An apology

As I write this, it’s thundering ominously outside. It’s been raining all day, ranging from a drizzle to a downpour. Saffron hasn’t gotten as much exercise as she’s used to, so she’s been bouncing off the walls. Right now, though, she’s taking a nap, which makes her a welcome warmth next to me. Since the markets are now closed, I check my stocks. They’re down 5% today, which puts me down 26% overall since I started my retirement investments. Self-doubt grips me. What am I doing telling people how to invest sustainably?

It’s been a while since I’ve posted. Partly, I’ve been really busy. In addition to working at my company, I taught two classes at IU this semester. It was (mostly) fun and gratifying to pass on some of my hard-earned knowledge, but prepping for classes and grading took way more time than I expected, especially towards the end of the semester.

Another part of it is that I’ve had a mental block on writing the last of my posts on investing sustainably. Talking about CDs or bonds is one thing. People either know about them already, in which case I’m doing no harm, or they don’t know much, in which case I’m helping introduce a subject. Stocks are a little different, though. It’s more complicated and more people know the basics, which makes me worried that I’ll give just enough advice to be dangerous. That’s doubly troubling to me given the recent market crash, which underscores the perils of investing in the stock market, especially as you near retirement age.

I’ll post more specific stock advice on Friday, but I want to use this post as my apology (in the philosophical sense). Who am I to give stock advice?

First off, let’s talk about what I’m not: a professional. I do a lot of reading and research, but stock market analysis is just a hobby. I also haven’t been doing it all that long. I first started putting retirement money aside just two years ago (yep, just in time to buy high). In that time, I’ve heard a lot of conflicting advice. Index funds, active funds, hot stock tips, commodities, gold. It seems like everyone has a favorite strategy but they rarely talk about their assumptions and biases, which makes it difficult to figure out if the advice is applicable to your situation.

I do all of my investing through a Roth IRA. At my income level (and most people’s), this allows you to put $5,000 into a special account (in my case through Charles Schwab). I’ve already paid taxes on that money, so I can buy and sell within my Roth without triggering any capital gains taxes. I’ll also be able to remove money tax free when I hit retirement age. A traditional IRA is similar except that you pay taxes at the end instead of the beginning. You still don’t have to pay capital gains taxes as you buy and sell within the IRA, which is good.

Following most people’s advice for beginners, I put my money into two different index funds, both tied to the S&P 500 (one with some bond exposure, not that I really understood that at the time). Since then, I’ve become disillusioned with index funds so I now buy more individual stocks. Every month, I set aside some money and, when I feel like I have enough that the transaction fee won’t be too high, I buy another stock to increase my asset diversity. At the moment, I own three index funds and five individual stocks across a variety of industries and in a variety of sizes.

I mentioned at the beginning of this post that my portfolio is down 26% over the two years that I’ve had it. That sounds bad (and is certainly a little depressing), but the Dow Jones Industrial Average is down 34% over the same period and the S&P 500 is down even more. That means that I’ve done about 8-10 percentage points better than the market as a whole, which is pretty good.

At this point, it’s almost certainly as much about luck as it is about any particular insight. The past year has been remarkable for stock buyers, with some incredible volatility. I tend to think that many stocks are currently underpriced but that it will take a long time for the market as a whole to recover. On the other hand, I think that some sectors will grow very quickly, which makes this a good time to buy in. Since your assumptions might be different (and your values almost certainly are), use my advice as a starting point rather than the be-all and end-all.

While I’ve written this, the rain has stopped. This seems like a good opportunity to stop reading (and writing) about underpriced companies and take the dog for a walk. Don’t let market problems keep you from enjoying the good things in life because they’re more important anyway!

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4 Responses so far »

  1. 1

    Andy said,

    May 14, 2009 @ 10:43 am

    I’ve always thought of stocks as a game, and a lot of people get addicted to it. Losing 26% is pretty serious, and to think that it’s not so bad because others lost more is a *really* bad way to look at it. The more people lose, the more they get addicted to finding new/better ways to use the system, and hate to pull that money out.

