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!