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Today, I thought I’d share how I have evolved as an investor over the years. I haven’t always been a passive index investor. In fact, I’ve made a bunch of mistakes along the way. At times, I was lazy when it came to contributing to my portfolio. I have also tried some harebrained experiments in order to optimize my portfolio.
I figure if I can prevent anyone from making some of the same mistakes, that those mistakes will be well worth it. So without further ado, the five phases of my passive index investing journey.
Phase I: The Naive Phase
Growing up, my Dad would dabble in stocks, but I honestly didn’t pay too much attention. I was too busy running around outside, playing basketball with neighborhood friends. Who knew that I would outgrow basketball and fall in love with the stock market a few short years later?
I remember every evening, my Dad would pull out the business section in the newspaper to check out how his stocks were doing. I remember thinking, how does anyone decipher these codes?
Unfortunately, I was too impatient to trying to learn at the time. So instead of venturing into the stock market, I pushed all my money into my savings account at the local bank, not that I had a ton of money as a teenager to begin with. Even still, my pennies of interest thrilled me each month. I couldn’t believe that I accrued interest just by housing my money at the bank. I thought I was getting the better end of that deal. That just goes to show you how little I knew. 🙂
Learning Something New
Everything changed when I took an Excel computer class during my senior year of high school. I know they teach this stuff to elementary school kids today, but back then, that type of class was new and super exciting.
Our teacher instructed us to pick some stocks to track by creating a table and chart. This was during the height of the dot-com bubble, so virtually every stock was on a tear. When I saw that some companies were doubling over night, I looked at my measly 4% annual bank interest. I realized could make double that in one day through the stock market. That’s when I decided that I was going to learn as much about the stock market and work on Wall Street one day.
Phase II: The Obsession Phase
When I went to college, I decided that I was going to major in Finance and consumed as much as I could about the stock market. I even did crazy things like schedule all my classes after 4 pm, so I could watch the stock market all day.
I barely read any text books. Instead, I spent most of my time learning about the hot new stock trading techniques, like technical analysis. I scoured various charts, trying to understand the Impulse Wave Pattern in the Elliott Wave Theory.
I made some money trading stock options by trading on the volatility of certain stocks. However, I lost one big trade while I was in college and completely lost my appetite for stock options.
Looking back, if I had spent as much time learning what my professors were trying to teach me instead of trying to learn technical analysis, I probably would have graduated with a 4.0 GPA.
A Change of Plans
After I graduated, the allure of Wall Street paled in comparison to staying close to family. I never took a chance on Wall Street, not that I would have been qualified, nor do I think I would have been cut out for Wall Street after reading The Buy Side. If you haven’t read this book by Turney Duff, I would encourage you to read it. It is hilarious, but also heart-breaking, at the same time.
Once I graduated from college, even though I didn’t take a job dealing with the stock market, I talked about the market with whomever I could. I solicited the best tips from all of my friends, trying to figure out what they were trading and what I could do to make a quick buck.
From hearing pitches on penny stocks, momentum stocks, and everything in between, I thought I knew it all. Then, the Great Recession ate my lunch.
Before the market crash, I would talk about all the hot stocks I was buying and how well I was doing. As Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked.”
Phase III: The Fall
I got hammered on my stock picks. My friends quit asking me about my investment strategies. Their investments were doing as terribly as mine. I even had a couple of friends ask their grandparents on what they should be buying, since they lived through the Great Depression.
It was a humbling experience. At that point, I knew that I needed to revamp what I was doing to better weather any financial storms in the future. And more importantly, I needed to better handle the emotional toll that the stock market took on me.
While technical analysis had taught me a lot, it wasn’t fool-proof like I had thought. I knew that I needed to stop chasing returns. Plus, I was getting tired of the stock market dictating my moods. I no longer wanted to be controlled by the whims of the stock market.
