This article is by staff writer William Cowie.
Several readers responded to our “Big Question” post by saying they'd like to see something about investing, and some elaborated that they'd like to see some advice for investing on a small scale. Small in scale obviously means different things to different people — but I'll relate my experiences, for what it's worth.
My background is in finance and accounting. You'd think having 10 years of college, focusing on business and money, I, sooner or later, would know what I was doing with my money. You would be wrong. Coming out of college, I joined the rat race in the fast lane and zoomed past most of my peers, landing a top executive job in a fast-growing computer company at a young age, and ending up with a small minority stake in it. When it was sold to a major conglomerate, all the stockholders received generous payouts. I was 30 at the time and decided to retire. For my retirement, I wanted to come to America and study some more — isn't that just the geeky “investment” to make?
Not wanting to become a professor, I rejoined the rat race, only this time taking care to stay away from the fast lane. It may look attractive to those getting passed, but staying in it requires too much time and dedication, and you have no life beyond it. I wanted to visit, smell and photograph some roses along the way.
I never gave retirement another thought. I just figured that I've done it once, I can do it again anytime I like. Well, that's not quite as easy when you don't make fast-lane money anymore. It took me a few years to realize this. I know, I know: I may have degrees up the ying-yang, but that doesn't mean I'm smart. I was now in my 40s, and starting all over with close to nothing.
The smart people (like J.D. Roth) say you have to invest and start early. Sounds good, of course … but I couldn't get myself to actually do it. Looking back, I can see several things which held me back.
1. I didn't make enough money. At least that's what I told myself. If you want to invest, you need to have some “over and above” money, right? I had myself convinced I couldn't check that box.
2. I didn't want to make sacrifices. In graduate school, we had a Polish couple living next to us in student housing, Wojcek and Kinga. He was an out-of-state student and had to pay high tuition fees. Yet, when he graduated, they had a down payment for a house. Amazed, I asked him how he did it. His answer boiled down to living close to the poverty line and squirreling away every penny they could. In five years, they saved up $18,000 and they bought a $180,000 house. My earlier life, on the other hand, had accustomed me to an inflated lifestyle. It doesn't take many years for that to turn into a sense of entitlement. “Hey, I'm entitled to eat out so many times, drive such-and-such a car, and live in a house with so many square feet.”
3. I failed once. I tried to open a brokerage account with Charles Schwab, back when they were the only discount brokerage around, to invest in stocks. I didn't have the minimum required to open an account. It was humiliating to be told I don't have enough money and, for some weird reason, that just stuck in my mind, reinforcing the first point I made up above. Worse, it made me not want to try again.
4. What's the point? Even if I had the minimum (as I recall, it was something like $1,000 back in those days) it was so little, there was no way it could ever be enough to give me a comfortable retirement. Besides, even back then everyone was talking about the market being rigged against the little guy. So why bother? I may end up losing it all, anyway.
5. I didn't know enough. Talking to friends, coworkers and acquaintances, it sounded to me like you needed a lot of luck to make good investments. At the time, I remember Microsoft and Walmart were the hot, high-growth stocks. But were they going to mature right when I bought? When a growth stock matures, its stock price crashes as the P/E (price-to-earnings) multiple gets deflated (like happened to Apple last year and Whole Foods this year). Because I didn't know enough about the stock market, I figured I had better stay out of it.
Other people told me they don't have time to invest, but I knew that didn't apply to me (or to anyone else, for that matter). If someone told you you'll win a million dollars if you set aside an hour every Saturday, we'd all do it. We all make time for something we truly value. I knew that I would make time for investing if I truly believed in it. Trouble was I didn't.
1. Our 401(k) plans. We both got jobs which offered what was still a fairly new thing back then — 401(k) retirement plans. These things are not perfect, and they've generated a lot of criticism; but at the time, I thought it was a great thing for only one reason: I got to take it with me.
