Shownotes
TRAILER
Welcome to episode 77 of the One for the Money podcast. Happy New Year as well as this episode is airing on Jan 1st, 2025. Crazy how time flies. I am both glad and grateful you have taken the time to listen. In this episode, I’ll share the biggest lessons I have learned in over 25 years as an investor.
In the tips, tricks, and strategies portion, I will share a tip regarding setting financial goals.
In this episode...
- The Importance of Starting Early [3:27]
- The Power of Paying Yourself First [4:19]
- Market Timing is a Fool’s Errand [5:36]
- The Need for Proper Planning & Tax Strategy [8:02]
- Spending While You Are Healthy [12:11]
MAIN
I’ve been investing in the stock market for a little more than 25 years and I’ve learned a lot about investing and building wealth during that time so I thought it might be helpful for me to share the biggest lessons I’ve learned at my silver jubilee investing anniversary.
But first, I should share that I was introduced to the stock market by accident. I was told by a university guidance counselor that graduate schools and future employers expected those they accepted to be well-read and that one should read the paper every day. After that guidance every day I would grab our local paper and read the current events in the world which would feature such things as natural disasters, politics, wars, etc. I would then skip over the business section to review the sports section. However, as I turned the pages on the business section I often wondered what all of these abbreviations and numbers represented. I learned later that these represented companies that the general public could invest into. Well, one day the newspaper advertised a free investing seminar at the public library in the city closest to my small town. I attended the presentation and it was incredibly interesting. The gentleman who presented spoke of one Warren Buffett and how the stock market was the way to build wealth. At the time of this investing seminar, Warren Buffet’s company Berkshire Hathaway had a stock price of a whopping ~$60,000 per share. If you think that’s amazing today a single share of Berkshire Hathaway stock is over $700,000.
A short time after I was introduced to investing, it seemed the rest of America became interested due to the dot com era. At the time the World Wide Web was a new phenomenon and the stock market rocketed higher. The stock market eventually crashed down to earth, but despite the volatility, I became very interested in investing.
These experiences started my journey into investing and here a little over 25 years later are the biggest lessons I have learned about investing and building wealth.
The first lesson I’ve learned in my 25 years is that little actions have massive consequences when given time. In other words, it is WAY more important to start investing than the actual amount you have to invest. Every little dollar can grow to mind-boggling sums given time. One of the best examples I share with clients is that of an apple seed. It’s hard to conceive that this tiny little seed could grow into a large tree that could produce thousands of apples, and yet that’s exactly what it can do, of course, given the critical ingredient of time. But your wealth can’t grow if you don’t plant the seeds to start with.
As the old proverb goes - The best time to plant a tree was 20 years ago; the second best time is now. As you get older you usually can make more money but you can never get more time!
The second lesson I’ve learned in my 25 years is understanding how paying yourself first makes all the difference. As Warren Buffett said so well “Do not save what is left after spending; spend what is left after saving.” People who know how to manage their cash flow have the best life in the future. They have more freedom, more experiences, and way less stress. As a certified financial planner, I’ve seen this firsthand. I’ve met with 50 and 60-year-olds who have accumulated millions and are excited about retirement but I’ve also met 50 and 60-year-olds who have minimal to no net worth and are scared of what the future holds. These are sobering meetings when I tell them that they have to work for way more years than they want to and their retirement will still be challenging. My heart aches for them. It’s the reason, I teach financial literacy classes in the community and why I teach financial literacy to the teenagers and young adults of my clients. Just doing for them what I wished was done for me. I like to remind people that you will turn 65 regardless of what planning you put in place.
The good news is that many already pay themselves first with their automatic contributions to their 401ks, IRAs, and HSAs.
The third lesson I’ve learned in my 25 years is an investor is that no one can accurately predict the future and despite such an obvious statement, we continue to digest the predictions about the economy, the stock market, or even who will win the Super Bowl for American Football fans or the Champions League for those European football fans.
And yet many investors try to time the market based on certain predictions. The famous investor Peter Lynch explained the fools errand of market timing best when he said- “More people lost money waiting for corrections and anticipating corrections than the actual corrections.”
Another great quote regarding predictions is from Warren Buffet when he said “We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, we continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
In a fabulous and equally free resource from JP Morgan entitled Guide to Retirement, it highlights the perils of trying to time the market and why it doesn’t work. The guide uses a 20-year investment period for the S&P 500, from Jan 1, 20004 to December 31, 2023. During that time there were over 5000 trading days. And if you were invested for all 5000+ days a $10,000 dollar investment in the S&P500 would have grown to over $63,000. But if you would have missed just ten of the best days of those 5000+ days. Your investments would have only grown to just over $29,000 instead of over 63,000. In other words, if you were invested for 99.8% of the days your investments would be 54% less. If you had missed just the 20 best days of approximately 5000 trading days, your investments would have only grown to just over $17,000. Too many people believe they can time the market and know when to sell and when to buy, but it’s impossible. Here is why seven of the 10 best days occurred within two weeks of the 10 worst days and Six of the seven best days occurred after the worst days.
This leads to the fourth lesson I’ve learned in my 25 years is an investor. Which is fear is not your friend. As the famous investment Advisor Nick Murray has said so well "All successful investing is goal-focused and planning driven. All failed investing is market-focused and performance-driven.”All successful investors are continuously acting on a plan. All failed investors are continually reacting to the markets. Everything else is commentary.”
