I made a rookie mistake when I first started investing that cost me tens of thousands of dollars
- I started investing in 2008, following Suze Orman’s advice to open a Roth IRA.
- But I ignored her advice to invest in market index funds, worried about losing my money in a volatile market.
- As a young investor, though, time was on my side: With more risk tolerance, I could have made tens of thousands more.
- Consult with a fiduciary advisor to make sure you are doing everything necessary to grow your wealth in this challenging time »
I started investing in early 2008, not long after my 28th birthday. At the time, I was making a living touring as a musician and doing other assorted jobs when I wasn’t on the road. My modest income, paired with my frugal lifestyle, was enough for me to pay off my student loans of roughly $18,000. No longer in debt, I was looking for somewhere productive to stash future savings when my girlfriend loaned me her copy of Suze Orman’s “The Money Book for the Young, Fabulous & Broke.” In it, Orman urges readers to open a Roth IRA and fund it as much as they’re able, so that’s what I did.
I was more conservative than I should have been
Unfortunately, that’s where I parted with Orman’s advice. While she recommends investing mostly in market index funds, I veered toward safer, more conservative options. I didn’t have a lot of money, and anxiety about losing what I did have made me far more risk averse than I should have been at that young age.
I puzzle over my attitude now because it was so uncharacteristic of me. I was taking personal and financial risks in other areas of my life: I moved from my hometown in Michigan to Seattle for love, I had just recorded a new album and was planning my first European tour, and I was in the midst of spending nearly $10,000 developing a non-profit website to support urban gardening. Nonetheless, I balked at the prospect of lobbing my disposable income at a slumping Dow.
I ignored the advice of a financial advisor
Schwab offered me a complimentary 30-minute phone consultation as a new customer, and as a novice (and nervous) investor, I took them up on it. The advisor I spoke with began our conversation by asking about my investment goals, and expressed light reproach when I told him I favored capital preservation over growth. Like Orman, he recommended several market index funds, and further nudged me toward even more aggressive growth funds.
I was adamant about choosing conservative investments, however, so he eventually steered me toward the Janus Henderson Balanced Fund Class T fund (JABAX) and the Morning & Napier Pro-Blend Conservative Term Series Class S fund (EXDAX). Both funds explicitly seek preservation of capital either alongside or in favor of income and long-term growth. That sounded good to me, so I split my $5,000 Roth IRA contribution down the middle between the two.
I repeated my investment each of the following three years, continuing to split my maxed-out Roth IRA contribution evenly between JABAX and EXDAX from 2008 to 2011. I kept a close eye on my portfolio, and was pleased to see my investments not only preserve value during the Great Recession (compared to the market broadly), but also grow as the economy staged a comeback. Based on the unambitious investment goals I had set for myself, my decision to invest conservatively was a success — after all, I didn’t lose money! In retrospect, however, my decision was very costly.
How much my mistake cost me
Including dividends, the $20,000 I put into JABAX and EXDAX appreciated to more than $30,000, which looks like a win at first glance. However, if I had instead listened to Suze Orman and invested in a market index fund, like Schwab’s S&P 500 Index Fund (SWPPX) or the Schwab Total Stock Market Index Fund (SWTSX), that $20,000 would have grown to nearly $70,000 — that’s a swing of almost $40,000. Had I listened to my Schwab advisor and pursued a more aggressive growth fund like the Shelton Nasdaq-100 Index (NASDX), my initial investment might now be worth over $130,000.
I have since reconsidered my approach and diversified my retirement portfolio. I invested in several market index funds and other more aggressive alternatives, so I haven’t missed out entirely on the rally of the last 11 years. But the damage of investing meekly during those early years can’t be undone: I surrendered tens of thousands of dollars of potential growth that I won’t get back no matter how long I stay in the market.
In my defense, the years since I began investing overlap with the longest bull market in history. The numbers above are accentuated by the phenomenal growth of that period; perhaps I’d be whistling a different tune if we were looking back on a decade of economic decline. It’s also easy to cherry-pick investments that performed well and view them as superior in hindsight — if I’d bought bitcoin instead of funding my retirement account in 2010 and 2011, I’d now be a multi-billionaire; that doesn’t mean bitcoin was a prudent investment for me at the time.
Time was on my side
But these defenses belie the greater lesson: Your investment goals should conform to your circumstances. My problem wasn’t that my investments were a poor fit for my goals, but that my goals were a poor fit for me. As a younger investor saving for retirement, I should have had a high risk tolerance, because I had time to withstand inevitable market fluctuations.
My refusal to accept a reasonable amount of risk limited my downside, preserving my annual Roth IRA contributions. But it also throttled my upside, costing me fantastic opportunities to ride favorable market conditions and grow my savings impactfully. Had I assessed my financial state of affairs more earnestly, I could have cultivated an investment plan to match.
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