Part 2 of my financial education, covering 1995 – 2004.
Nineteen-ninety five was a watershed year in our lives for a number of reasons, not least of which was the impending arrival of our little bundle of joy, Allie. It became a time of reassessing and organizing my life goals and financial plans.
I started using Microsoft Money — which had just come out with an overhauled version for Windows 95 (itself something of a watershed in Microsoft’s long-running battle with Apple for the PC desktop) — to help track my budget, expenses and investments. The Money program proved very helpful to track nearly all my financial activities if I was willing to input them. The program slowly added features for online updates from various banks, credit cards and investment accounts which helped tremendously. I still kept my separate spreadsheet for a clearer view of all my investments, though.
Microsoft Money was a useful tool for me for the next 14 years until Microsoft decided to discontinue it in 2009. It included a pretty good retirement planner with a projection tool I could play around with. I enjoyed playing with the variables and started to learn what a difference small changes made over long periods of time. After Microsoft killed the program, I’ve had to make do with a variety of less efficient programs and tools — it was nice to have everything in one place and I find it hard to believe I’ve found no solid replacement. Quicken might have done the trick but I was always a little leery of the program’s cost and security, maybe unduly.
In 1995 I started to more consciously keep a document called “WHD Plan” which was simply an open-ended list of life goals, career goals, vacation plans, Christmas and birthday gifts, home improvement ideas, personal improvements, financial and investment milestones and retirement alternatives. For about five years it was a useful place for me to keep track of what I’d done and what I wanted to do. I regret falling out of the habit of updating it after 2000, but I still refer to it from time to time, and have more or less stayed on track.
With Allie due to arrive in October 1995, I had a greater incentive to save and plan. I liked Microsoft Money’s retirement planner but didn’t have a lot of confidence in its rosy outlook or whether I was using it right. I spoke with George about doing a more professional, comprehensive financial plan. He didn’t do them himself but he referred me to a colleague, Tom Doerfler. This was the first I realized the distinction between an investment advisor and a financial planner. Though Tom was a Certified Public Accountant, there was no mention of him being a Certified Financial Planner. The term existed but was not really in wide use yet.
In June 1995 I commissioned a full plan from Tom. I have the input documents and the completed results he delivered in November but I honestly don’t remember actually meeting or working with Tom. How can that be? In any case, the plan itself was something of a disappointment with lots of boilerplate and only the most obvious of recommendations such as our need for wills (we didn’t have them yet) and to start saving for Allie’s education. Duh.
The plan did give us the sense we were generally on the right track for retirement and it gave us a comprehensive view of our assets and expenses. The plan gave us the green light to start looking for a larger home for our new family which we would do in 1996. We also found a local attorney to draft some basic wills and medical directives for Barb and myself.
By the end of 1995 I opened a couple of new accounts, one specifically for Allie’s education and another more generally for her — I eventually wanted to replicate Dad’s gift to me for her…but it wasn’t going to be Exxon stock. For the first several years I used these accounts mainly for money market savings to build up cash balances though I did buy one mutual fund for her education in 1996.
As all this was going on in 1995, the S&P 500 rose over 34%, its best single-year performance in my lifetime (so far). My own investments more or less tracked (I added some Intel and Disney stock in 1995) and our combined nest egg started to grow noticeably. I was starting to like this game. Our first Christmas with Allie was a happy one all around.
In mid-1996, with a rising financial tide and solid work prospects, we decided to move into a bigger house on Paddington Court in Ellicott City. I sold my Microsoft stock (it had tripled in four years so I felt it was ripe to take profits) and several mutual funds to put the down payment on our Paddington house.
The next three years through 1999 saw 20-30% annual returns in the markets (thanks, Bill Clinton!) and I mostly rode along with them. The NASDAQ, focused mostly on technology firms, went bonkers rising 86% in 1999 alone. These were the frothy days of the dot-com bubble. I didn’t change my asset mix too much, ending 1999 with 14 stocks and 30 mutual funds.
