FOOL ON THE HILL
This July The Motley Fool begins a month-long campaign to encourage everyone to make a Declaration of Financial Independence to reduce debt, save more, and invest -- any of which are easier if you live below your means. Changing habits is hard enough, but it helps to start with a look at the lessons we learned about money growing up. My parents lived through the Crash of 1929 and the Great Depression. My mother's story provides an earful of money lessons.
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Anyone whose parents lived through the stock market "Crash of 1929" and the Great Depression grew up with this message: At any moment, just when you think things are going fine, you could lose everything. I heard it loud and clear in my house because my mother's family pretty much lost it all. To kick off The Motley Fool's Financial Independence Month, here's a look at how the crash affected them -- and what the experience can teach everyone. Turning your money over to someone else My grandmother tried to make a go of it with the pharmacy, but finally had to sell out. (Lesson: Make financial planning a family affair.) Relying on her husband's stock and bond investments and the advice of her broker, she survived for a few years because the '20s were roaring. She sent my mother to Catholic school, where she was first in her class -- though fond of saying it was only because the number-one girl moved. With my grandmother's encouragement, my mother hoped to attend college at Vassar. (Lesson: Education is essential for financial independence -- and we explain ways that help you save for it.) In March 1929, my grandmother cabled her stockbroker because she was concerned about her investments and asked whether she should sell some or all of them. The message came back loud and clear: They were high-quality investments, and the market would only go higher. She held. (Lesson: You are the best person to manage your money.) We all know what happened in October and the next few years. For my mother, Vassar was out. (Lesson: Don't put money in stocks that you will absolutely need -- such as for college or a down payment on a house -- in fewer than five years.) Penniless, my grandmother and mother moved upstate to live with relatives. Eventually, my grandmother got a job out in the country managing a hotel, and her daughter would take the milk truck run 20 miles into the city some mornings to study at a secretarial school. For several years in the '30s my mother had two dresses. She would wear them on alternating days, washing and ironing the other each night. She used to tell me how tough that was for a single woman in her late teens and early twenties. I'm sure she had plenty of company. (Lesson: Things can be tough, but you can always live below your means.) Loans against the value of your securities Uncle Tom was convinced that stocks and bonds would rebound, so he went as far as loaning my grandmother a little money during the lean years, with the securities as collateral. (Lesson: Don't panic and sell. With a 20-year, or longer, horizon, stocks will outperform other asset classes.) But when the market began to recover, he called in the loans. Of course my mother and grandmother couldn't repay. (Lessons: Borrowing against your investments is not advised. But if do find yourself in debt, when you do borrow, pay down your debt.) Uncle Tom took possession of her securities and apparently did well. In family lore, he became Uncle Tom, the Old Coot -- a small penalty, if you ask me. Around the time that the U.S. entered the Asian and European theaters of World War II, my grandmother eventually was able to buy a very inexpensive duplex in a city neighborhood. She lived in one unit and my parents lived in the other. She reveled in the World War II news, glued to her radio in the dark with the shades pulled for the blackouts. When she died, the place became my parents', and they lived there and rented the other unit for income, eventually selling and buying that 1950s dream: A house in the suburbs. (Lesson: Save and invest in a house if possible. It's forced savings, and it's almost always better for you financially than renting.) Despite some major bumps along the way, with regular saving and investing -- and my father's steady job at Eastman Kodak (NYSE: EK), the Great Yellow Mother -- things stayed pretty secure. Full disclosure What if she had ignored her broker and sold? She might have sold the wrong things, or put the proceeds into something else that lost value. Back then, they didn't have money market accounts invested in treasury bills, for example, or index mutual funds. The banks? Failing left and right. Good thing the family was extremely fortunate: They had relatives to go to, could get jobs, and, in my mother's case, continued with some schooling. (Lesson: While money does matter, concentrate on nurturing your relationships with loved ones -- except Uncle Tom, that Old Coot!) Could you lose everything? When you do begin to invest in stocks, consider putting the bulk of your money in broad market stock index mutual funds, and consider DRIP investing. If you use a broker, make it a discount broker. Have an investing strategy. Buy to hold, knowing why you bought, and when it's time to sell. Have a long-term investing horizon, and take advantage of all the ways to save for retirement. We are better armed today than every individual investor in 1929 -- except, of course, those who played according to rules outlawed with the formation of the SEC. Does this prevent us from making mistakes and learning? No way. I had 1929 and the Depression drummed into me, and I lived through the late 1960s "Go-Go Years," the last great stock market bubble -- and the subject of John Brooks' excellent book -- yet I didn't sell two stocks at the height of early 2000 insanity and bought several others at absolutely absurd valuations that today languish in penny-stock land. Nope, no one -- not a broker, not yourself -- can save you from learning. There's never a better time to start than right now. Oh, and by the way, you wonder what my father was doing during the Crash and Depression? Many lessons there, too, but with a surprise twist. That's for another column. Happy Financial Independence Month! Tom Jacobs (TMF Tom9) is living proof that no matter what other people tell you, you still make your own mistakes. At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
In 1923, when my mother was seven years old, her father died of pneumonia. He had owned a pharmacy in Manhattan, Candow & Co., and I still have the pedestal on which the drug store's signature mortar and pestle would sit in the window. I also have a bottle of his store's generic cough syrup. The label lists stuff you couldn't obtain over-the-counter today without a gun.
The story goes that my mother's wealthy Aunt Minnie said on her deathbed in the '30s that she "wanted to make it right for" my mother. Her husband, Uncle Tom, assured her he would, but Aunt Minnie's wishes weren't in writing. (Lesson: Make sure that your property is distributed according to your wishes. Execute a will, powers of attorney, and other documents.)
Of course, those schooled in history will note my simplifications and a few things I've overlooked, such as the fact that my grandmother's broker was probably only one of the 99.99% of financial professionals who shared his optimism about the bubble and brought others to their doom. The average person -- even the more financially savvy person -- had nothing like the individual investor's resources today and had to contend with financial shenanigans that led to the formation of the Securities and Exchange Commission (SEC) in 1933. In that kind of environment, it's hard to imagine what a lock brokers had on commissions, investment information, and mystique. Not to mention the old gender wars: My grandmother was smart and tough, but it was very much a man's world, and she and others can hardly be faulted for going with the "experts."
The experience of loss pervaded our house, and I grew up with the fear that the floor could open up beneath us at any time. There are no guarantees, but today we know there are things everyone can do to combat that fear. First, keep a rainy-day fund in a short-term savings vehicle. Next, pay off debt. Then learn all you can about investing before actually investing.
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