Phase IV: The Road to Enlightenment
During the Great Recession, I must have read every book that was out there. I learned about dividend investing, the randomness of the stock market, building the optimal portfolio, and the efficient market hypothesis.
I tested each one of these theories by backtesting various portfolios. Then, I created complex formulas to speculate where the market might go in the future.
The formulas were overly complex. I was spending more time than I cared trying to optimize my portfolio. That’s when I finally came to the conclusion that I was working too hard for a return that would barely beat the market. Some people on Wall Street with PhDs that try to beat the market full-time can’t even do it.
I thought about completely jumping out of the market and putting all my money back into my savings account. At least that way I would receive a guaranteed rate of return. Then, a friend recommended that I read The Little Book of Common Sense Investing.
Phase V: Simplicity
The Little Book of Common Sense Investing had me nodding along with each page, as if I had just uncovered the secrets of the universe.
At the core of the book, John Bogle, the founder of The Vanguard Group, describes the simplest and most effective investment strategy to building long term wealth. That includes a buy-and-hold strategy with low cost fees, which mimics broad stock market indexes.
I read this information as if it was revolutionary. I couldn’t figure out why I had been so obsessed with beating the market, when I could have focused on areas that I have more control over, like my savings rate.
So after finishing the book, I totally revamped my portfolio and started contributing my money into the SP 500. I stopped worrying if the market went up or down, knowing that overtime, the market would probably go up. Because my risk was spread over 500 (actually 505) shares in the S&P 500, I didn’t need to worry about getting every stock pick right anymore.
Since that time, hot investments have come and gone. However, I don’t worry about chasing the next great investment. For instance, many people jumped into Bitcoin at the top of the market. I could have probably been one of them as well if I hadn’t altered my investment strategy.
Do I miss the thrill of buying a stock and watching it go up?
Absolutely. But, being able to fall asleep at night and not wondering what the market is going to do the next day is an even better feeling for me.
Some people never reach the point you did – good for you to getting there!
And yes, I’ve followed a similar path. My portfolio is much simpler now, and also a bit more conservative. If I were still long-term investing toward retirement I’d definitely be 100% stocks; largely in the S&P500. Now that I’m in FIRE mode I’ve added some bonds to smooth out sequence of returns risk.
Brad – Financial Life Planning recently posted…Why You Need To Understand How Mortgages Work
Thanks for sharing Brad!!! Once you hit FIRE there really is no reason to take on too much risk. It’s all about wealth preservation at that point 🙂
Like you, I used to buy individual stocks, but now I have almost all my money in Low-Cost Index Funds and bank accounts. I still try to get a little tricky with adjusting my asset allocation percentage in US stocks according to CAPE, but I’m simplifying that over time.
I guess that puts me very close to Stage V – Simplicity.
Mr. Freaky Frugal recently posted…Do you have Unclaimed Property?
Hahahah…sounds like you are definitely in Stage V – Simplicity!!!
That’s quite an evolution Rob. I think most of us who have invested for a while have some type of similar highly personal set of phases we went through. Tom
Tom @ Dividends Diversify recently posted…FIRO and You
Thanks Tom!!! It’s funny how many of us have gone through similar journeys 🙂
I think that I am still in phase two – trying to beat the market. It’s pretty foolish of me to still try as I pretty much know that I can’t. What still keep me going is the motivation to do better and to try and generate more dividend and options income.
I am slowly gearing towards indexing investing and will probably take a couple more years to make the full move. Hopefully, my investment lesson won’t be too expensive.
Leo T. Ly @ isaved5k.com recently posted…Do Good Money Problems Exist?
Hahahha…I have been there and it was definitely fun trying to be the market along the way 🙂 But I am glad to get rid of that stress!!!
I plan on utilizing index funds for most of my portfolio, and experimenting with creating my own smaller index funds as my money gets larger.
