How I made $0 in the stock market.
9 March 2017
Today, March 9th, is the anniversary of when I lost 12 years worth of savings growth. Not just me but most people my age or older. For those of you who don't pay attention to the stock market, don't save for retirement, or are under the age of 40, I'll start at the beginning. Well, my beginning.
I graduated college in 1993 and immediately got a great job as a computer programmer in Silicon Valley. In hindsight, I'd say this was perfect timing for riding the explosive growth of computers and the Internet. I had the very fortunate coincidence of being in the right place at the right time with the right set of skills. I had a great career, I worked hard, I saved hard, and I managed to accumulate a sizable stack of pennies. Lucky me.
Being young and full of hubris, I figured I could turn my stack of pennies into a much larger stack by investing in the stock market. This was the early days of the Internet, way before things like Google or online trading existed. In order to buy stocks, I had to walk into a brokerage firm and speak with someone in person. Since I was young, they handed me off to their most junior adviser. I didn't care, I knew exactly what I wanted, I wanted to invest my extra savings in this largely unknown company called Microsoft.
Back then, almost nobody had heard of Windows so I spent about an hour explaining the future of Microsoft to this "expert" financial adviser. I explained how Microsoft's new operating system was going to take over the world and how all I wanted to do was buy as much Microsoft stock as I could afford.
To this day I don't know how he did it but that financial adviser talked me out of Microsoft and instead convinced me to invest in their loaded mutual fund. As stupid as I feel about that mistake, it did teach me a valuable lesson. The lesson was *not* about trusting myself instead of experts, no, the lesson was that nobody, not me nor anyone else, can predict the future.
I only stayed in that mutual fund for a few months before I saw my mistake and fixed it. I never did put money into Microsoft, instead I spent the next decade dollar cost averaging into no-load index funds. Let me say that again because if you haven't heard it before, that's the best investment advice you'll ever hear:
In hindsight, it's easy to see that Microsoft would have been a great investment. What you have to remember is that there was no point along that journey where it was a sure thing. Is Microsoft still a great investment today? What about Apple, Google, Amazon, Tesla, Netflix, Citigroup, Alibaba, Bitcoin... or whatever your favorite company might be.
If you want to invest in stocks, not only do you have to predict the future of the company, you also have to predict what everyone else is going to think about that company. And we know how fickle public opinion can be. No thanks, I'll stick with dollar cost averaging.
So there I was, late-1990's, increasing my pile of pennies by dollar cost averaging into index funds. Then along came the dot-com bubble burst and I watched my nearly two million net worth shrink down to a half million. No sweat, a half million is nothing to complain about. I kept on doing what I did best, writing code and saving my pennies so I could retire before I turned 40.
Sure enough, in 2005 I quit my job and traded my cubicle for a coffee farm in Hawaii. It was a great decision. I probably could have timed things better but I had no idea what was going to happen next and neither did anybody else.
Historically, the stock market averages somewhere between 7% - 11%. Using those numbers, retirement advisers often quote 4% as a safe withdrawal rate. If you want to retire, you can use 4% (or maybe 3%) to predict how large your pile of pennies needs to be. For example, if you need $30,000 per year for living expenses, and you plan to live another 30 years, then you'll need about $750,000 in savings. Here's an online calculator with a better explanation and some colorful graphs.
Back in 2005, I did the math and felt that my pile of pennies was large enough that I no longer needed to sit in my cubicle every day. I was tired of working for the man. I knew the stock market would have ups and downs but the math said that my past decade of savings should continue to grow at a rate of nearly 7%. Having confidence in the U.S. economy and the power of compound interest, I decided to go for it and quit my job. Unfortunately, what the math didn't say is that the banks were playing a very dangerous game and the economy was about to fall apart. If you don't know what happened in 2008 then you have some reading to do. The short version is that it was bad, almost very, very bad.
9 March 2009, eight years ago today, is when the S&P 500 closed at its low point of 676.53. The last time it closed that low was all the way back in 1996. That's a span of nearly 12.5 years. Those 12.5 years happen to coincide with my high income generating years. In other words, instead of my retirement savings earning the historical 7% average, I earned a whopping 0% interest during that period. More than a decade's worth of market gains, gone. Thanks Wall Street.
I'm not saying that investing is a bad idea, or that a 4% withdrawal rate is too high, or that the market is about to crash again. Quite the contrary, I still firmly believe that dollar cost averaging is the best way to achieve the historical market average of 7% - 11%. Is the market close to another peak? I don't know and neither do you. We can guess, but it's only a guess.
I remember a day back in 1998 when I was having lunch with the company's CEO. Besides work, we were also talking about the economy. We had both just spent several years watching the stock market climb and climb and climb. I remember it being a big deal when the Dow broke 5000, then 8000, then 9000. Shortly after that it fell back below 8000. The CEO had pulled his money out at 9000 and I thought he was some kind of genius.
Look at the chart and try to predict what happened next. Did the CEO somehow manage to time the market peak? Was he smart to take his money out when he did? Not at all, he missed out on two more years of fantastic gains. The Dow quickly climbed back to 9000, through 10,000, then 11,000, and almost all the way up to 12,000. About a week ago it broke 21,000. There's no telling where it will be when you read this.
That's the problem with the stock market, nobody knows what it will do next. Past performance does not guarantee future results. If you're saving for retirement and someone tells you that a 3% withdrawal rate is safe, don't believe them. If someone says 4% is too dangerous, don't believe them either. You can look at what happened in the past but that doesn't mean it will be the same in the future. Just like there's no guarantee that you should buy or rent, or that you'll live to be 80, or that having kids is financially devastating.
Let me explain that last one. Yes, raising kids is expensive. It can also be extremely rewarding. Or not, depending on the parents and the kids. Beyond the emotional rewards, having kids was probably the best retirement investment I've ever made. The oldest is studying neuropsychology and the youngest is going into aerospace. I don't plan on needing my kids to take care of me when I get older but it sure is great knowing that they'll be there if necessary. Well, probably, but who knows what the future holds. Should I have put my money in the stock market instead of their college education? I don't know and neither do you. All we can do is make the best guess possible. I'm guessing that college tuition was the correct choice for us.
Anyways, happy anniversary everyone. It has been eight years since the 2008-2009 financial meltdown ended and we've been in a bull market since then. I'm not going to try to guess what the economy will do next because I'll probably be wrong. All I can do is be prepared for the worst and hope for the best. May we all see more upticks than downticks.