My Wild, Wild Life in the Stock Market (Part I)

I’ve been investing in the stock market for over 20 years.  That participation has been through my deferred compensation program at work.

The provider I selected, T. Rowe Price, is a well know investment firm but I did not have access to all its investment options.  Nevertheless, there were numerous mutual funds of various types to select from based on my investment preferences.  These included large cap(italization), mid cap and small cap funds.

Or, I could invest in sector specific funds, such as health or telecommunications. I could also focus on capital appreciation, dividend growth or other “objective” funds.  (I couldn’t find the “make obscene money fast” fund, which is a lot of folks’ objective.)

If I wanted to be conservative, I could select from various bond funds.  I could also “leave the country” by investing in an “international” stock fund.

And if I wanted to leave the work to T. Rowe Price, they had a number of “retirement” funds.  All I had to do was select a target year for when I’d be drawing the funds and they would establish a “correct” balance of stock and bond investments based on the premise that you can take more risks the further out you are but need to be more conservative as you get closer to retirement.

I selected an “aggressive” approach but for “safety” I did spread myself out.  I’m in large, mid and small cap funds.  I’m in the telecommunications and health sector funds.  I’m in “dividend growth” and “capital appreciation.”

What I am not in are the “conservative” investments.  Even though I’m now retired, I do not plan to draw from my account for at least another eight years (when I ‘m 70 and required to begin taking minimum distributions) and I want to maximize my investments before then.

When the stock market got whacked back in 2008, my investments took a huge hit. The value of my funds dropped about 45%.  Although I did stop investing, I did not sell.  That’s a losing proposition because selling when the market is going down transforms a paper “unrealized” loss into an actual “realized” loss.

I had no doubt the market would come back and so I decided to save my investment money for when I felt the market was bottoming out.  For me, that was when the Dow hit 7,500 in mid-February 2009 (although it did drop about another 1,000 points over the next month before beginning its march back).  Not only did I start investing again, but I doubled the amount I was deferring to “catch up” from when I had not invested.

It’s been said that the stock market’s prime directive is “buy low, sell high.”  A corollary of “buy low” is “dollar cost averaging.”  If I buy a stock for $100 and it drops to $80, then I should buy again if I have any confidence in that stock (or why did I buy it to begin with?).  Assuming I buy the same number of shares as originally, what has happened? My average cost has now dropped from $100 to $90. So if the stock goes up to $90, I’ve broken even; and if it goes back to $100, then I’m ahead.

That’s why when the stock market drops, it’s not a time for hand wringing (unless you are selling as a form of income).  What you have is a sale.  And when the Dow was at 7,500, it was a super mega clearance sale… Buy, buy, buy!

And in fact, we know what happened.  Although the market has been volatile the last few months, the Dow has often been over 15,000.  By investing big when the Dow was at 7,500, I lowered my average cost and so was able to ride up with the recovery and not only regain my losses but come out ahead. The folks who sold or did nothing out of fear made a mistake from which they cannot recover. They missed a stock sale of historic proportions.

Dow Jones History 2008 - 2013

Dow Jones Industrial Average History 2008 – 2013

As an example, my IRA is entirely invested in the Vice fund, which invests only in gaming, tobacco, alcohol and defense stocks.  Unlike my deferred comp account, which always purchased on the last working day of each month (when I was paid), I could buy for my IRA whenever I wanted to.  And I always bought when the price dropped so I could keep that average cost as low as possible.

My faith in the fund has been rewarded.  In March 2009, you could buy into the Vice fund for $10.86 a share.  Last Friday, the price was… $25.98 a share.  Over the last 10 years, its value has increased an average of 15% each year.  In the one year ending August 2013, its value increased 26%.  Ka-ching!

As another example, in January 2008 my deferred compensation’s “growth” fund was $30.16 a share.  In January 2009, when the recession was still deep, its price had dropped to $18.72,  a shocking 38% drop in value.  But only a “paper” loss as long as I did not sell.

I held on and  bought more beginning in March of that year since it was now such a bargain.  In January of this year,  its price was… $38.92.  That’s about $9 higher than in January 2008 and over double the value in January 2009.   Last Friday, it’s price was…$45.11   Ka-ching!

These experiences with my deferred comp account and IRA were to factor large in what was to come….

