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Dealing with a Setback Thumbnail

Dealing with a Setback

Bull and Baird

Let me tell you a story of how bad of an investor I am. 

In 2006 our son was born. We tried forever to have him and when he arrived, our family was filled with joy. Little did I know what was about to happen to the World. 

On his first birthday, January of 2007, my wife and I took a chunk of our money and dropped it into a 529 account and deployed it 100% into equities. We were hopeful that when he turned 18 it would cover some portion of the gigantic bill that would come due. 

On his 2nd birthday, January 2008, it had basically gone nowhere. 

On his 3rd birthday, January 2009, that account had lost close to 30% of its value. Two months later it was down 50%. HALF. I HAD LOST HALF MY SONS COLLEGE ACCOUNT. 

I was a relatively new Dad, working through the worst financial crisis since the Great Depression, and my tiny son’s college account got nuked. Max pain my friends. 

I had two choices: take my money out because I was scared or leave it be. I left it be, what else was I going to do?  

On his 5th birthday it was back to breakeven. 

On his 11th birthday it had doubled from my initial investment. 

This year, on his 16th birthday, it was up 5x from my initial investment.  

An account that was started at arguably one of the worst moments in history, that got cut in half along the way, was up 5x just 15 years later. Did I get lucky that this time frame was the 2nd best bull market ever? Sure. Also here’s where I’ll say “past performance is no guarantee of future results.” 

What’s the takeaway from my setback? What’s the timeless lesson that I’m trying to convey? 

First, it’s that you need a reason to be investing in the stock market. Whether it’s college, or retirement, or a wedding, you need a purpose for your money otherwise you’ll just run for the hills at the first sight of losses. “Make number go up” isn’t enough. 

Second, time frames are all that matters. Every single discussion about the stock market should start and end with “how long until you NEED this money?” If it’s the next few years, then, in my opinion, it should not be in stocks, period. The stock market grows over the long run, that’s why we invest in it. Long run…not short run. 

Third, no one knows when this horrible market will end but we do know one thing: it will end. The average bear market (from top to bottom) lasts about 338 days. It might take less, it might take more, but that’s as good of a way as any to think about it. 

For some strange reason humans crave complex answers to questions when we know deep down that the simple answer is almost always right (and easy to do). 

If you need to lose weight the simple answer is burn more calories than you consume.  

If you need to get a good grade on a test, study more.  

The simplest advice for investing is this: be more patient. If the market is down for whatever reason, don’t cash in your losses to stop the mental anguish. Instead, be more patient, hold to the reason you are investing in the first place. 

I know that’s little solace as you stare at losses worrying about the future. But guess what, 2009 Michael also stared at losses and worried about the future.

I’m not promising you’ll experience the same returns he did, I’m just telling a story from another difficult time (like now) and what I learned. 

In the end, Michael of the past followed the simplest advice as the stock market came apart (as it has numerous times in history): be more patient. 

And that made all the difference.