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My Bumpy Road

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By Eldrehad
May 2, 2003

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Just want to share a little experience here... what I've done that's worked... what hasn't worked... how I got started... what I learned along the way. Maybe somebody will learn something from it, and if not, writing about it forces me to think back and reflect - and thinking back and reflection often leads to insights... so I guess I'm writing this to benefit myself as much as anyone else.

How did I get started thinking about retirement and investing? Well, my mother did me a huge favor one day. She gave me a book to read entitled "The Wealthy Barber" when I was a teenager. No, I'm not particularly recommending this book - it has some assumptions in it I no longer like and there are better books out there covering the same subject. But basically this book explained how compound interest over time works, and that how anyone of even modest means with enough time and discipline can become quite wealthy.

This particular book didn't really cover consumer and credit card debt, but it did explain how an interest rate of 15% over time in a good actively managed mutual fund would grow (see what I mean about assumptions I no longer like?). Fortunately for me, I was able to quickly come to the realization that "If 15% interest being paid to me over time amounts to so much, imagine how 18-19% being paid by me must work over time!" I've never carried much of a credit card balance in my life (sure, when I was a struggling student I sometimes had to put car repairs on my credit card and pay them off over a few months, but that's about it). Some pretty powerful lessons my mother taught me early by having me read that book.

Now I didn't take the investing lesson to heart immediately (though the credit card lesson sunk in immediately), but it was kicking around in my brain for a few years. When I was struggling through my first few years of college (a classic underachiever, I was) I managed movie theaters for a living. The pay wasn't very good mind you... but they did offer a 401(k) and offered a match of 50% up to 6% of my pay - 100% vested from the beginning. Thanks to those ideas kicking around in my head, I signed up. Now back in those days I was still operating under the assumption of the 'magic' 10%. Save and invest 10% of your income and you'll do fine... forget about the rest. I no longer hold this view - but it served as a starting point for me - part of the reason I ponied up the full 6% of my pay was not only to take full advantage of the matching, but also because 9% (6% me, 3% match) is pretty darn close to that 'magic' 10%. I picked a mix of funds back then, about 80% in U.S. and 20% in foreign funds.... I used the little workbook they give you when you sign up... you know the one - telling you about risk tolerance and time to retire and offering model asset allocations. I even had some money in 'cash' (though not much) and I was in my early 20's. That's changed... but that little brochure that came with the 401(k) sign-up sheet helped get me started.

So I bounced around college for a little while, not really succeeding, but shuffling money into my 401(k) like clockwork. I don't remember where I read it, or how I heard it, but at some point I learned about index funds, their low expense ratios, low turnover... thanks to "The Wealthy Barber" I knew how powerful even a 0.5% return difference could be over time. I don't remember what the % difference in fees were between the index fund and the actively managed ones I was in, but the index fund's fees were lower. About the same time I somehow learned, can't remember where, that there is no 'magic' asset allocation model. That depending upon one's situation, folks in my age bracket might choose to be invested 100% in stocks. These two lessons put together, and I picked up the phone... called my 401(k) provider, and switched everything over to the index fund, as well as allocated 100% of my future contributions that way. I now realize it was a mistake to be invested in cash at all at such a young age (at least for me, everyone is different), but at least I got started.

So anyway... after bouncing around college for far too long and wasting a lot of time partying, I came to a crossroads in my life. I knew bouncing around college wasn't working. I told myself it's time to either put up or shut up. Either decide to really get a degree, or just quit fooling myself and get on with a career. Thank goodness I chose to get the degree.

Overnight everything seemed to change. I enrolled in a different community college in my area - thought the change of venue would suit my new focus, my turning over of a new leaf. But what to study? What to major in? I loved science (was a Physics major for a while), liked math, liked English, liked history, loved to sing and loved music, loved to act (and did a little in high school) and loved drama... what to do? What do I really want to be when I grow up? Maybe that's why I bounced around so much - I didn't really know.

But I knew I wanted a degree, and knew I didn't want to wait... so I said to myself, "Self? whatever you decide to do, chances are whatever it is you'll be working for some kind of business, why not major in that?" That's what I did - and it worked. I enrolled, signed up for business courses... actually studied once in a while... actually showed up to class every day... actually turned in all the assignments.

