Getting It Half Right Is Still Wrong

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UnknownWe all see the light in different ways at different times.  Here’s how it went for Osbon Capital editor Steve Mott.

I don’t remember exactly how I was introduced to index investing, but I was well ahead of the curve. I liked the idea of owning all the big company stocks without having to figure out which ones would be the big winners, so I started buying Vanguard’s S&P 500 index fund in the early 1990s.

With dividend reinvesting and additional purchases, my modest nest egg grew with minimal attention and effort. As the dot.com wave rolled to shore, I added QQQ, the index fund tracking the hot NASDAQ exchange. I set up monthly automatic purchases to take advantage of dollar cost averaging.glass-half-full1-183x300

Markets were very strong at the time, so my balance continued to grow as I smugly watched on the fascinating new contraption on my desk, the internet. My monthly contributions bought fewer shares each month as prices rose, but I didn’t care. My net worth continued to slowly grow.

And then…

We know what happened next: the bubble burst. Prices slid for months. My dollar cost averaging continued for a while. I added money each month, but still my account balance fell. It was painful. The pride I had felt in being an early adopter of indexing turned to doubt, then regret.

As prices continued to fall, I panicked and fled. I not only stopped my monthly contributions, I started selling some of my existing holding and buying bond funds, because of their safety.

Then 9-11 hit. Further discouraged and fearful, I sold more holdings, feeling safer in cash than stocks that had let me down. Honestly, I was relieved to be out of the market.

I waited for something good to happen. And it did. The economy found its footing eventually and stock prices turned around. After watching significant gains for about 6 months, I started buying back shares of the S&P 500 index…at prices well above where I had sold months earlier.

A costly education

This is all ancient history now and lessons are written all over the margins. Ultimately I got it half right. I trusted the indexes to deliver the benefits of capitalism. I knew enough to keep buying shares. But when the markets turned sour, I panicked. Instead of buying more at lower and lower prices, I sold. And then I hid on the sidelines until I was sure the bad stuff was done. When I bought back in, I did so at higher prices.Vanguard 4

Thanks to my very human instincts, I sold low and bought high. Vanguard has a great tool for calculating this behavior.

It was through this experience that I learned that buying the right stuff is only half the battle. The other half is overcoming emotions in turbulent times and staying invested when it’s so much easier to quietly retreat. My poor behavior under pressure cost me real money, and taught me that I needed help. I sought the help of a professional advisor. (My advisor is not Osbon Capital, but a firm with a similar investment approach in my hometown.)

Having an advisor did not prevent the markets from going down. The great recession hit hard. But with my advisor acting as an emotional buffer between me and my account, I resisted any temptation to sell in 2009. I am happy to have a voice of reason I can turn to when markets are uncertain.

It’s not particularly flattering to recount this story, but as I meet more and more investors trying to protect and build their wealth on a DIY basis, it seems like a good story to share.

Steve Mott


Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

Past performance is not indicative of future results.  Investment in securities, including mutual funds and ETFs, may result in loss of income and/or principal.

Specific securities identified and described may or may not be held in portfolios managed by the Adviser and do not represent all of the securities purchased, sold, or recommended for advisory clients.  The reader should not assume that investments in the securities identified and discussed were or will be profitable. 

An investment cannot be made directly in an index.

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