…his timing was abysmal! The dot-com bubble burst a couple of weeks after he’d invested $150,000. Close to 80% was wiped from the technology sector and in the space of two years the share market declined by almost 50%… He was beyond devastated!
Meet Ted Griffin. ‘Griff’ to all his friends, but just plain old ‘Ted’ to you and me. Ted had always been a great saver, he’d just never had a lot of luck investing.
Learning an important lesson from a ‘sure thing’…
When Ted was fifteen years old, he invested all the money he earned from his paper run in a penny stock on the back of a ‘hot tip’ from a friend at school. Unsurprisingly, Ted lost all his money. Year upon year of trekking up and down the footpaths around his neighbourhood to deliver newspapers went up in smoke literally overnight. And Ted was understandably devastated! So much so, that this one event scarred him for life.
In hindsight, he knew he never should have listened to Tommy Demarco and his playground prognostications of a ‘sure thing’, but, despite learning an important lesson about the need to diversify when investing, the loss of his hard-earned money still left Ted with enduring regret.
…he could only bring himself to invest when there was an abundance of good news around… Unfortunately, this led to a lifetime of horrible investment timing…
In fact, it made him so anxious about fluctuations in the share market that he could only bring himself to invest when there was an abundance of good news around about the extraordinary gains that other investors were reaping after year upon year of strong returns! Unfortunately, for Ted, this led to a lifetime of horrible investment timing . . .
Patience eventually lead to the perfect time to invest
After finishing his studies, Ted entered the workforce in 1980 when he was in his early twenties. He’d already saved $2,000 from part-time jobs that he’d done while completing his degree at university, but he was extremely reluctant to invest it as there was a lot of negative press around about high inflation and Cold War tensions between the USA and Russia potentially leading to a significant decline in the value of the share market. So, Ted waited until the narrative became more positive.
To Ted’s immense disservice, he waited 7 whole years until the share market was running red hot! Everyone was making a killing in stocks and all the reasons not to invest seemed to have subsided so much so that they were no longer even a concern. This, thought Ted, was the perfect time to invest! And on Friday, 16th October 1987, Ted invested his hard earned savings (which was now at $25,000) into an index fund that was comprised of a diversified portfolio of the major blue chip stocks on the share market.
Unfortunately, for Ted, the next trading day came to be remembered as Black Monday because the Dow Jones crashed by more than 20% in a single day! World financial markets also tumbled, and Ted saw the value of his portfolio plummet before he had even received his trade confirmation in the mail.
Once again, Ted was understandably devastated! He couldn’t believe this was happening to him. He thought he must have the worst luck in the world![do_widget id=text-2]
In the days that followed, he read something about ‘portfolio insurance’ being the cause of all the problems, but he couldn’t understand why he hadn’t heard anything about this at all during the years of extraordinary market gains that occurred throughout the 1980s. Surely, thought Ted, this market crash had to be an anomaly!? A mass panic that was founded in neither fact nor logic! So, with this mindset in play, Ted decided not to sell out of the index fund and instead hold onto his investment. Unbeknownst to Ted at the time, this was the best investment decision he would ever make!
Fear of missing out proved stronger than his fear of losing
Although Ted had learned some lessons about the importance of diversification and holding onto investments for the long-term, true to form, he still couldn’t bring himself to invest more money in the share market until there was an abundance of good news around about the extraordinary gains that were being reaped after year upon year of strong returns. For Ted, now in his early thirties, the shadow of Tommy Demarco’s playground prognostications still loomed large! That ruinous penny stock had made him an anxious investor and there was no changing that.
It follows that Ted saved his money throughout the remainder of the 1980s and all the way through the 1990s. The collapse of the Soviet Union unfolded, the First Gulf War came and went and the new millennium was ushered in with the promise of a better tomorrow. And just like it was in 1987, the share market was once again running red hot!
The dot-com boom was in full flight as investors fell over each other to get a share of the profits that were coming from the internet.
It was an exciting time and Ted could feel the positive energy in the air! Indeed, the noise around the share market was so positive that, true to form, Ted felt like this was the perfect time to invest! And at the beginning of March 2000, he took $150,000 of savings which he had built up over the last 13 years and invested it into the index fund.
Fortunately, for Ted, he had the diversification part right, but, once again, his timing was abysmal! The dot-com bubble, as it came to be known, began to burst only a couple of weeks after Ted invested his $150,000. The technology sector lost close to 80% of its value in the following two years and the share market, more broadly, declined by almost 50%. Ted was beyond devastated!
