How I Conquered Investment Roadblocks!

In my previous article I told you about my background story and how I began moving down the path to master the principles of investment.  But I had not yet created a framework around which I could invest confidently.  I would struggle to cope with uncertainty in my decisions. I needed to know how to be as certain as possible I’ve made a good choice.  I’ll also tell you how gold saved my life!

In this article I’m going to focus on how I tried to invest.  I’ll tell you what I was trying to achieve and what didn’t work.

Setting investment goals

The trouble with not having a goal is that you tend not to achieve it…

The biggest problem was that I was not clear on my investment goals.  I should have sat down and planned this out.  Unfortunately, retirement was some vague notion that old people worried about.  I was in my early 20s and I figured that somehow, I would be rich and the future would take care of itself. 

The trouble with not having a goal is that you tend not to achieve it.  Imagine a basketball game where the referee removed both the baskets.  Not much would happen.  The players would probably just mill around, occasionally passing the ball and eventually get bored.

The trouble is, this is how most people approach their investments.  How can you know where to invest if you don’t even know why you are doing it?  You must start with a well-defined goal and work backwards from there.  I’ll explain more about this in the later articles.

Savings accounts

Probably my first investment was savings accounts.  I think this is the same for most people.  When I joined PwC one of my colleagues told me that he had $10,000 in savings.  He wanted to know how to invest.  Potentially my first client .  He knew that I had a finance degree.  Unfortunately, at that stage I really did not feel comfortable advising him.  That shows you how much a finance degree prepares you for the world!

So basically, I just put my money in savings.  I had two problems with this.  First, even prior to the bank bail-outs of 2008 interest rates in savings accounts were pretty poor.  I wasn’t motivated to save by the pitiful rates.  You didn’t need a degree in finance to see that it would take forever to save a decent amount.

Secondly, I had a big student loan.  The interest rate on the loan was higher than the savings rates.  So actually, it wasn’t a good investment decision to put my money in savings.  I should have just paid down the loan quicker.

Don’t trust the banks!

…banks are some of the biggest scam artists around…

One thing about banks.  I think that banks are some of the biggest scam artists around.  And that’s coming from a banker.  Consider this: in 2008 banks collectively created the biggest financial crisis the world had ever known.  And they were rewarded with massive bail-outs.  The bail-outs were financed by the Fed and other central banks in Europe and the UK printing money.  What is the result of this?

The problem of inflation

Inflation.  It means that the prices of food, clothes and other necessities generally go up.  It also means that interest rates (the price of borrowing money) goes down. So, what happens here?  It means that your savings rates plummet while the cost of living goes up.  So, if you are a saver you are paying to keep the banks operating.  Also, as a consumer, the increased prices of foodstuffs also indirectly pay for the banking bail-out.  So, the banks screw up and responsible people like you pay the price.  As a matter of principle, I would not put my money in the banks.

Risky savings accounts

But there is another problem.  I don’t think that the return on savings accounts adequately reflects the risk.  Generally, as the risk increases so does the return.  However, as I mentioned, in 2008 the banks almost brought down the entire financial system.  It required extraordinary measures to keep the banking industry afloat.  In some cases, depositors lost their savings.  The central banks may not be able to bail-out the banks a second time.  Putting your all your money in a bank is just too risky in my view.  You could lose everything.

So, I concluded that putting my money is savings accounts was a complete waste of time (and money).

Lacking investment knowledge

A serious road block for me was a lack of knowledge.  Sure, I had two finance degrees but what I have discovered about conventional education is that it doesn’t provide a framework for action.  It is very academic.  You could say that learning finance in school is like getting a jigsaw puzzle.  They give you all the pieces but they don’t put it all together for you. 

It reminds me of when I tried to learn Spanish.

Learning finance is like learning a language

When I started learning Spanish I focused on all the grammar.  This was how my classes were set-up.  I also bought books and worked through all the problems.  Thanks to this, I knew most of the rules but when I went to Spain I could barely speak a word.  I couldn’t figure how to string a sentence together.  Also, I couldn’t understand what people were saying.  I was stunned.

So, I changed my approach.  I began practising conversations with Spanish speakers.  This taught me the context and framework for speaking a foreign language.  So, what was the lesson?  I took action.  Action is how you will accumulate investment knowledge.  It is also how you learn how the pieces go together.

Fear of making losses…

But what held me back from taking action was fear of making losses.

I know that a lot of people now bare the emotional scars of the global financial crisis.  We don’t want our investments to lose value should the market go down significantly.  But I still needed to take action.   So, I opened up a small investment account and bought a small number of shares.  I used money I could afford to lose.

Honestly, I didn’t really know what I was doing.  I watched my stocks daily.  Nothing much happened.  They went up some days and down the next.  I recall I picked really big well-known companies that had been around a while.  I didn’t really make any money out of my investment.  But I didn’t lose any either which was encouraging.  What I learned was that to really make money out of stocks was that you need to invest a lot of it over time.  Scary?  Maybe but not if you invest wisely.  More on that later.

Can you trust advisers?

