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MY FIRST JOB AFTER college was at a global engineering firm. A roommate also worked there. It was a tedious office job, but my bosses thought I had potential and encouraged me to study engineering, which I didn’t.
Instead, I quit and went to graduate school to study linguistics, a field where I observed the most professors having the most fun. My last paycheck at the engineering firm included an extra sum. It was a refund for a retirement account that had failed to vest because I hadn’t stayed long enough. This shocked me, since I hadn’t the foggiest sense that someday I would be old and need retirement funds. I didn’t know there was such a thing as a defined benefit plan. I spent the windfall, probably on rent and books, with nary a second thought.
At my second job, I paid attention when bosses talked about the company’s 401(k) plan and insurance coverage. I worked there five years and, when I left, that money stayed in place. A lazy investor, I let it ride until I later rolled it over into my retirement account at my next employer.
Throughout the remainder of my working life, I never cashed out that money. In fact, thereafter, I let all saved dollars ride, remembering that first little retirement check that got away.
Some friends worked on picking better investments in an effort to boost their performance, but that sounded like extra effort with limited return for time invested. I just saved a little more, assuming my results were a little weaker. I’d ask others only general questions and tried to stay away from the worst investment mistakes, even when banner headlines managed to pierce my general disinterest in personal finance.
During the dot-com boom, I met a couple of guys at a conference mixer who were discussing their hot investments, including the grocery service Webvan. I asked why they owned the stock, given Webvan’s apparently flawed business model. “What do I care?” said one. “I’m selling that stock tomorrow.” That day, I gave up owning anything other than mutual funds. I figured it would take a lot of time to be knowledgeable enough about individual stocks, and I was too busy with family and career.
Instead, I followed a “random walker” dollar-cost-averaging investment model, saving what I could of each paycheck and periodically noting whether my retirement accounts were growing. I didn’t switch in and out of funds based on returns, and I didn’t accelerate my contributions when markets were weak, strategies that might have boosted earnings, if I were correct and lucky, or might have cost a lot.
Some years, I felt like I was pouring water into a draining tub, buying into a falling market. But I was no expert. I never spent enough time studying finance, so I had no idea how to avoid such bear market losses, if that’s even possible. I couldn’t outsmart expert investors and industry insiders. So I continued on my lazy path.
As I grew older, the cost of retirement became clearer. Once I hit age 50, I took advantage of catch-up contributions. This was a choice made out of fear, not savvy, and also a lazy way to “spend” my salary increases, since my living expenses were pretty steady at that point.
Whenever a market correction occurred, I would open my retirement plan statements with trepidation. Even with ongoing contributions, my total balance sometimes declined. I’d look happily at the portion of my portfolio in bond funds that retained the value of recent contributions. In other years, and over time, I noticed how little my bond funds grew. The bulk of my money, held in diversified stock index funds, had done much better. This encouraged me to keep contributing to a balanced portfolio that had slightly more in stocks than my risk-averse nature might prefer.
I have time now to reflect on the outcome of four decades of work and investing. I’m no market expert and there was nothing remarkable about the funds I selected. But over time, I built a secure foundation for retirement. Looking back, three things strike me:
Catherine Horiuchi recently retired from the University of San Francisco’s School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Check out Catherine’s earlier articles.
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I’m inclined to believe that I was born frugal, but I had an experience in my early 20s that further formed my attitude to material things and helped turn me into a life-long investor. Like many males of that age, I too purchased a sports car. Though it didn’t appear so at the time, it was most definitely a status symbol boosting my confidence level so much more when taking girls on dates.
I soon had a flat tire and the replacement, if I recall correctly, was almost $300 per tire, for which I needed two. So $600 in a blink of an eye and this made me rethink the benefits of a shiny red ego booster.
A while later I was rear ended and needed body work to straighten out the frame and the rest. After this the car was never the same and my feelings toward it changed – It became just another used car to me.
After this experience I never again became emotionally attached to fancy cars and to this day, cars are just a mode of getting from here to there.
The real lesson for me here actually wasn’t about costs though it was important. The deeper lesson was the transient nature of happiness we obtain from material things. This lesson is as old as mankind, but it’s amazing how we’re constantly fooled into buying newer, bigger, fancier, shiny objects when we could be doing something smarter with the money.
As I said in the first sentence, i believe i was born frugal. This frugality isn’t extreme by any stretch, but I’ve always been rather insecure about it, as if there was something wrong with me. Should i not care about designer clothes, nice cars and a house as big as I can afford? After all, this is America !!
Imagine how relieved I was when I read the seminal book The Millionaire Next Door. The book was describing people like me !! The typical millionaire appears to be a hardworking, frugal, unentitled individual living next door in that average house driving that average domestic car. When observed in laboratory experiments, even the typical millionaire creature’s dietary habits were quite ordinary. When lavish food was placed in the same room, this creature opted for the simple sandwich. Entitlement is not in its nature.