Now that I’m retired, there’s a big limitation with my deferred compensation participation in the stock market: I have no “compensation” to defer.  All I can do now is “rebalance”…sell some shares from one or more funds and use the proceeds to invest in other funds.  But no “new” money can come into the account.

I had another investment problem.  Before the recession, I had invested much of my savings into laddered CDs with one year maturities.  But as the recession deepened and interest rates dropped, I did not renew and just let the money go back into my savings account where it earned almost nothing.  I had hoped that interest rates would come back but after five years they are still at almost nothing.

Last year, I decided I needed to put some of that money into an investment that would be fairly secure and earn something more than almost nothing.  I settled on state and municipal bonds.  I might only get 2.5 to 3 percent interest but at least it’d be federal income tax free (there is no Florida income tax) and fairly secure, especially if I invested in a mutual fund which owned a variety of these bonds.

After some research, I settled on a T. Rowe Price short and intermediate term bond fund.  I planned to open up a brokerage account with Scottrade, which generally charges just $7 for a stock purchase and $14 for a mutual fund.

But before I could do that, I received a call from my bank’s branch manager. They too had noticed that I had a large sum sitting in savings and earning almost nothing.  Would I be interested in coming in and talking with their financial advisor about investing some of that money in a more profitable manner?  No harm in talking, so I accepted.

The advisor began asking a lot of questions about my financial situation and goals.  I quickly put a stop to that by explaining that I was already planning on investing in state and municipal bonds and that it would cost me about $14 through Scottrade.  What did the bank have to offer and at what cost?

She advised that because of the way they were tied into a certain investment firm, going with the T. Rowe Price funds I wanted would cost $30.  But, they did have another firm’s fund that was “no fee” if I held it for at least a year. Although it was not rated as high as T. Rowe Price’s fund, the interest rates were close enough and I decided to invest an exploratory amount.

At the end of the one year, my investment had earned an underwhelming 0.009 percent interest, significantly lower than the minimum 2 percent I had expected.  I decided that bonds were not a good enough return on investment and cashed out.

I returned to my original plan to open a Scottrade account.  But I would use it for the stock market, not bonds.  I would put a third of my savings into the account.  If I was doing well after six months, then I would increase the account to half my savings.

Next week:  My 100-day roller coaster ride in the stock market.


3 responses to “My Wild, Wild Life in the Stock Market (Part I)

  1. Well you have a plan and that’s half the battle. Everyone has a level of risk they are comfortable with, I find mine is directly proportional to my age. I have become much more conservative in my portfolio than I was in the 90’s before the bust, and the recession. Then I felt I was a really smart guy, everything came up roses. Now, less so.

    Couple of things to offer. Now I am just as concerned with income generation as I am with value growth. No need to die with it all in the bank. So I seek dividends on everything I buy, whether individual stock or mutual funds there are many that pay between 3 & 7% dividends while they grow. If they don’t, I pass. Recently I shifted from 85% funds to 60% with the remainder in individual stocks (all paying dividends) in the energy, life sciences, technology and agri/food sectors. I am particularly enamored with Canadian Pipelines. Their dividends are subject to a 15% pre-award tax but it;s deductible.

    Also I qualified for a mortgage re-fi which cut 4% off my rate with zero closing costs. So I am paying less monthly and for the remainder of the note. We have been in the house now for 20 years and as property values continue their comeback, real estate becomes a larger piece of the total strategy.

    Also I suggest a solid life expectancy assessment is in order for every retiree. Not a subjective one based on what you think but rather based on current medical testing including comprehensive stress test, colonoscopy, and detailed bloodwork. Life expectancy is just as much a factor for me as market trends.

    • My deferred account is the “biggie” and that is 100% in funds since I don’t have the option for stocks. Now that I’m investing savings, I am interested in dividend-paying stocks.

      I have a physical every year, with bloodwork, and so far so good. Doctor said I will not die of heart disease because cholesterol is excellent. Stress test was fine too. Colonoscopy in 2005 turned up zilch, so next one is 2015.

      I’ve rarely been sick most of my life but of course with age things happen. My concern is the idiot drivers on the road….!

      As for the house, that is now paid for. I had about $3,000 left and decided to pay it off. Got the satisfaction paperwork last week.

      I see the Dow went up nicely, but one of my stocks is hurting and dragging my overall value down. Details Sunday!

  2. Live long and prosper:)

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