markets which do not enjoy the same level of public scrutiny.
2. Wall Street insiders . . . purposely complicate financial products, labeling them with misleading names in order to confuse the public. For example, remember the credit default swap? It wasn't really a swap at all. It was an insurance policy. Insiders end up making a lot of money when customers don't understand what they are buying. So I try to follow my dad’s advice, which wasn’t original to him, but is no less worthwhile: Invest in companies where you know what they do and how they make money. If an investment story is too complicated, it's probably not reliable.
3. If you think you can beat the market . . . well, good luck with that! You're not the smartest person on Wall Street, and neither is your financial adviser. Top players in the investment world work for big institutions and deal in hundreds of millions of dollars. The people who work for you are the ones who couldn't get a job where the real money is made. You can't outsmart the market, so just be in the market, with a low-cost index mutual fund or exchange-traded fund.
4. People on Wall Street are not . . . looking out for your best interests, they're looking out for their own best interests. (If it's any consolation, the politicians in Washington, the moviemakers in Hollywood, the oil producers in Texas are all just as self-interested -- and often short-sighted -- as any shark on Wall Street.) This is another reason to stick with a low-cost mutual fund instead of taking a flier on a hot stock that someone smarter than you may be trying to unload.
5. Investment experts rely on . . . sophisticated statistical models, and they have access to top leaders in the business world. But even they don't always know what's going on. None of us is old enough to remember 1929, but maybe you recall the crash of 1987 or the flash crash in May 2010. Wall Street wizards enjoy all kinds of advantages that we don't have – but even they don't get it right all the time, because things in the real world don't always work out the way the analysts say it will.
My dad was even-tempered, and had profited from decades of experience, and so he would remind me that the stock market doesn't go up all the time. And it is always ready to take money from bold and brash traders who think they know more than they do. But on average the stock market goes up between 5 and 10 percent per year. The stock market gives us regular people a chance to own a small bit of the great American capitalist machine which, for all its faults, can help us build a retirement portfolio, and produce income in our later years when we’re no longer working.
11 comments:
Great advice. I would add - don't be greedy. When you have made a good return on your investment by your definition then lock it in rather than trying to get just a bit more.
Interesting post. You were fortunate in your choice of a father.
Good advice. Reminds me to get investing a small sum that I had set aside for stocks and shares.
Hi Tom! I'm making an effort to be more involved in my families "investment portfolio" which includes a small amount in the stock market. It sounds like your dad was a very sensible man and lived a very SMART and rightsized life. Good for him for passing it on to you. The only thing missing was investing in real estate. Because my husband and I both have a background there, real estate has been very, very good for us. Much of the time it pays to stick with what you know. Thanks for some food for thought. ~Kathy
Good advice. I have a few products where the interest is invested in the market but the principle is protected. The gain isn't great but I'm not greedy and I get more than the low interest banks are offering.
When I retired eight years ago, it was just before the bubble burst. I lost several hundreds of dollars a month from the annuities I had chosen. But it never seemed prudent to change things around when everything was so bad, and now I've recovered and hope that the future will be better. Although I can move stuff around, I have chosen not to because I think I made the best choice back then. But yeah, sometimes it's tempting. :-)
Well, like most people, I was fortunate in my choice of a father in some ways, not in others. But that's another story. He did have good advice, and if only I had followed it more closely, I myself would be a little more millionaire-next-doorish, and a little less hand-to-mouthish!
Good post. I always worked for Estate Planning lawyers and the majority of our clients were the millionaire next door. Mom and Pops who lived under their income and saved and invested. I'm retird now but I'll bet it still works.
I agree with it all, but would have added something about index funds as the ideal way to invest in the market. I used to chase "high performing" funds, and then I read Bogle, and have since resisted all attempts by my Fidelity appointed adviser to steer me toward managed funds.
Your Dad was awesome, and had great advice. Yes it still works today.
Barb
I've seen a lot of financial advice, and have occasionally written some. What your dad told you was better than 90% of what is out there.
Underlying all of what he said is that successful investing in stocks is WORK. You can't be successful if you're not willing to do the research that success requires. If it doesn't interest you, buy a whole market index fund and let it ride.
What isn't exactly right is #3. You can indeed beat the "smartest" people on Wall Street, but you can't do it by competing with them. You'll have to look at mid-caps and small-cap stocks where the pros don't or can't go. I'm not talking the "pink sheets" and hot phone tips, of course. And if you try to day trade or make a quick profit, taxes will eat you up even if you're successful (which you're unlikely to be).
Good luck with your investments. I think you're right--it's a good time to sit on some cash.
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