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Three Investing Lessons Learned the Hard Way

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My wife got her Thrift Savings Plan (TSP) update the other day. (For my civilian readers, this is the military version of the 401k or 403b retirement savings plans). Not good times. I hadn't noticed what she was looking at, so I just suspected it was some junk mail. I think this is the first time she's looked at how the stock market really hit her.

"I lost [thousands]", she said (I'm keeping the exact number private since I didn't ask her to disclose her finances). Like most people, that represented around 30% of her money. As Monty Python might compare the money to a dead parrot in a well known skit, "It is no more. It ceases to exist."

Lesson 1: It Hurts to Lose Money

People are risk adverse by nature. For many, winning $10,000 is going to make someone feel great... for maybe a couple of days. However, losing that amount will put a damper on the next few months. My wife had this reaction. She had gained 3 times the "thousands" in equity in her home back in 2006. While she was happy about it, we didn't go out to Black Angus to celebrate it. On the other hand, losing $16,000 was a sobering moment.

If that wasn't bad enough, it's gets worse. It's all my fault. I had found out she wasn't maxing out her TSP. Even worse, she was putting it in the G fund - a fund that consists of "short-term U.S. Treasury securities specially issued to the TSP. Payment of principal and interest is guaranteed by the U.S. Government." I don't mind being conservative, but every financial guru will say that you should "go aggro" (not in such words) on your investments with some 40 years left until retirement. So I persuaded her to do "the smart thing" and move the money to something invests heavily in stocks. We saw what happened there. This lead to a predictable reaction:

Lesson 2: People Want to Sell When It's the Best Time to Buy

My wife quickly said, "I should get back to the G fund." I reminded her that she was the one who suggested we put more money in the market when it had dropped. She was the one who said, it was a good time to buy at the lowest point we've seen in years. It was my hope that reminding her of her smart, logical thinking would get the better of her emotional reaction. I couldn't tell if it really worked or not and still don't know where she stands on that front.

Lesson 3: Establish Risk Tolerance Before Investing

Sometime soon, probably this weekend, we need to sit down and talk about the things that we should have already. We need to figure out her risk tolerance before I recommend she get in the fund that invests mostly in stocks. We need to go over all the funds available and do a little more diversification. Diversification does matter, even though it might not have helped too much in this case.

Overall, I would say that we are pretty lucky. My wife could have lost a lot more if she had been investing the entire time (though she would have made more on the up years). Since I had twice as much invested, I lost twice as much. I can't imagine what her reaction would have been if that had happened to her. One thing that comforts me, is that I have a pile of years before I can even access this money (except under very specific conditions). The ideal scenario would be for the stock market to collapse for a long period, allowing time to pick up a huge pile of shares on the cheap, and then sell on the recovery. It looks like we are halfway to that ideal scenario.

Posted on February 26, 2009.

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10 Responses to “Three Investing Lessons Learned the Hard Way”

  1. Roger says:

    Three very good lessons. I hope that your wife will stay the course, keep investing, and look back on this as a temporary set-back in your long term plans (or perhaps even a chance to get more shares of the stock funds at a cheaper price). Good luck to both of you.

  2. Eric says:

    Great post Lazy Man. It can be very frustrating when everything you have been preaching momentarily comes back to bite you.

    However, I would be cautious using the word “lost.” In reality, you and your wife still own the same thing (same amount of shares, etc) but the value has gone down. You haven’t actually “lost” until you sell it. Once the market comes back you will be right where you were.

  3. thisisbeth says:

    I’ve lost thousands, and while I’m partly frustrated it, it’s tempered by the fact that I won’t be needing this money for 30+ years. In fact, I’m a little deflated that I might have to decrease my retirement contributions a bit in order to buy a house this spring. I’m trying to rearrange a budget that doesn’t require less into retirement, and will try to cut back nearly everything else before retirement. (I can’t cut back *everything*, because some things are still very important to me, like my charitable contributions. It’s a personal thing. Beyond that, I will need to have some fun, I’ll just have to cut it back.)

  4. Manshu says:

    If you have age on your side then the current downturn shouldn’t be too much to worry about. I think in a few years time people who didnt invest at this point will regret.

  5. plonkee says:

    I agree that your wife hasn’t really lost the money. Stuff like this is one of the reasons that I always avoid giving short answers when people ask what to invest in. And bite my tongue when they make choices that are too conservative for their life stage. It’s really hard to ascertain someone else’s risk tolerance without going into in in depth, and really easy to assume that they understand things in the same way that you do.

  6. I think the most helpful thing I’ve used to help me get over the mental part of “losing” all the money that’s been lost is knowing a bit of history.

    This has all happened before, only this time it’s happening to us. That has comforted me many a times. As much as the media spins it as this being catastrophic and life changing and “we will never recover,” it’s not true.

    The market will recover and in 50 years maybe another event like this will happen.

    That’s life.

  7. Jon says:

    I’ve felt the same way recently. My son is in the military, and has a TSP, plus some outside investments in a Roth IRA. Given his age, 21, both I and my financial planner recommended that he go very “aggro”. Unfortunately, timing wise, he began putting money away in these accounts at the peak of the market, and now it appears that he’s “lost” around 40% of the money he worked so hard to earn. I’ve encouraged him to stay the course, and let time and the economic recovery to come work its magic, but with all the doom and gloom in the media I’m having a tough time remaining convinced that this plan will work.

  8. Glenn says:

    My TSP is lower now too. I try not to look at it. They sent an update in February. Still, historically it is a good bet. I use the 2030 fund that automatically gets more conservative the closer you get to retirement.

  9. averageguy says:

    I am 60.

    In less that two years, my assets declined 50%.

    Save save save, then what? Reminisce about my old 401k statements?

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