  2. 2

    Will said,

    May 14, 2009 @ 5:31 pm

    If you’re a short-term investor, the stock market is a lot like a game and it’s easy to get caught up in the highs and lows of checking your portfolio every day. I think the stock market is not a good place to be as a short-term investor for just that reason. I plan to keep my money where it is for the long haul (at least a couple years and hopefully 30-40). Since I’m investing on that time scale, it would be short-sighted (and backwards) to sell pieces of good companies at fire sale prices just because they’re selling for fire sale prices.

    Comparing my losses to the market as a whole is important because it lets me know how well my personal strategies are working, apart from the movements of the general market. If I can continue to do 8 points better than the market, I’ll have a lot of money when I retire in 40 years even if the market as a whole has middling returns.

    If you think that the stock market will never recover then this naturally doesn’t apply, but I’m not that pessimistic. Perhaps you are?

  3. 3

    Andy said,

    May 14, 2009 @ 11:54 pm

    I’m definitely pessimistic about the stock market. It’s one thing to look at previous recessions and bumps in the economy and know that things turned around and people made loads of money again afterwards. I am certainly not an expert on stocks, economy, or any of this stuff, but it seems clear to me that we have entered into a time when economics is going to be shifting dramatically this time. As I have come to understand, stocks increase in value if there is growth, but since we’re currently using way more energy/resources than is sustainable, we will soon be finding that growth is just not going to work out the way it used to, so the stocks will have an increasingly harder time rebounding.

    It seems like our economy is run mostly by businesses that are ‘too big to fail,’ oil, and big box stores, but they are all hurting for extra money these days. That’s an extremely bad sign in my viewpoint that making long term investment choices is really just a crap shoot. It may have worked in the past, but I don’t see it working out the same these days. I wish I could know what the world will be like in 2050, but I’m hoping that it still doesn’t revolve around these monopolies.

    Continuing to do 8 points better than the market is only good if the market stays afloat. What happens if things crash again and even the smart, well-educated investors are down 30, 40, 50%? That’s where this becomes clear that stocks can be an addicting game. The knowledge of how to make your investment grow is a good tool, but only if the market is in your favor. That’s a risk that I don’t plan on ever taking, and if we use -34% as a baseline, I’m 38 points higher than that by using reliable CDs instead of the stock market. Will I always be 38 points up – of course not. But at least I know that I’m not going into the negative by trying to play a game with old rules.

  4. 4

    Will said,

    May 15, 2009 @ 1:07 am

    If you’re risk averse, then you’re doing exactly the right thing. CDs might only get you 2% right now, but you won’t lose money. Personally, I’m willing to take on some risk in return for the prospect of greater reward, especially since I have other money in safer investments.

    Historically, CDs return about 4.5% annually over the long term. Over 30 years, that would turn $1,000 into $3,745. The stock market has historically returned about twice that, 9%. That would turn $1,000 into $13,267. If I can maintain my 8 point lead on the market, which is a big assumption of course, I’d have $85,850 for every $1,000 that I invest now! Or, to put it another way, I could put in $50 for every $1,000 you put in and still have the same amount at retirement.

    You seem to have a problem with stock growth because you see it as unsustainable. Although that’s true for the market as a whole, individual companies can still grow sustainably. Even so, growth stocks are risky because for each proto-Microsoft there are 10 (or 100) companies that will fail trying to get there.

    There are also a lot of value stocks out there. These are stocks that have prices that don’t reflect the underlying business. Value companies are safer investments but don’t promise the same returns, since the price only goes up to the value of the company. However, this just requires a company to maintain its value, which should be sustainable.

    Finally, there are dividend stocks. These are companies that have grown as much as they can, so they return any extra money to their shareholders. It’s a bit like a co-op, which is definitely a sustainable model.

    Even if all of these assets as a whole lose value, I find it hard to believe that every stock on the market will lose value along with the market. Even in the troubled market of the past year, some stocks have literally doubled in value. If you think that energy constraints are going to hurt the market as a whole, you could make a killing investing in renewable energy companies.

    But this is all really beside the point. If you’re not comfortable investing in stocks, don’t! Just don’t laugh too hard at us stock investors while you’re sitting on a 2% return and we’re languishing in the negatives because the tables might turn.

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