The beginning of a new year - actually, the end of an old year - is a good time to review your financial plan. You do have a financial plan, right?
Of course you do! Sorry, I guess I lost my head there for a moment.
Well, my financial plan is a lot simpler than yours, I'm sure. I own my own house, I have no dependents, I don't need to finance an education (my own or anyone else's), and I don't even have to worry about losing my job, since I don't have one.
I do need insurance, of course, to guard against any (hopefully, rare) catastrophic events. But other than that, my financial plan is basically an investment plan. So that's what I'm going to talk about,... assuming that any readers are still with me at this point.
I didn't have a detailed investment plan until I started planning to retire - I mean, seriously thinking of quitting my job. My goal was always to retire when I turned 55 - that was about five and a half years ago - but I wanted to be absolutely sure before handing in my resignation.
But honestly, a written plan would have made a lot of sense long before then. I see that now. A written plan, especially in a computer file, so you can easily review and revise it as time goes by (and keep track of those revisions), would have been really valuable earlier in my life. Oh, well. That's not the only mistake I've ever made!
I actually started investing in the stock market - in stocks - in the late 1970s, if I remember correctly. I had a full-service broker, which was mostly all there were back then (Charles Schwab began in 1975, but I didn't know that), and costs were very high, especially for a small investor like me.
My idea at the time was that, since I had little money to invest, I needed to make a killing. Otherwise, any kind of tame return wouldn't make any difference to my life at all. Well, that was the first of my investment mistakes, though far from the last.
I did very well at first. I was enthusiastic, and I regularly spent some time at the public library doing research. (These days, you can do that from the computer, but back then, it required a trip to the reference department to look through paper documents.)
So at first, I did great. Maybe that was just luck, maybe not. But I have a lot of interests, and my enthusiasms tend to come and go. When I stopped paying a lot of attention, and just started listening to my broker, I lost money like crazy.
I spent years like this. I'd get enthusiastic again, and start doing my own research, and I'd do well. Oh, the stock market would still go up and down, but I'd make money over time. But inevitably, something else would catch my attention, I'd stop paying attention to my stocks, and I'd lose big-time. After ten years, I had relatively little to show for my efforts.
That was my first, and maybe my most important lesson: know yourself. I find everything interesting, and I don't stick with anything for long. Frankly, it's been remarkable that I've stuck with this blog for almost two years now. You may be different, but if I was going to invest, I needed an investment that could run on autopilot when necessary.
So, about 1990, I started investing in no-load mutual funds. Mutual funds have some disadvantages, but they had some big advantages for me. (Please don't get the idea that I'm offering advice here, except the very basic idea of having a written plan in the first place - which, actually, I haven't really gotten to yet.)
Mutual funds probably weren't any easier to select than stocks, and it was at least as hard to know when to sell them, but I didn't have to watch them very closely. It was useful to check on them once a year or so, and to rebalance my holdings occasionally, but I didn't have to pay close attention. I still did, often enough. But there were other times when I got involved with other interests. (That's still the case.)
And I didn't need a broker to buy no-load mutual funds. I could buy them directly from the fund company with no sales charge. That was nice. Even better was that I could start investing with a ridiculously low amount of money.
At first, I started investing in funds which would waive their normal investment minimum if you set up an automatic investment of $50 a month. Yup, just $50 a month. Clearly, I was no Warren Buffett. :)
At $50 a month, it takes a long time to get anywhere. But in investing, time works for you (just the reverse of borrowing money, I'll point out). And I added to my holdings, sometimes adding new mutual funds, as my income increased.
I made a lot of mistakes. Well, they weren't always my mistakes. Sometimes, a mutual fund just wouldn't do what it claimed it was doing. Mutual funds, too, have investment plans. And I did a lot of research trying to find funds with an investing philosophy that seemed to make sense. Sometimes, I was wrong. But often enough, a fund wouldn't actually follow its own plan.
Well, that's how it seemed to me, anyway. And in those cases, I'm not sure if you can call it my mistake. That's something I've learned from my investment plan, too. Sometimes, you can do all the right things and still lose money. Of course, I did plenty of wrong things, myself, over the years. You have to expect that.
Today, I don't own any of those early funds I bought. In some cases, I sold them because I realized I'd made a mistake (and occasionally, it was probably a mistake to sell them). In other cases, I sold them for tax purposes. Investing in mutual funds doesn't get quite the favorable tax treatment as investing directly in stocks, but it's still far, far more favorable than if you actually have to work for a living.
Back then, of course, I did work for a living. And I used that income to invest in mutual funds. And I kept it up for years. That's where my first investment lesson really paid off. You don't actually have to make a killing in the stock market, because your earnings compound over time. You just have to have patience.
At first, especially when I was just investing $50 a month, it seemed like I might just as well blow it on lottery tickets. (No, I was never actually that dumb, not really.) But after awhile, things change. After awhile, you realize that you've started to accumulate a little nest egg.
I remember the first time I made more in my existing investments than I'd added to them during the year. That was a real milestone! Much later, there came a year when I made more on my investments than I'd made from my job. That was another memorable milestone. And it all started with just $50 a month.
OK, this is getting too long, and I haven't even made it past the introduction. Heh, heh. I'd planned to make this a two-part post, but I think it might have to be a three-part post, instead.
I suspect that most of you are horribly bored by this, if you've made it this far, but I'm enjoying the look back, myself. And that's what matters here. :)
But if you have any questions, please ask them in the comments. It might be something I'll get to in parts 2 and 3 (coming up soon, I hope), or it might be something I'm not qualified to answer. But there's a lot to this subject, much more than I'll be able to post here.
Note: Here's Part 2.
The Big Picture: A Desperate Man - Read More →
23 hours ago