In November 1999 I had my first direct touch with Wall Street IPO fever. There was a company in Texas called MetaSolv that Hekimian discussed partnering with. I don’t think things got much past the discussion phase, but for whatever reason they put me on their list of invitees to purchase stock at their IPO listing price. I decided to go ahead and put in $10K at $19/share. On the first day of the IPO, shares rose to $55. Within three months, they reached $126, making my stake worth more than $50K…briefly. The company was doing reasonably well, but after February 2000, the stock price started to nosedive. I ended up selling a month later and netted around $25K — still a great payout for four months of holding a stock, but the whole experience taught me to beware of the wild gyrations in tech stocks and IPOs. It was nothing short of gambling. MetaSolv survived long enough to be bought by Oracle in 2006 at $4/share.
In March 2000, the NASDAQ peaked and some of my (too-easily) acquired gains started to slip. I began to think about selling some shares to lock in gains but had a hard time deciding just what to do.
NASDAQ performance 12/1980 – 6/2000
At mid-year the first of my VP-level bonuses came through so I turned to George Hayes for advice. We began developing a diversification strategy that relied much more on his recommendations and a mix of new stock holdings and funds. In October, I acquired 14 new stocks based mainly on George’s suggestions, six of them in Allie’s name. Things got so much more complicated I gave up on manually updating my spreadsheet. I started to rely more on George’s reports and Microsoft Money.
In the second half of 2000 I became involved with the details of preparing Hekimian for an acquisition or going public. I spent time in meetings at work with a number of Wall Street types and I started to get an inkling of just how much they were making on the deal. It became clear to me that our company was a commodity to them, something to be marketed and sold. They didn’t particularly care about us, our products or the relationships we’d built with customers.
This was an eye-opening lesson for me about Wall Street and the world of finance in general. Wall Street firms liked to create investment ecosystems — self-reinforcing communities of customers, vendors, investors, technologies, media, analysts, government regulations, etc., that spun up a tornado of economic activity, creating great investor returns and usually upending a dormant economic sector. Telecommunications was a great example.
Wall Street firms provided a lot of the fuel were not a benign influence. They fundamentally wanted a score, setting up companies to be bought and sold while they were getting a very large cut of the transaction despite adding very little value to the deal. They were almost as bad as the lawyers who charged outlandish rates for every minute they looked at a document or sat in a meeting, which was all the time. It was a lesson in the world of finance and the value of getting closer to the flow of money. You’re more likely to get wet the closer you can get to a fire hydrant. But it was also clearly soul sucking — these people were awful to deal with. [For a recent illustration, see the hedge fund manager who keeps repeating “Make trades” in Soul.]
Hekimian was sold to Spirent in November of 2000 and I was looking forward to a rosy future of significant bonuses and stock options. As part of the transaction, the other Hekimian executives and I were given options on thousands of shares of Spirent stock but they were all way underwater by the time we could actually begin to consider exercising them.
That was another education, learning about how stock options worked (it’s messy). It would have gotten even more complicated if they had really been worth something.
We held onto the Chrisland Cove house until November of 2000. It had been more or less continuously rented over the decade by two different tenants, one of them a Congressman, Mickey Edwards. When the second tenant decided to move out in late 2000, we decided to sell the place rather than find another tenant. We ended up selling it for about $80,000 more than we paid in 1986, or a 55% increase over 14 years — seemingly not a bad return overall but less than 4% per year.
In the same period, the S&P 500 rose more than 450%, so who’s the financial genius? We’d kept the Chrisland Cove house because I thought it was a good investment and a diversification from the stock market. We made enough in rent to cover the mortgage and keep a contingency for repairs, so overall it was a positive investment but we could have done much better in stocks. Thus ended my career as a real estate mogul.
In 2001 and 2002 I added several more individual stocks and funds and sold a few others. Markets declined for three years in a row during the early-2000’s recession and while I was investing some, I also looked for other uses for my cash. We paid off the mortgage on the Paddington house in 2001 and I remember even the bank manager was impressed we could accomplish that at such a relatively young age. We were debt-free but I was literally making more than I knew what to do with.
George started talking to me about other investments to diversify beyond stocks. In 2002 he got me into shares of a real estate investment trust (REIT), Wells Properties, that primarily owned business properties around the country. It was not a stock, per se, and tied up my investment for five years. Once I was finally able to get out of it in 2007, it had proven to be a dog.