The weathly in that book were not highly educated folk in high powered, high paying jobs with nice benefits. Most millionaires, as I discerned from the book, do not scheme to be rich, but are instead born to work hard, live frugally and save (rinse and repeat). They often run a small business where you can’t run from accountability.
So between nature and nurture, I tend to lean on nature as the primary causation for the formation of financially independent people. Financial tips and tricks go a long way, but you need the nature first. Certainly many of you will disagree.
I never cared about cars, and I can’t to this day identify models the way many people can. But my wife was different. As a poor college student working in a bookstore, she somehow managed to buy a used MGB roadster. She was quite proud of it. It was fun to drive, and we drove it across the country to CA then shipped it to Hawaii. But after several more years, the undercarriage was rusted out, and we sold it for $400. We should have charged more.
The power of disciplined saving and compounding.
When I was in college back in the mid 80’s, I worked part time for a local Marriott hotel on the night audit shift. I participated in their profit sharing plan (their version of a 401k at the time). When I graduated and left there, it was only a couple of thousand dollars, but it became the 1st amount in my rollover IRA. It’s in there somewhere, along with a couple of other rollover amounts over the years, but it got me started on the slow and steady path to good saving habits for retirement.
Smarter than me! It is so hard to imagine our older selves getting excited about those little bits of savings we kept at. But I sure do!
Well, well. Another linguist. I was, too, for 40 years. I came to mutual fund investing because of a book I happened across on the efficient markets theory, from which I drew the conclusion (rightly or wrongly) that there was no point in selling one security to buy another, since the securities I was interested in were probably fairly priced. That is, I don’t trade. It has worked very well for me. I buy and hold forever.
Sounds like a great book.
I like using Arthur Okun’s “leaky bucket” metaphor to reach a similar conclusion, (even though his topic was income transfers). The more moving around, the more leaks and splashes. The many costs of trading (including information asymmetry) are greater than zero. It’s hard enough to invest and earn.
I have never regretted determining my graduate school major by asking, “where are people having the most fun?”
Another linguist here! Finished my doctorate in applied linguistics in 1991. Still working as a professor.
I like the author’s quote:
Until an investor has experienced the miserable feeling that comes when market values keep falling month-after-month… Until you live through it and you KEEP INVESTING ANYWAY… you won’t be able to fully appreciate that simile.
The article doesn’t say it explicitly, but I will. When the market eventually recovered, the mutual fund shares that the author had bought while prices were low (and falling), began growing. And that’s one of the fundamental goals… Buy Low..
“…live through it and you KEEP INVESTING ANYWAY…”
Yep. That’s the “miserable feeling.”
Glad I stuck with it!
We have somewhat similar investment histories. I cashed in about $6,000 in retirement savings to help fund graduate school in the mid-80s. After graduation, I followed the HR manager’s advice and chose a 50/50 stock/bond allocation that I stuck with until the meltdown in 2008, which cause me to panic and sell most of my equities because I planned on retiring within 10 years. Fortunately, I also immediately began reading investment books, including Jonathan’s, which convinced me to put my money back in equities a couple of months later. My wife and I also maxed out our 403(b) plans for the last 10 years we worked. Frugality, NYC real estate, and working until 70 also put us in good shape when we retired two years ago.
I funded my first quarter of grad school in 1965 by working for the Ohio state highway department in the Fall of 1964 filling road cracks with tar and riding on a snow plow talking with the driver to keep him awake. (They wouldn’t let me drive.) From then, I existed on assistantships in grad school. My first investment came in 1972, which I split between no-load mutual stock funds and dividend paying utility stocks,
Your story has a happier ending than many who gave up on the market in 2008, because you were able to learn that it might not be a good idea and had the courage to put the money back in.
Well done, you!
Starting with $2000/yr IRA contributions 30 years ago or so, my balance today is a mind blowing amount when remembering how small the contributions were. Only now do I know real investing is all about contributing on a regular basis and forgetting about it. I mean how much simpler can it get?
One magical term I learned when I was young was “fiduciary”. That is, many firms with funds for long term savings are relatively safe places to put them. Once you start, forgetting about contributions can make for a fun surprise when you go back and look.
I agree that younger investors should tilt more heavily towards stocks. If you have a 30+ year time horizon, live well below your means, and have an emergency fund, what’s the point in holding a bunch of bonds? I’m planning on staying close to 100% in equities until I’m in my late 40s.
Even in your 40s your time horizon is 40 years, maybe more. Your life expectancy will be in the 80s, and if you have a spouse the odds one of you outlives life expectancy is high. Then you might leave something to your kids. You’ll want to have enough bonds to draw on in down years, but you’ll still need plenty of the portfolio in stocks.
I never could get to 100% stocks. A little timid. However, I would often deliberately decide to skip rebalancing, and that nudged my portfolio toward more equities over time, due to stronger average earnings for stocks. Helped build risk tolerance, too.
Living well below your means, and having an emergency fund, two excellent habits.