When I was a child, I distinctly remember my Dad discussing the stock market with friends and family. He always owned a few blue-chip stocks like General Motors, Caterpillar and Ingersoll-Rand but he very rarely traded. He’d gush about his stocks, market newsletters he’d read, and his favorite TV show – Wall Street Week with Louis Rukeyser. He’d never miss an episode. Old Louis made the stock market seem funny with his dry sense of humor.
So I grew up thinking it’s perfectly normal to own stocks and hold them for a long time. Didn’t every Dad in every family buy and discuss stocks? Not really, but I didn’t know any better.
In 1985, I graduated with an MBA, got my first real job at Scott Paper Company, and had a little extra cash to put into the stock market. Plus I could kind of read corporate financial statements – being a freshly-minted MBA and all – so I figured I could be a stock market genius!
I also was a total geek because I’d immersed myself in the first IBM and Compaq PCs as soon as they came out. The Compaq was “portable” even though it was the size and weight of a suitcase. I loved it! I’d read PC Week every week to keep up on the latest technical innovations like modems, laser printers, and, of course, new PCs.
So given all that, it shouldn’t be a big surprise that my first stock investment was – ta da – Microsoft (MS). Yep, I used the MS operating system everyday and it seemed like MS had a super-bright future. I bought $1,000 worth of MS stock and, believe it or not, a year later it was worth a whopping $10,000! My first stock pick had gone up 10x in one year! I remember telling my Dad this stock investing stuff is easy. Little did I know how hard this would be to repeat.
My Dad advised me to sell $1,000 worth so that I’d recover my original investment. He was worried this new-fangled MS stock would crash and burn. I ignored his advice.
Instead, I decided I wanted to switch careers to programming. I caught a break when Scott Paper announced a voluntary downsizing that included 6 months severance. I volunteered in a hurry. I took the cash severance, sold the MS stock, got a job at Unisys, and made a down payment on our first house with the pile of cash. If I’d been smart enough to keep that MS stock, I would have become financially independent MUCH earlier. But hindsight is always 20/20.
I went on to buy a few other individual stocks like Borland, a software company, and Today’s Man, a men’s clothing store. Have you’ve been to Today’s Man? No? That’s because it declared bankruptcy in 1996. But I managed to sell it before losing my shirt. Anyway I never made much money on the other individual stocks I bought. Picking individual stocks turned out to be really hard for me so I stopped buying individual stocks.
Anyway the book espoused the Efficient Market Hypothesis – which I don’t completely agree with – and a sensible asset allocation into mutual funds for the long haul – which I agree 100% with.
I realized successful investing has a lot more to do with patient, long-term investing in low-cost index funds than it does with trying to hit home runs by picking individual stocks. I’m not Warren Buffet so I’m happy hitting investing singles and doubles all day long. It’s so much easier and less risky. And I can sleep at night.
The right attitude
I also realized that investing is all about the right attitude. And what’s that? The right attitude is to be completely rational and remove emotions – like greed and fear – from your investing decisions. You have to be willing to invest for the long-term even when it causes you short-term emotional pain.
The best tool to help you maintain the right attitude is an investing plan. It keeps you on track and your emotions in check when Mr. Market starts acting bipolar. In particular, you need to make a written, sensible, investment plan and stick to it. No. Matter. What.
Part of my investment plan consists of a regularly scheduled reallocation of my assets to maintain a fixed percentage of each asset class. For example, I rebalance my portfolio every April so that I have 45% of my assets in bond funds and cash, 45% in stock funds, and 10% in a REIT fund. My plan is more complicated than that, but that’s the general idea.
You would think it’s easy sticking to an investment plan like this no matter what, but it’s often hard. When the 2008 Financial Crisis hit and everyone was frantically selling stocks, I was nervously selling bond index funds to buy stock index funds during my annual asset reallocation. Buying stock index funds felt horrible at the time, but I gradually felt better as the stock market recovered. And buying then ultimately allowed me to FIRE in 2012. Yep, you heard right – the Financial Crisis helped me retire early. Crazy, right?
This last April I did my annual asset reallocation. I had to sell stock index funds to buy bond index funds when everyone else was buying stocks during this long bull market. Selling felt stupid but I did it anyway because it’s what my investment plan called for – no matter what!
I have no idea what Mr. Market will do next, but I can guarantee at some point you’ll feel greed or fear trying to take over. Don’t take the emotional bait! Hang on to the right investment attitude backed by a solid investment plan and you’ll do well in the long run.
Thanks for reading! Do you have an investment plan? Do you have any great investing stories? Do you invest in individual stocks, mutual funds, or both?