I started toying with the notion of a second home or a vacation equity property for ourselves. I took a serious look at Equity Estates and some other luxury vacation clubs but (fortunately, I remain convinced) nothing really made sense with our lifestyle. I concluded that we could stay at nice hotels or rent houses when and where we wanted to rather than getting locked into a second home or vacation club arrangement. It also felt just a bit too ostentatious for my blood and I felt a little creepy even thinking about it. It felt like a sign I was going too far.
Over the course of 2002 I became increasingly dissatisfied with my work situation at Spirent. I started to consider career alternatives so I could be home more to care for Allie and in general just be happier. I thought about finding another job in the telecom or marketing management arenas but, with the recession and the telecom bust such jobs didn’t grow on trees, would probably mean relocating somewhere disrupting Barb’s career, and would still leave us in the boat of both working and not having time for Allie.
I suggested several times to Barb over these years that we didn’t both need to be working and that it would be fine with me if she stopped lawyering or went part time so we didn’t have to rely on Adrienne or Michael Edwards or someone to take care of Allie. Barb never seemed keen on the idea; she liked working and enjoyed the independence of having her own career, plus she was doing well at it. Eventually, I came to the conclusion that if she didn’t want to slow down and get off the merry-go-round, I would be happy to.
I felt we reached a point where we had nearly enough money for the rest of our lives as long as we didn’t spend it on too many outlandish things. There was only so much that we really needed despite an endless list of increasingly useless things we could aspire to. If we could moderate our wishes, splurge now and then but avoid some of the more ridiculous temptations of the luxury lifestyles foisted upon us on TV and magazines, we could live very well for a long time. I didn’t see the need or moral worth to keep chasing ever-higher levels of wealth.
At the same time, I didn’t feel I could comfortably risk full retirement and no working income. Also, for Barb’s sake, I didn’t want to sentence her to an absolute requirement to work to her full retirement age, nor did I want to sit around and do nothing while she worked for another 15-20 years. I would only need to make a fraction of what I had been making, maybe $30-40K per year until I could access my retirement funds when I was 55 or 62. Surely there was a way to make that much. I felt like I could achieve that on a consulting or self-employed basis rather than having to find a full-time job working for someone else. I had plenty to tide me over for a time, and in fact I was due a year of severance at full salary if I left in 2003, two full years after the Spirent acquisition.
Remembering my disappointment with my financial planning experience with Tom Doerfler in 1995 and in my arrogance of doing well in the ensuing years, I felt like maybe there was room for a fresher approach to financial planning and investment advice. It was a topic I wanted to learn more about for myself, and I slowly began to feel like it might be a career path where I could help others.
At some point toward the end of 2002 or early 2003, I started looking into the mechanics of learning to be a financial planner. I discovered I would need a certificate-level education (as opposed to a four-year degree) and there were online courses available that I could get through within two years. One of the better programs was offered through Kansas State University and I could enroll in the fall of 2003. In spring of 2003, I decided to leave Spirent with the intent of becoming a financial planner.
I tried not to gloat to Barb about retiring, but I did save this Dilbert cartoon at the time…
I maintained a close relationship with George Hayes, leaning on him for advice but starting to question more of his recommendations. He helped me set up accounts to cover Allie’s education through primary and secondary school at private school rates, and a separate 529 fund for college expenses. We did a basic retirement plan using one of his automated planning tools, similar to my Microsoft Money planner; it didn’t tell me more than I already knew but it was another confirmation that we were doing OK. He also helped me set up a tax-deferred annuity with some of my bonus funds to spread out my income flow in 2003. Those seemed like decent steps.
On the other hand, he also promoted a mining trust in Montana and putting some cash in a hedge fund that just didn’t feel comfortable to me. I was particularly dismayed to see the level of management and performance fees that went to the hedge fund managers. It seemed like a great way to make hedge fund managers rich — basically being paid to gamble on the customers’ behalf, and the fund managers were the ones with the greatest likelihood of winning big. It made me question how much of a sales commission George was getting from these recommendations.
