Lesson Well Learned

Brian White

WHEN I BEGAN investing in 1987 at age 33, I knew very little about the financial markets. As a new University of North Carolina employee, I just started having money taken from my paycheck each month and put in North Carolina’s 457 plan for state employees. A 457 plan is a deferred compensation plan, similar to a 401(k) plan, but the plans are offered by state and local governments, and they’re subject to somewhat different rules.

I have no idea how I chose the mutual fund in which I initially invested. Fortunately, since I didn’t have much invested then, it didn’t make a whole lot of difference.

Sometime in the mid-1990s, I started reading the “work and money” section every Sunday in Raleigh’s The News & Observer. The section included a couple of pages on personal finance from The Wall Street Journal. Besides the usual articles on recent market performance and where the market was sure to go in the near future, there was solid personal finance advice: establish goals, allocate assets based on risk tolerance, diversify, rebalance, save regularly, use low-cost index funds, “ignore the noise” from all the market prognosticators and invest for the long term.

These sounded like good ideas to me, as they were based on research and mathematics, both of which are dear to my heart. But I wasn’t yet at a point where I could implement all these ideas in a simple way, because the funds available to me through my 457 plan were limited to actively managed mutual funds, along with a “stable value” fund that paid a relatively low interest rate.

Nevertheless, I was able to invest in a bond fund, a couple of stock funds, a balanced fund and an international fund. I set up a spreadsheet to determine what my combined allocations were to large, medium and small-cap U.S. companies, as well as bonds and international stocks. I decided on a target allocation that was fairly conservative given my age, about two-thirds stocks and one-third bonds, because I didn’t want to do anything too risky.

I also started rebalancing quarterly, by adjusting my monthly contributions so they went into whichever areas were low. Rebalancing was a complicated process, since most of the funds I owned had money invested in more than one asset class. I couldn’t just add more to my mid-cap fund, for instance, since I had no fund that was just mid-cap stocks. Unfortunately, my 457 plan also didn’t provide a total stock market index fund with the various asset classes represented according to their market capitalization, which would have made things far simpler. Still, my asset allocation spreadsheet helped immensely in figuring out how to rebalance things. It didn’t hurt that I’m a computer geek with a mathematical bent.

Things were going pretty smoothly with my regular saving, rebalancing and ignoring the noise—and then the dot-com bubble burst in March 2000. By then, I was convinced that rebalancing was the way to go, but this was the first big test of my convictions. Rather than panicking and selling my stocks, I moved money from bond funds into stock funds and set my monthly purchases to be all stocks, thus keeping my allocation to stocks at around 67%. I also tried not to watch too closely and continued to tune out the noise, recognizing that selling stocks when their price was low would only lock in my losses.

Shortly into the market crash, I was approached by a helpful “advisor” working for the company through which I made my 457 investments. This advisor, who was really a salesman, urged me to move my investments into a stable value fund to stop the bleeding. He claimed this was what he was recommending to his mother, which I found questionable. The stable value fund locked you into a low interest rate, there were fees if you withdrew more than 10% in a year and it likely paid a commission to the salesman.

Fortunately, I had learned enough by this point—and I ignored his advice. It was one of the smarter things I never did: As readers likely know, the market bounced back and rebalancing through the 2000-02 market decline ultimately paid off nicely. It was a lesson well learned—and it stood me in good stead during 2008-09’s market collapse and this year as well.

Brian White retired from the University of North Carolina, where he worked as a systems programmer and then director of information technology in the computer science department. His previous article was Rookie Mistakes. Brian likes hiking with his wife in a nearby forest, dancing to rocking blues music, camping with friends and stamp collecting. He also enjoys doing volunteer income tax assistance (VITA) work in the Chapel Hill senior center.

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