One of the reasons I started to manage my own monies is because after about 10 years of following conventional investing wisdom I had nothing to show for it. Before I get into the details of what happened let me give you a little bit of background about myself.
I grew up in Malta and my parents were very conservative when in came to financial choices. We did not have a lot of money but we did not have any debts whatsoever. We lived within our means and we only bought and did things that we could afford to pay for upfront. My parents even had enough money saved to build a house as they married later on in life. I never knew what a mortgage was or that I needed to save for retirement. I thought when you finish working you get a pension and you are set for the rest of your life.
Saving for Retirement
In my early twenties I immigrated to Canada where I completed my graduate education and then got a job in the oil and gas industry. One evening my colleague invited me to go with him to a talk by “The Wealthy Barber”. It was a packed house. I remember my colleague nodding in agreement as the guy spoke. I did not know it at the time but “The Wealthy Barber”, David Chilton, is a financial advisor and his message, as I remember it, was in line with conventional financial wisdom. Save 10% of your monthly income and you too can be like the wealthy barber.
The next day we continued the conversation at the office and my boss referred me to a small investment firm that he had a long standing relationship with. I was a diligent student eager to learn from my elders and I embarked on the 10% plan with this small investment firm. I was given a questionnaire to assess my risk tolerance and as it turned out that I was young enough and willing to take some risk I should start investing in the stock market through various mutual funds. ETFs were not yet popular at that time. I was also told that I should expect to make about 10% return per year.
Trusting the Conventional Wisdom
Well, a year or so go by and my investments have lost a significant amount of money. In addition my personal financial advisor has moved on to another job in another city and my monies are on autopilot. I decided to leave those monies there as I did not have much, but opened an account with a major bank and started putting my monthly contributions with them.
A year or so later I accepted a transfer to Houston, Texas. While in Houston I opened new accounts with two big national US based investment firms in Houston. Each time I was given a questionnaire to assess my risk tolerance and determine my portfolio allocation accordingly. I continued to make monthly contributions to these new accounts and I also put in any extra monies I had from time to time.
Four years or so later my sojourn in Houston came to an end and I found my way back to Canada. As I settled into life back in Canada, I continued with the recommended investment plan saving 10% a month and also adding additional monies from time to time as they became available.
Over the years my life circumstances had changed. When I started investing I was a single guy who rented an apartment and worked at a corporate job. I was now married, owned my own house and ran my own business. So how was my investment plan turning out?
Despite my disciplined effort and commitment to regular investing, things were not looking very good. In fact, I had less money than I had put in. Significantly less.
As it turns out when I started investing, right after my visit with the wealthy barber, it was 1998. Two years later the dot com bubble happened and the markets crashed hard for a couple of years. The markets then took the next 5 years or so to get back to their previous values. Just when things were looking on the up and up again, there comes the biggest financial crisis in recent history triggered by the housing market crash which brought the market all the way down to levels it had not touched some 13 years earlier, in 1996.
As it turns out I had had the misfortune of embarking on my investing journey right at the start of the Lost Decade! For the first time in its history, the market had gone nowhere over a period of 13 years.
At face value this just seems like bad luck or bad timing. However there were lessons to be learnt here. As they say, you learn more from your losses than you do from you wins. So what did I learn from all of this? The main points can be summarized as follows.
- Whether you invest your monies with a small company or one of the large banks the business model seems to be the same. They have various analysts within that company that give their opinions of what the market is going to do and/or make recommendations of where people should be putting their monies. The financial advisor chooses to follow his or her favorite analysts and allocates his clients money according to those analyst’s recommendations and the client’s risk profile. If the best guys on Wall St from George Soros to Bill Gross can’t predict what the market is going to do how can these analysts do any better?
- As every piece of financial literature properly disclaims, past performance is not indicative of future results. Sure, maybe the market did generate average annual returns of 10% or more over the past 20 years. But there is no guarantee that it is going to do the same over the next twenty years. The problem is that in 20 years I will be 20 years older and if my money has not grown over that time my retirement plans are going to be in trouble. As Nobel prize winning economist Robert Shiller aptly put it: “Can you live on 10% of your current income? If the market generates 0% returns then that’s what you’re going to have.” ( I once saw a video on Yahoo Finance where he discusses this in detail. Unfortunately I can no longer find the link to it. If you do find it, please send it to me.)
This experience led me to wanting to take charge of my own investments and so I started reading and learning as much as I could. The logical place to start is to have a closer look at the historical performance of the stock market. My bad timing aside, as I discuss in the post Past Performance is No Guarantee of Future Returns, it turns out that the claimed 10% return of the stock market is not a sure thing.