For a time I dabbled with the notion of day-trading, focusing on stock trading as a way to fill my time and play the markets. I started watching CNBC and other financial outlets, reading lots of articles and even attended a seminar or two from outfits that “had all the secrets.” I quickly determined it was not my cup of tea. It was little different than gambling and I didn’t get an adrenaline rush from the game, more like anxiety and a stomach tied in knots.
As I started to take my K-State financial courses, I tried to get smarter about using leverage, making short bets, placing puts and calls and other more sophisticated investing techniques. Like day-trading, it all smacked of gambling and never felt comfortable. Collectively they were ways of goosing profits and potentially mitigating risk but the strategies just made things even more complicated. I put some stop-loss (or was it stop-limit?) orders on some of my stocks but even then I wasn’t sure it was the right thing to do. I simply couldn’t tolerate the increased risk and anxiety of using leverage or buying on margin and ultimately decided I didn’t need to use that bag of tools.
Learning more about different financial strategies, my eyes opened to the merits of passive investing. I hadn’t realized that basically no active investment funds outperformed passive index funds for very many years in a row. Anyone could get lucky for a little while but not even the best could beat the indexes for very long. Realizing that, I became increasingly concerned about the management fees for mutual funds — why pay for bad advice and ultimately drag down my performance?
If I wanted to avoid the management fees and essentially build a fund of my own stock holdings, how could I expect to do any better than the pros? Plus, I had a very hard time keeping track of all my stocks and trying to decide when it might be a good time to sell shares and rebalance my holdings.
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:
1. Live Below Your Means
This is a simple strategy – spend less than you earn. Live below what you need. Save the rest. Frugality is important, but so is earning more.
2. Invest Early And Often
This is one of the main reasons why I started this site. I wanted to encourage young adults and college students to start investing. The earlier you start, the better you’ll be financially.
3. Never Take On Too Much Risk, Or Accept Too Little
Investing is a game of risk – but you don’t want to go crazy. You can lose money investing. In fact, many people have gone broke investing. But that’s rare, and it’s near impossible to lose all your money investing if you follow simple advice.
4. Diversify
It’s important to never keep all your eggs in one basket. Look at the people who had all their investments with their company stock, and then their company goes bankrupt. Investing in low cost index funds gives you diversity in your portfolio, especially as you mix up stocks, bonds, and other asset classes.
5. Don’t Time The Market
Time in the market is better than timing the market. You never will know when the top or bottom is, all you can do is invest for the long term.
6. Use Index Funds
Index funds are fantastic tools to diversify across the stocks. Heck, you can buy the total stock market in one index fund! When it comes to diversification at low cost, there’s no better way to do it.
7. Keep Costs Low
Fees are going to be the number one detriment to long term investing success. Keep cost low. Invest in low-cost mutual funds, and be wary of advisor fees. Read this scary story if you dare.
8. Minimize Taxes
Taxes are the enemy – we all hate taxes. Make sure you’re taking advantage of tax-deferred investment tools like a 401k or IRA to the max. If you’re self employed, you have the solo 401k at your disposal that can really allow you to save.
9. Keep It Simple
Simplicity is important. The more complex you make things, the harder it is to manage. Investing can be simple. Pick a few funds, keep your accounts together, and watch your money grow.
10. Stay The Course
The stock market goes up and down. In fact, as of writing this, it’s near all time highs. It might crash. But you need to stay the course and keep investing for the long run. Buy low, sell high – don’t fall for the panic and do it backwards.
From What is a Boglehead and What Investing Lessons Can you Learn?
By the end of 2003, my portfolio consisted of 47 stocks and 45 mutual funds. It was an impressive but very unwieldy collection of holdings. Having invested through three years of down markets, more than half of my holdings were in the red — lower than what I paid for them. This despite getting advice from George (and paying for each transaction) and paying each of the mutual funds management fees between one and two percent annually. Plus, each year I found I would get hit with unexpected capital gains taxes even though I was paying quarterly estimated taxes.
I started to reach the end of my rope with George and his strategies. The last straw for me came when George started pushing me to get in on the stock of Icos, the maker of Cialis, another ultimately questionable investment. I simply didn’t want to invest in erectile dysfunction but George kept pushing it.
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