Next, I hired an investment adviser.

I’m not sure where I found him.  I think he called me out of the blue.  He worked for UBS and arranged to meet me at my office.  This was back in my mid-twenties and I was still pretty trusting.  But I knew UBS so I drew some comfort from that.

Roth IRA

Basically, he had one investment to sell me.  A Roth IRA pension plan– with fees paid to UBS.  I had the impression that he sold that investment to everyone.  He didn’t do any real analysis of my situation which is crucial to providing proper advice to someone.  It was a bit like when you go to a car dealership.  Every car they have is perfect for you.  Nobody at a Honda dealership is going to say “well actually I think a Toyota is better for you…”

…fees… can be devastating to your portfolio…

But the investment performed OK… to a point.  The first thing is that I had no idea about fees and how they can be devastating to your portfolio in the long run.  So, I don’t know how much more money I could have made if I had done my own research.  The second problem was access to funds.  If you need your money for an emergency (like say unemployment, which has happened to me four times!) you will pay huge penalties!  For withdrawing your own money….

Third, when I travelled to London to work for a German bank I carried on making contributions.  And the IRS charged me penalties for doing so.  What?!  So, I had to stop contributing to it.

The point is that while pension plans can have their advantages they also come with serious disadvantages and may not be appropriate for you.  There are many other ways to save for retirement.

Back to stock options…

I mentioned in my previous article that I received stock options from a couple of the companies I worked for.  This was a common form of compensation in the United States during the late Nineties and early 2000’s.  The thing to consider is that it is an indirect investment to the company’s stock.  Some people might think that it is good to be invested in the company stock.  After all you know your company… right? 

This is known as familiarity bias.  This is when people underestimate the risk of their employer’s stock because of their familiarity with the company.  They are also overconfident in their estimates of the company’s performance.

Your company’s stock is high risk!

Well Enron and Lehman Brothers employees probably thought they knew their companies and both ended in disaster for many of their employees. I heard horror stories of Lehman bankers who borrowed money to invest in Lehman Brother stock. This meant that experienced bankers went to being millionaires to heavily indebted overnight.  Wealth and job wiped out in an instant.

Now this is very dramatic but it is a good example of why you probably want to get rid of company stock and/or options as quickly as possible.  As I said previously, when I worked for the Internet company I held on to my stock options only to see them expire worthless.  I could have sold them earlier for significant money.

Good times and bad debts

My second mistake with stock options was at Sallie Mae.  I incurred debts through various amusing activities (like trips to Miami and NYC!) and just generally having a good time.  But instead of exercising the options and investing the proceeds in a diversified portfolio (more on that in the next article), I used the proceeds to pay off debts.  Not ideal.

The golden investment…

The next thing I tried was investing in gold.  Strictly speaking gold is not an investment.  An investment has cash flows.  Obviously, a block of gold doesn’t have any cash flows.  Gold can be an investment if you invest in companies that mine or sell gold products.  But then this is not especially different from any other investment.  You are making either an equity or debt investment into company that happens to be in the gold industry.  Not necessarily the best performing industry.  You would have to analyse the company before buying the stock or the bonds.  And it is possible that the company hedges its exposure to gold.  Therefore, you might have no exposure to gold.

Gold mining stocks

At first, I looked at investing in gold mining stocks but I quickly realised that this was going to take up a lot of my time.  I was already spending my days analysing real estate companies.  I didn’t want to spend my evenings analysing gold companies for an uncertain reward.

Gold bullion

So, I bought gold bullion.  I kept some in a vault and some at home.  I bought gold bullion because of the fall-out from the 2001 recession and later because of the crisis of 2008.  At this point I did not believe that banks were safe places to keep my money.  I was also concerned about the value of fiat currencies (bank notes). 

Currency collapse

You recall what I mentioned about inflation.  It is possible that a country that prints too much money could suffer a currency collapse.  It has happened many times in history.  And in 2008 the central banks were printing trillions of dollars to pay for the bail-outs.  This was uncharted territory.  The last thing I wanted was my savings in a bank that might go bust, denominated in a currency that might collapse.

The S&P 500 lost half its value after the crisis of 2008…

Additionally, like many people I was extremely concerned about the stock market.  The S&P 500 lost half its value after the crisis of 2008.  However, it turns out that in the long run I might have been better off investing in the market in 2008 since it has doubled in value since then.

But hindsight is always 20/20.  I’ve done very well out of gold regardless and I think if you are looking for safe place to keep your savings or your emergency fund, gold is a good place to put it.  Like diamonds, gold is forever.

So, what are the key points here?

1. Before you start investing you must set goals.
2. The risk of savings accounts does not match the risk.
3. You really can’t trust banks. At all.
4. Learning finance is like learning a language. You need context.
5. Don’t let fear hold you back.
6. Make sure investment advisors truly understand your situation
7. Investing in your company’s stock is a risky strategy.
8. Gold bullion is a good investment

I’ll tell you about my “ah-ha” moment in my next article.  How I finally created a framework for my investing.  But in the meantime, if you have any questions or comments, please leave them below.