W is the person we know who made the longest journey to become an effective investor. Before, he chased performance, jumped on popular investments, and focused only on the short-term action of his holdings.
In Part One we profiled how he managed to learn the correct lesson from the Tech Wreck in the year 2000. W learned that popular but over-priced assets are dangerous. Others learned the wrong lesson, “stocks are dangerous.” Those who learned that lesson generally went on to buy over-priced real estate, or withdrew completely from investing.
W profited by owning equity investments in the recovery from the technology bubble, all the way up to the stock market peak in 2007.
Approaching his retirement years, the ensuing market value losses terrified him. He told us later he did not know how he was going to explain to his wife how he had ruined their financial situation.
Although he was tempted to sell out at low points several times during the financial crisis, three things helped him stay invested, but just barely:
- The realization that the damage was probably already done, and selling out would only lock in the losses from the peak.
- Our relentless reminders of how market cycles work, and the positive perspective that comes from taking the long view.
- The dawning realization that portfolio income is what would supplement his retirement—not the market value that appeared on his statements. “If the fruit crop is big enough, why would you have to worry about what the neighbor would pay you for the orchard?”
There is no polite way to say it. W was a difficult client in these years. We spent a lot of time talking him down from the ledge, so to speak. But it was worth it, for the kind of investor that W became.
When the recovery from the financial crisis arrived, W’s portfolio was in position to potentially rebound, and it did. Free from worry about short term action, he could stand to own bargains that might be volatile in the short run. It paid off.
W went through the valley of the shadow of death, and learned that fear was optional. More accurately, he learned that fear did not need to be acted upon. When he emerged on the far side of the valley with more wealth than ever before, his experience had inoculated him against worrying about short term fluctuations.
W had completed the second part of his journey. He had learned two crucial lessons. But he was not yet fully formed as an effective investor. One more lesson was needed. It came entirely from within himself, with no help from us. We’ll write about that in the next installment.
If you would like to talk about your journey or your situation, please call or write.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing.
Investing involves risk including loss of principal.