Until the early '80s, the default retirement option at most employers was a pension. The problem with a pension, though, was you often lost it all when you changed jobs — and that was by design. Back in the day, employers used their pensions as a golden handcuff, an incentive/reward for staying there. A 401(k) was different because you could take it with you when you moved on, or if you were “asked” to move on.
So, we embraced our 401(k) plans and contributed to the level our employers matched. It wasn't much, but at least there was some “free money” (the matching) to give us the motivation to do it.
And then we forgot about them. In hindsight, that was probably a good thing because they grew quietly and undisturbed. You avoid using any 401(k) plan at your own future peril.
2. Our savings. My wife and I grew up in frugal households and we tend to live below our means. So, we opened a savings account to serve as an emergency fund. We lived on a strict budget — not overly tight, but it was a high priority never to exceed it. And, every month, we'd transfer everything left over to the savings account and start fresh for the next month. The emergency fund slowly grew, and we never paid it much attention. There were a few times a car needed repairs and so on, and it was nice to have enough for that. But, other than that, we never really thought of it.
Then, one year, we got a bigger income tax refund than we expected. The natural thing was to put it into the savings account, which we did. But then, suddenly, we looked and saw that we had “real money” in that account.
It dawned on me that we had enough to risk opening a brokerage account without the fear of being told we're insignificant cockroaches.
3. Old age suddenly drew closer. After we turned 50, and the over-the-hill parties faded in the rear view mirror, we looked through the windshield of time and gulped. What'll we do when, like the Beatles song, we turn 64? Funny how you never think of this when you're young. But, as they say in the sports world, Father Time is undefeated. Sooner or later he'll beat you.
My (and your) only defense against that old fart is our investments.
So, all of a sudden, I was confronted with the question: What am I going to invest in? I had no clue. That's when, as my wife put it, I went to “night school.” Every night, for months, I'd hit the Internet after dinner till past midnight and learn everything I could about investing in general and stocks in particular.
Why stocks? If I were a different person, I'd probably go for rental real estate, because you can (literally) buy the house next door and keep a watchful eye as other people pay down your mortgage and inflation builds you a lovely nest egg. However, to make that work, you need a modicum of handyman skills and you should be somewhat of a people person, engaging enough to attract tenants, and tough enough to kick them out when they don't pay on time. I'm neither. I am enough of a geek, though, with enough education to understand companies and stocks. So that's why I became like the little robot in the movie “Short Circuit,” muttering “input, input” night after night.
What I learned
1. Investing matters. I can kick myself for the years I avoided it, and the overcome-able reasons I used to justify that. As time passes, we'll be less and less able to rely on Social Security or pensions. Therefore, you will be the master of your fate, and there's no way other than investing to master your fate when you're older.
2. You get nothing for nothing. To get something in the future, you have to forgo something now. It is what it is.
3. Time is everything. Even if the amounts you work with are small — and they can be — they will add up the longer you give them.
4. Patience is essential. As Warren Buffett puts it: Investing is like planting a tree — nothing happens overnight.
5. Perfection is not required. Nobody, not even Warren Buffett, has a flawless track record in their investments. That's the bad news. The good news is investing is robust enough that, as long as you are patient and diligent, the good will far, far outweigh the mistakes and misfortunes. My perfectionist tendencies kept me from investing for too long. (“If I can't do it right, why do it?”) Imperfect investing, started earlier, will always beat perfectionist investing delayed.
6. You can learn. There are plenty of resources, free and paid, to learn everything you need to know to succeed at investing. The good news is it's not rocket science, so anyone can learn it. The bad news is it's not all obvious, so you do need to put in time (nothing for nothing, again).
7. It's never too late. We got serious after reaching 50, so we had to sacrifice more than we would have needed to if we started earlier, but that's the price of folly. The good news is you can learn from my mistake. And if you think you're too old, stop. Just stop. You can always catch up; it's never too late.
The key to success, though, is the old Nike slogan: “Just do it.”