First I’ll explain a little bit about what happened with my money. The year was 2008 and I had been working hard to save all that I could in preparation for transferring to a university after completing my associates degree. It was my goal to save enough while working full time during community college that I would be able to pay for as much of my living expenses as possible from savings after I transferred. I assumed that a university would be much harder than community college and wanted to not have to work once I began so that I could focus on getting the best grades that I could. All of the adults in my life at the time told me that a mutual fund was the way to go. This was the best way to get decent returns on my money without much risk because the capital is diversified across multiple individual stocks. The stock market was a great choice, they assured me, because it had been going up steadily for several years. Everyone was making money in the stock market and it would continue for a long time (warning sign). I was intimidated by the whole process but was eager to have my money working for me, so I agreed that I would meet with an advisor and put my money in a mutual fund.
The first couple of months that my money was invested, it was steadily increasing, and I was kicking myself for having let the money that I had accumulated sit in a checking account for so long, basically doing nothing. I even began to add to the amount in $1,000 increments as I was able. Then, all of a sudden, I logged into my account one day after about a week of not checking it, and to my horror, the number was down about $1,500. I panicked and called my mom. Who else do you turn to in a time like that? She assured me that this was normal and that I should leave the money alone and it would eventually rebound. This eased my mind, but I was still very concerned. Over the next several months, the account did not rebound, it got much worse. After about nine months, I decided enough was enough. I called the advisor and demanded that the mutual fund be cashed in. Since the advisor that I chose didn’t really care about my well-being, he didn’t try to deter me and help me to make a more rational decision. I ended up with about $6,500 of the original $12,000. My two biggest mistakes that I made in this situation were that I was not selective about the advisor that I chose and also that I had no idea about the inner workings of mutual funds or the stock market in general. At the time of this writing, had I left the money alone and never taken it out of the mutual fund, I would have over $20,000. The stock market did rebound and it rebounded to a huge degree, but I was in it for the short term and not looking at the bigger picture. After losing so much money, I was determined to never invest in the stock market again. Luckily, since then I have had a lot of time to learn about finance and investing, and I am able to recognize the mistakes that I made.
Any investments made into the stock market have to be focused on the long term. No one can accurately predict the daily, weekly, or monthly fluctuations of the market, but we know for sure that historically, over time, the market has increased at an average rate of 8-10% a year. Any money that you invest should be money that you will not need to touch for at least 5 years, but more likely closer to 10 or more years. For most people this means retirement savings or college savings for their children. There are other places that you can put money that you will need in the shorter term (<5 years) and those include CDs, money market accounts, savings accounts, and short term bonds. At any point in time, it is possible that the market can drop by 50% and you will lose a significant amount of money but until you take the money out, this loss is unrealized and could always return to the baseline or higher in the future. Once you take the money out, it is a realized loss and there is no chance of recovery. Come up with a financial plan, a good adviser could be of great value here, and stick to the plan no matter what is happening with the market. Your adviser should be the person that you turn to in times of uncertainty and fear… not your mother. Don’t let fear push you into making the same mistake that I did. I was very unlucky in the timing of when I first put money in the stock market but it proved to be a valuable learning experience for me.
Have you made any similar mistakes with your investments? Thanks for reading, any comments or feedback is appreciated!
Fifth Wheel Physical Therapist 
This is a great post. I don’t know if you have heard of Dave Ramsey, but I started following his “baby steps” and am seeing a huge return on my dollars. Not as much with investing, but paying down “stupid debt”. I like how you touched on realized losses, but when I try to explain this to people, I have to slow down a ton because the simple concept is not so simple. Awesome post.
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I’ve read a couple of Dave Ramsey’s books and he has been a huge blessing for the general population. Getting rid of high interest rate debt is always going to be the best investment. I always find it very difficult to discuss personal finance with most people because they just can’t understand the basic concepts or don’t even want to try to learn.
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My high schools Personal Finance teacher is OBSESSED with Dave Ramsey, but I can definitely understand why!
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Good story–thanks for sharing! I’ve only been investing for around a year, but have read enough Boglehead propaganda (and am lazy enough) to know that “buy and hold” is the way to go. Plus, it makes tax time way easier!
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Bogleheads forum is a great place to learn. I’ve read quite a bit there as well. This year will be my first time with actual investments earning money so I’m a little nervous about tax time but I think I’ll be able to figure it out.
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Thanks for sharing that! A very cautionary tale about personal finances. Overreaction to market events is definitely hurting investors, both getting into the market at the peak, for fear of missing out, and getting out at the bottom of the market, for fear of the end of the world.
My personal recipe for avoiding this is to never even try to time the market. Keep low cash reserves, invest new savings automatically in the market, don’t withdraw anything in response to a market drop. Use a drop for tax loss harvesting and Roth conversions.
