Investment Lessons Learned

Here is a summary of the financial lessons I’ve learned over my investment career. I feel like I’ve gone through a long learning curve and want to share some of my slowly learned advice. I couldn’t write this post of Lessons Learned until I did a detailed review of my investment history, starting here. I have a single, first-cut post that I’m keeping private for Allie or others in case someone wants more detail.

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Going through the exercise of assessing my investing career, things fell into three phases: 1) getting started (1968-1994), 2) building my own portfolio (1994-2003), and 3) adopting passive investment principles (2004 – now). The big demarcation was in 2004 when I shifted lots of individual stocks and mutual funds into a mix of passive index funds and exchange traded funds.

The bottom line lesson is that one can build a very comfortable retirement nest egg and sleep reasonably peacefully at night with a passive investment strategy. It’s not hard to do, it simplifies a great deal of financial complexity and reduces stress. This strategy makes it easier to put together a long-term financial plan that stretches several decades and actually achieve it. And the best news is that the longer the time horizon the better chance you will actually get there.

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I discussed passive (or Boglehead) investment strategy in Part 2. At the risk of redundancy, I’ll repeat part of it here (it’s worth remembering):

I basically became a “Boglehead” without ever actually reading one of Jack Bogle‘s books. Their 10 basic philosophies made a lot of sense to me and became my guides, well summarized by Robert Farrington in this excerpt from his article:

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To the Boglehead maxims let me add my own lessons and advice on investing:

• Buy and hold. From the start, Dad inculcated a long-term, buy-and-hold approach to investing. I’ve largely kept with this principle, in investing and in life, it seems. I have a hard time getting rid of anything which is why our house is cluttered with a lifetime of memories. It’s why I can write this whole website. It’s at least partly why Barb and I are still together. The principle has worked for me. It’s opposite to a frequent trading approach which is more akin to gambling but is valid for some who have a higher tolerance for risk than I do. My point is that buy-and-hold works out just fine, over time.
• Take responsibility for your own financial well being and retirement. Under the current ground rules in America, one of each person’s main responsibilities in life is to prepare one’s own nest egg for retirement. In my parents’ lifetimes one could rely on a company pension, as my Dad and Fred did. Those days are long gone, though Barb and I just missed them by a few years. As we came into the workforce the philosophy shifted to a mix of Social Security (and Medicare) covering a portion of the retirement stool but the main responsibility was saving and investing through 401K or IRA accounts. Pensions, if you were lucky enough to get one, were a bonus. Barb and I have a mix of all three, but the core (for me) has always been our own retirement accounts.
• Let time work for you. The inexorable mathematics of compound growth and the time value of money are your friends. A growth rate of 7-8% virtually guarantees that anyone can save a tidy and sufficient nest egg over four decades or so of a working life. It’s not hard but it takes discipline and the sooner you start the better. I’ve been looking for a simple article to explain the concepts but I haven’t found a great one. Here is one with a simple chart that illustrates it pretty well. Here’s a post reminding millennials that 401Ks are a relatively new concept and it behooves you to start saving early. This simple financial calculator lets you play with the concepts (it’s useful to play with the variables; it’s astonishing how much a difference time makes):

• Stock market returns are hard to beat. The stock market is about the only place you can reliably expect a sufficient return to make this all work. Other investments (like real estate, gold, other commodities, art…) may have appeal but it’s hard to beat the flexibility, consistency and overall return of stocks. Once again, time is your friend, smoothing out short-term losses; the longer your horizon, the better. Granted, I have been lucky so far to have been investing in a period from 1980 – 2020, but historically a long-term horizon minimizes the potential for encountering a losing period.

In August 2005 I put together a spreadsheet that projected our needs to get to retirement which I guessed would be in 2023. I used annual growth rates of 8% for most of our stock investments and 6% for the more conservative accounts. I’m pretty pleased and somewhat amazed that — as of 2021 — it turned out to be pretty darn accurate, despite two financial crises and recoveries in the interim. I wasn’t necessarily confident it would all work out every step of the way, but I’m pleased to report that a long-term plan can indeed work out pretty close to projections.