The reason why planning-driven investing is so important is because it takes the emotions out of investing. Those emotions can have a huge impact. Nick Murray also said, “Wealth isn’t primarily determined by investment performance, but by investor behavior.” How true that is I know this from personal experience when very early in my time as an investor, I purchased a stock that then dropped 50%. I sold out only for the stock since that time to increased over 7,900%. that’s right, instead of selling I should have bought more and enjoyed a nearly 8 thousand percent gain. For more details on this painful lesson see episode 18 of this podcast entitled, When Life Gives You Lemons, Stay Invested.
Another fairly recent example, was during the Covid correction. Fidelity who manages over $4 trillion said that one third of their investors over 65 got out of the market during that correction. Since that time the market is up over 137%.
The fifth lesson I’ve learned in my 25 years as an investor is that no one has their stuff together. Almost everyone needs help when it comes to investing. I was a do-it-yourselfer myself before I became a financial advisor but now that I have been investing for over 25 years and have been a financial planner for nearly 10. I’ve realized that no one is coming close to optimizing their investments. I’ve seen literally hundreds of portfolios and most were not in alignment with the clients' goals. Here are just a few examples:
- During downturns in the stock market, I’ve kept clients in the market. This increased their returns by hundreds of thousands
- I have had numerous clients with hundreds of thousands and in some cases millions of dollars sitting in cash at the bank making hardly any interest but investing these funds I’ve been able to help them earn tens to hundreds o thousands more than they would have.
- So many clients had the wrong allocations in their portfolios, too much allocated to a single company, or a single sector (technology for example) or a single country (the US) or in the wrong size (too much small cap or too much large cap)
- Too many clients weren’t pursuing the right type of retirement plans. Instead of saving $50-60,000 on a pre-tax basis, I’ve helped clients save hundreds of thousands on a pre-tax basis through Cash balance retirement plans.
Another example leads to the sixth lesson I’ve learned in my 25 years as an investor and that is taxes matter. It’s imperative that people implement strategies to reduce taxes because otherwise, they end up giving WAY more to the government instead. My clients do a way better job of spending their money than the government. You must pay taxes, but there’s no law that say’s you gotta leave a tip. Or as Judge Hand said so well “In America there are two tax systems; one for the informed and one for the uninformed. Both are legal.”
That’s why investors need to pursue Roth IRAs, Roth 401ks, Roth Conversions, Pre-Tax IRAs, Regular 401ks, Cash Balance Plans, 529 plans, and Health Savings accounts and pursue these when the time is right. In addition, they need to consider gifting strategies and tax loss harvesting just to name a few more.
I could share many other lessons but I leave with one last lesson I’ve learned in my 25 years as an investor and that lesson that the primary purpose for investing is so we can spend later, and yet far too many struggle with making that switch from saving to spending. For my clients that have struggled with this concept I’ve given them the book called Die with Zero which is written by Bill Perkins. One of the most significant learnings for me from the book was his explanation regarding the intersection of time, money, and health and how too many worked too long to the point where they had plenty of time and money but didn’t have the health to truly enjoy it. He argued that people should be spending more money when their health is better. More money to be spent in the 40s 50s and 60s than after 65 during the typical retirement.
I often tell clients that there are two significant risks in retirement. The first is running out of money and the second is dying with too much. So many are fixated on the first risk, that the vast majority succumb to the second. Research has shown that 84% of retirees have MORE money in their account at the end of retirement than they started with and 66% of retirees over a 30-year retirement will have 2 TIMES MORE money at the end than what they started with using traditional spending amounts. Ultimately Your life is a sum of your experiences and so to maximize your life you need to maximize your experiences. Memories are an investment in our future selves. Buying an experience just doesn’t buy you the experience itself–it also buys you the sum of all the dividends that experience will bring for the rest of your life.
What many fail to understand is that you need to have a plan to spend your money just as much as you need a plan to build the wealth you have to spend. 3 people will spend your retirement money: You, Your beneficiaries or The Government. We employ a dynamic distribution strategy that makes adjustments based on the stock market. Consequently clients get to spend as much as 62% more than they would under traditional distribution strategies.
I’ve invested now for over 25 years and the blessings I have received from attending that first investment seminar nearly 26 years ago are nothing short of remarkable. That one investment presentation sparked an interest that led to me to max out Roth IRAs for my wife and I, max out my 401k, start 529s for my boys and ultimately establish a company that enables me to help others make the most of their money. This has taught me some of the most valuable lessons I’ve learned from the importance of getting started, paying yourself first, not trying to predict market movement, not succumbing to fear, why tax planning is critical, and ensuring one plan so they can spend on the things that matter most.
TIPS, TRICKS AND STRATEGIES
Welcome to the tips, tricks, and strategies portion of the podcast where I will share a tip regarding setting financial goals. This podcast airs on January 1st when we typically make resolutions for the new year. Interestingly, the month of January is named after the Roman God Janus who is the God of beginnings and endings and as such is usually depicted as having two faces. One facing forward and one facing backward. This is a great analogy for our financial goals. We should look back at 2024, see what we did well, look forward to 2025, and make improvements. Personally, I plan to automate the savings into my kids' Roth IRA accounts. I also plan to establish a sole proprietorship to pay my kids to eliminate certain taxes. I’m also finalizing vacation plans for 2025 and 2026.
References