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I like your recipe and agree completely. I am still learning about tax loss harvesting and Roth conversions so it’s a little confusing to me right now but hopefully I’ll be able to take advantage of these things as well in the future.
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Warren Buffet once said “If you don’t sell, than you haven’t lost anything yet”. When the market dropped like a stone back in 2008, we also watched our balance plummet, but we decided to brave the storm and put more money INTO the market. Well, years later we have more than tripled our initial investment.
We believe that if you pick a good, low cost index fund like Vanguard and hold tight you will be rewarded. We like index funds because they are already diversified and it takes a lot of the guess work out of the equation. 🙂
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I have learned my lesson and now base my investng strategy on index funds as well. I wish I would have been a little older in 2008 so I could have taken advantage of that awesome sale!
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Touché here, my friend! To have been older and wiser would’ve been an excellent recipe for financial gain. No worries though; it’ll happen again…and in some sick way, I’m actually looking forward to it! I just pray that we have a nice fat cash reserve (and zero debt! ) to take advantage of the next Blue Light Special! LOL! 🙂
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Well, at least $5500 is a relatively cheap lesson, particularly if it has taught you that buy and hold is the way to go, and that your mother is probably not the best place to turn for financial advice. Actually, I would say that it is almost impossible to find a good financial advisor, especially when you only have $12,000 to invest. It is much better to just read a few books and learn the stuff on your own. There are plenty fo good basic books on mutual funds that will teach you all you need to know.
I learned a $30,000 lesson in college not to try to time the market through buying call and put options. The weird, thing, I had only planned to risk $15,000 but somehow lost more than my plan.
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Wow, I’ve never really spent much time learning about options trading but it seems fairly complicated and risky. $30,000 is quite a bit of money to lose while in college, I’m sure that was a tough lesson. I like to read and learn about value investing though.
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While the $5,500 loss had to have hurt at the time, you learned a valuable lesson that many people pay much, much more to learn (as smallivy pointed out). And, you shared the lesson so that others can learn from your mistake for free. Well done.
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it’s pretty scary how many people get in to the market with absolutely zero knowledge and it’s even scarier how many investment professionals don’t have anyone’s best interest in mind.
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Yes it is! The financial industry is not the most moral it seems.
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I think investing is as much psychological and it is anything else-unfortunately it seems like it often takes an expensive lesson to learn. I had an $8,000 lesson around the same time with micro caps involved in the mining industry. I have been successfully value investing ever since. Long live Ben Graham!
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I agree, the psychological aspect is huge. I’ve been very interested in value investing over the past year and actually set up a fake brokerage account to see how I could do with it. Over the past 10 months, I turned $100,000 into $161,000… Too bad it was fake money. In that same period of time the market has gone up quite a bit so I’m nervous that my picks were just beginners luck combined with a market rally and therefore have still not bought any real value stocks. How have your returns been?
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Wow! Yeah too bad, what kind of stocks did you have? I’m building a dividend growth portfolio at the moment hovering around 5% unrealized gains excluding dividends. Nothing to write home about but am working toward providing myself a sizable retirement income in 30-40 years. I recently graduated from college and unfortunately have a lot of student debt/not a lot of capital to grow. I think a downturn is inevitable at some point. But, with companies paying reliable dividends I’ll hopefully keep getting paid even if there are hard times. A buy and hold strategy should also reduce the desire to exit if things eventually fall apart. It will be interesting to see how new U.S. policies affect the markets in 2017. If you end up taking the plunge, I would love to hear about your strategy and results!
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I was looking at only large cap stocks that I determined to be undervalued based on P/E ratio and EV/EBITA. I also made sure that they had decent looking balance sheets and debt that was under control if possible. I invested $20,000 of that fake money into HPQ at $9.36/share and it is now $15.14/share. The rest of the money was divided between another 8 stocks that were similar and most had very good returns. I think I was just lucky in my picks and timing though. I like the idea of dividend stocks but I believe that you are right about a downturn soon. I have felt that way since the beginning of the year when the Shiller PE was around 27 but now it’s even higher. I actually stopped adding additional money to equities at the beginning of the year and have been stockpiling money since then. I’m feeling a little dumb about that decision right now but we’ll see what it looks like next year at this time. I hear you on the loans. I graduated a year and a half ago and have around $100k in student loans as well.
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I am in the same boat as you guys with the student loans, but I was looking to start investing in the stock market with the little I have. I keep reading stories like this that scare me, though. Hopefully I can find a good advisor.
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In my opinion, an advisor is not needed to start out. There is so much information on the internet to get you started. Index Funds are a safer alternative to choosing individual stocks with less fees than mutual funds. Check out the Bogleheads forum or the book “Bogleheads guide to investing” for some great advice.
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This article is a good help to me since I am also considering to invest in stock market. Now I know one of the donts in this option. Thanks for sharing.
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