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.
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.