A smaller index fund you ask? If you take a look at the s & p 500, there are some companies in there I would rather not be investing in with the purchase of an index fund. I plan on learning the basics of stock analysis and then using that to create my own buy and hold index fund from the companies in the index, the ones who have the better financials and future.
Interestingly enough, one of the huge benefits people state for index fund investing is diversification (which is true since you buy so many and easy for us uninitiated). Charlie Munger actually doesn’t believe in it that heavily, he believes in finding an opportunity that will make you money with a safe moat, then make a big bet on it!
Thanks for sharing Chris!!! Back in the day I use to have a fun portfolio where I picked out stocks to test my theories on. They have done well over the years but lately the opportunities haven’t been there like years past…
They seem all to familiar. I’m at the fifth one but know many in the previous stages. I’m not sure how they’ve done. I still have some bare stocks I’m planning to keep for the long term and maybe just rebalancing a bit. 🙂
Hahhaah…yeah I’m in a similar boat. I have some stalwarts that I love that have outperformed the market and I plan to hold for awhile 🙂
Set and forget – just let the power of time and compounding do it’s magic 🙂
Great post Rob
Erik @ The Mastermind Within recently posted…The Mastermind Within February 2018 Goals Check-In
Hahahhaa…exactly!!!
That was an awesome post. I love the common sense investing book as well. I haven’t tried The Buy Side. Will definitely get to it in the near future. Thanks for the recommendation!
It’s a great read…but somewhat depressing at times 🙁
I could see lots of people going through these stages of investing. I would guess that some high risk investors go through the first three phases then cycling back to picking individual stocks hoping to hit it big.
It’s great to see you go through all these stages and evolve into simplicity.
Kris recently posted…Expense Chronicles – February 2018 Costco Cash Rewards
I’m glad I didn’t get back on the individual stock side again. Life is much easier and much simpler 🙂
I love it, I’m fully bought into indices…although I do have fun balancing different indices in my asset allocation.
Ms ZiYou recently posted…Are you accidently offensive with your language?
Hahahha…that’s awesome to hear. Having recently done my taxes, rebalancing and paying taxes on everything was not super fun 🙂
I think I went through three phases. Conservative phase where I picked up blue chip stocks. Thanks to a bull market my returns were good. Know it all phase (thanks to my previous success) where I dabbled into speculative stocks. After crash and burn, I am now in index investing phase. I don’t plan on leaving this phase anytime soon. Nice article mate.
Thanks Dividend Geek!!! The index phase is so much better and a lot less stressful 🙂
This journey sounds similar to mine except I was dabbling in managed funds up until 2014. If I had only seen the light sooner I would’ve have messed with this one and that one. I just could’ve put it in index funds and let it run. My portfolio would most likely be a lot bigger than it is right now.
Jason recently posted…Changing My Attitudes on Our Student Loans
Hahhaa…I had a managed fund for way too long that my grandma gave me. That sucker underperformed for far too long. I should have gotten rid of it much sooner.
Bang on about the phases of investing!
Hahaha!!!!
My investing life has followed yours almost exactly. I have also settled on low-cost index funds. I no longer try to beat the market. This was a great read. Thank you.
Glad you enjoyed the read Shawn!!! It’s funny how many people have followed a similar path to find the best and easiest way 🙂
I moved one phase further when I read a book by Ben Stein and Phil Demuth which described the efficient frontier and I understood you not only buy return but you also buy risk in a portfolio. It turns out you can tune for lowest risk and highest return for best performance. I think it was “Yes you can supercharge your portfolio”
Mean blog Mr Mustard! (to quote the Beatles)
I’ll have to check out the book Gasem!!! I’m always looking for great new reads 🙂
Thx for sharing. I do recognise some steps…
Since a few months, the monthly investing is back on track, emotion free. Sadly, in Belgium, I can not automate the full process. With an app, it takes me less than a minute to do the trade. That is ok.
That stinks that you don’t have access to a frictionless process like automation. Hopefully Belgium offers the feature in future 🙂