• Diversification and periodic rebalancing further reduce long-term risk. These are two simple concepts that are pretty easy to implement but I found hard to manage when I had a lot of different investments; having a simpler portfolio makes it easier to maintain. The SEC, of all places, gives a good overview. Schwab also covers the basic principles pretty well.
• Stick to an asset allocation mix. There are really just a handful of basic asset allocation targets. My own portfolio mix has tended to be in the range of 40% large cap stocks, 20% small and mid-cap, 20% international, 10% bonds and 10% cash — an “aggressive” or “very aggressive” strategy. I’ve been comfortable with it for a long time. Now that we are officially nearing retirement and I’m considering Barb’s holdings as well, our mix is (in the process of shifting) to something closer to 40% large cap, 10% small and mid-cap, 10% international, 30% bonds and 10% cash. We’ll see how that goes.
• Four-percent rule for retirement holds up. In retirement, the 4% withdrawal rule of thumb seems to be working alright for me. This is a guideline for how much you can reasonably withdraw from your retirement assets annually. For the past few years while I haven’t had an income from working, I’ve stayed conservatively below 4% withdrawals but I think it’s still a reasonable target and an easy rule-of-thumb guideline.
• Find tools that let you visualize entire portfolio. This is an area I continue to struggle with and I still can’t believe how troublesome it is. Microsoft Money was the best I’d found, but it’s gone. The Excel spreadsheet I kept for years was good but very cumbersome. The USAA website was decent for a number of years but they’ve taken some functions away. I’m using Schwab now and it’s about the same as USAA. I tried Mint for a while but didn’t like it. Basically, you want one place for a consolidated view of your assets, and a reasonably easy way to compare gains, growth, asset classes and diversification strategies.
• More active gambles are not necessarily bad, but keep it limited. Don’t be afraid to take a gamble now and then on a stock, but keep a long-term, buy-and-hold perspective. Only gamble what you’re not afraid to lose and keep the gambles to a small percent of whatever you’re investing annually or maybe set a limit of $5-10K that you’re prepared to sink in at a time. You have a much better chance of hitting a long-term winner in stocks than in playing the lottery or going to a casino.
• Keep track of long-term goals and plans. Writing these things down can feel foolish or like tempting fate, but I think it’s helpful to keep a document that you can revisit and revise over time, checking off milestones and keeping track of longer-term wishes and achievements.
• Find a good budgeting tool. Get used to living with a budget, track it, but don’t necessarily be a slave to it. It’s important to get a handle on what you have to spend vs. what you want to spend vs. what you actually spend. With most transactions now happening electronically it’s easier to find a tool that captures and consolidates your actual expenses. Develop a rough monthly and annual budget and try to stay within it, but don’t sweat too much if sometimes things stray above target. Life happens.
• Find a retirement planning tool. Having a retirement planning tool where you can play with variables and run different scenarios is very helpful. I used to have this with Microsoft Money and then the USAA retirement planning tool, both of which have disappeared. There are a bunch of basic calculators online but you really want something where you can plug in variables, save them securely and fiddle with them over time. For the time being, I’m relying on Schwab’s service through my advisor; it’s comprehensive but I have to call her to make adjustments.
• Don’t panic. Markets go down and up (but mostly trend up), plans change, life happens. Keep a long-term perspective. Things tend to smooth out and work in interesting ways…maybe not exactly how you planned but as long as you’re still playing, you’re winning.

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Some more specific lessons, pulled from the previous posts:

In retrospect, I threw out some babies with the bathwater when I shifted to passive index funds, most particularly holdings of Amazon and Apple that brought stellar returns over the next 16 years. I did a rough analysis and found that if I had held those two stocks I might have an additional million dollars or more in my pocket. But the fact of the matter is, I would very likely have sold at least some of those stocks along the way to preserve gains, diversify and ensure not too many eggs were in one or two baskets. We’ve done OK anyway, and by holding index funds I still effectively own a healthy slice of both stocks plus hundreds more.

My analysis showed that more than half of my 2003 holdings underperformed the S&P 500 over the next 16 years. Without the Amazon and Apple stocks, the portfolio as a whole would have underperformed the S&P 500, not even counting for fees and taxes. I’m satisfied that my passive strategy worked well enough for us to retire comfortably. We maybe could have done better with a more active strategy but it’s not a sure thing.

Most of all, I can say with certainty that I slept more peacefully under the passive strategy. I worried much, much less about my investments and followed a more predictable course toward my retirement goals.

This entire discussion is biased by the fact that we are, in late-2020, near all-time highs for each major U.S. index. I expect a fall will come before long but even so, having ridden out 10 recessions in my lifetime, their effects have been relatively short-lived, even if some were scary at the time.

I’ve thought for some time that the markets and our country might be due for another full-fledged depression, particularly as baby boomers start to draw down their retirement holdings. I’m less worried about that now, especially seeing how the markets reacted to the COVID-19 crisis which I thought might have been a trigger. Instead, after a sharp drop we have shot to new highs, even if they are frothier than they perhaps should be (see NY Times article with good explanation of why the 2020 market boomed despite the pandemic). I remain convinced that, as long as your time horizon extends a decade or more, there is no better investment than stocks.

I’ll admit that several macro-trends have made this a good 40-50 years to invest:

• Over my lifetime, the U.S. has played a leading role in the world economy making U.S. stock markets a relatively attractive place for the world to invest. It may be that eventually the “smart money” moves to other markets, but it hasn’t happened yet and I don’t see it happening soon.
• In any case, U.S. financial markets reflect growth around the world; the companies on the U.S. exchanges include a great deal of globalized income, not just the U.S. economy.
• Vast portions of the world, particularly China and India, have raised hundreds of millions of people out of poverty, boosting global economic activity. Likewise, substantial proportions of women have come into the workforce, further boosting economic growth. The fascinating website Our World in Data does a great job identifying these macro trends.
• Will these trends continue? My conclusion is, yes, probably, until we screw things up so badly that any investment strategy becomes a moot point anyway.
• So ride the wave! Capitalism may be a global Ponzi scheme but it’s been going for centuries and the whole world is (literally) invested in seeing it continue. I’m not one to bet against it.

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I hope this post proves to be the most useful one on this whole site. Good luck to all readers.