How could this be, he thought? It was like as if he was ‘cursed’, his friend, Billy, said to him in passing as Ted recounted the ill-fated timing of his most recent investment decision at a weekend barbeque. However, they both agreed that at least Ted was not as ‘cursed’ as their other friend, Dave, who had invested all his money exclusively in technology stocks with a hefty margin loan attached – the end result being no less than bankruptcy! If only Dave had diversified, Ted thought to himself quietly as he and Billy lamented the situation over steak and a cold beer.
He had developed some good investment habits
Just like he had after the crash in 1987, Ted held onto his investment. He didn’t sell any of his holdings in the index fund, despite being tempted on more than one occasion to be done with investing forever. Although Ted had developed some good investment habits over the years, he still couldn’t bring himself to make any new investment unless the share market was running red hot. The psychological scarring brought on by Tommy Demarco was with him for life and he needed a wave of positive news to encourage him to invest fresh savings.
This would be his largest investment to date!
As with the two major share market crashes before it, Ted was consistent, if anything, when it came to the global financial crisis that began to unfold in October 2007. Unfortunately, for Ted, he had just invested another $250,000 of fresh savings into the index fund when the housing bubble burst in the United States of America.
In what quickly became a broader credit crisis as trillions of dollars of toxic debt infected the global financial system, share markets around the world tumbled to painful lows as massive write downs wiped billions of dollars off balance sheets in a seemingly never-ending barrage of ominous news. This time it was sub-prime mortgages and collateralised debt obligations that were to blame. Whatever they were, thought Ted.
He shrugged his shoulders forlornly as he once again couldn’t believe his terrible timing! It seemed to be even worse this time around, though. Some pundits were calling the global financial crisis the ‘end of capitalism as we know it’. A few of Ted’s friends even lost their homes as, like Dave had years earlier, they too fell victim to ill-conceived margin loans and they warned Ted about the dangers of remaining invested altogether. ‘Griff’, they said, ‘Pull your money out, mate! The whole system is coming down . . . !’ But, Ted was too set in his ways to change course, so he did what he had always done and he held onto his investment.
Despite horrific investment timing, his portfolio was in great shape
You’ll be happy to hear that Ted, or ‘Griff’ as we probably know him well enough to call him now, retired last year in his early sixties. He had intended to work for a few more years, but, despite his horrific investment timing, his retirement portfolio was actually more than he needed (between $1,600,000 to $2,000,000 on a conservative estimate), so he decided to hang up his boots and move to the coast.[hcode_accordian accordian_pre_define_style=”toggles-style3″ accordion_preview_image=”toggles-style3″ without_border=”1″ accordian_id=”1519614220″][hcode_accordian_content accordian_title=”Estimates used to calculate Griffs retirement balance”]October 1987: $25,000 (Invested Savings) – 20% (Share Market Drop) = $20,000 (Investment Value) x 1.10^12 (12 years earning 10% p.a.) = $62,768
March 2000: $62,768 (Current Investment Value) + $150,000 (Invested Savings) = $212,768 – 50% (Share Market Drop) = $106,384 x 1.10^7 (7 years earning 10% p.a.) = $207,312
October 2007: $207,312 (Current Investment Value) + $250,000 (Invested Savings) = $457,312 – 40% (Share Market Drop) = $274,387 x 1.10^10 (10 years earning 10% p.a.) = $711,689
June 2017: $711,689 (Current Investment Value) + $500,000 (Savings) = $1,211,689
Retirement Balance: $1,211,689 (Total Investments + Savings) + Griff’s Superannuation Balance = $1,600,000 to $2,000,000 conservatively
Griffs estimated investment return of 10% is based on the historical 30 year returns on the S&P 500 for the period 1986 to 2016 taken from an article appearing on A Wealth of Common Sense by Ben Carlson CFP[/hcode_accordian_content][/hcode_accordian]
There is no doubting that Griff would have saved himself a lot of heartache, anxiety and lost opportunity if he had just followed a few simple investment rules, such as dollar-cost-averaging, but, for all his mistakes, he still ended up in a very comfortable position at retirement.
What we can learn from Griff’s successful, yet ill-timed journey is that investing in the share market is not about timing the market, but time in the market. With a long runway (20 years or more) and committing fresh savings to a diversified portfolio (e.g. mainstream index funds or exchange-traded-funds), even if you had invested at literally the worst possible time over the last forty odd years, you would still be in a strong financial position today.