Now I was still partying a little... I was in my 20's after all... about this time I went to a local bar/club. Asked a cute girl to dance... that cute girl became my wife. Funny how these things work... I get my own act together, and other things just fall into place - isn't life wonderful?

Anyway, I spent 2 semesters at this community college (I needed to give my GPA a boost before transferring to a University). Two semesters of a 4.0 GPA later, I transferred to a local state university. Spent a couple of years there, including summer courses, all the while working, plunking down money into my index fund, getting married along the way, and graduating as a 2 time Presidential Scholar.

So... degree in hand, I set out to make my way in the world... doing something I loved and that I thought was important. Managing movie theaters was nice while it lasted, but I'd outgrown it... time to move on. I looked, and looked... for a few months... but I couldn't find anything. As it turned out, I'm glad I didn't � funny how life turns out sometimes. While I was looking I kept thinking, "What about a Masters degree?" I kept going back and forth between an MBA and a Masters in Economics... finally it came time to make a decision, so I just chose the MBA. I'd like to say there was some real reason behind that choice, but there wasn't. Both appealed to me, but I wanted to get started � the sooner I started the sooner I'd finish � so I had to pick one.

I took the GMAT test, did well, and looked at local schools. UCLA and the Drucker School were the two schools in the area with the best reputations, so I called both. As it happens, I was applying after the normal deadline for a fall start date � but I figured, "If you don't ask, you'll never know." UCLA said they did reserve spots for exceptionally well-qualified candidates who might apply late, but the tone of the person on the phone wasn't encouraging. The Drucker admissions representative asked, "Have you taken the GMAT? Might I ask how you did? Really? That's a very competitive score. I'll send you the admissions package right away. We'll need transcripts, an essay, letters of recommendation, etc.. Send them in as you get them � don't worry if we get things piecemeal, we'll put it all together here." I started at Drucker that September. As it turns out, I loved the school... much smaller, more intimate... smaller class sizes, fantastic professors. I wish I could tell you I planned it that way after carefully comparing the schools, but I didn't. The reality is that the Drucker admissions representative was simply better at customer service than her UCLA counterpart. UCLA's loss, and my gain.

I now had to figure out how to pay for this education. Private graduate schools aren't inexpensive. I got some tuition reimbursement from my employer, a partial scholarship from the school, and took out student loans for the rest. I continued to work full-time while concurrently carrying a full-time class load. Fortunately, managing a movie theater that is open from early morning to late at night, 365 days per year, was a blessing. I piled 16 units of classes on two days a week, and worked 8+ hours the other five. Considering the commute to school was about an hour each way, plus studying time, I kept myself pretty busy. Thank goodness for my wife... I could have never done it without her support... you know... doing my laundry, shopping, meals... all that stuff I didn't have time for. I could have quit working, or cut back to part-time (I was only one of two students in my class who managed both a full-time job and a full-time course load), but to do that would have meant bigger student loans. "The Wealthy Barber" still firmly implanted in my brain, I knew I wanted to earn interest, not pay it, so that's what I did. Two years later I graduated � all the while plunking more money into those index funds in my 401(k).

Now it was time to get a job. I guess "The Wealthy Barber" really made an impression, because while I liked all my classes in grad school, I liked finance classes the most. I spent a few months looking for a finance position, finally found one, and took it. Of course I again signed up for the 401(k), took full advantage of company matching, and allocated 100% of my contributions to the index fund offering. About the time I took this job, I discovered The Motley Fool. While I learned an awful lot about accounting, finance, discounting cash flows, corporate strategy, etc. in grad school, TMF had information that grad schools just don't teach. Among them the idea of choosing a discount broker, rolling over a 401(k), and directing it yourself � giving you the option of investing in individual stocks. That's just what I did with the 401(k) money that I'd acquired over the years managing movie theaters. I sill am a firm believer in indexing, so the majority of my portfolio went into Spiders, but with the rest I picked individual stocks, including allocating a small portion of my portfolio to Foolish Four picks � I don't use this strategy any longer, but like with my other mistakes, this one allowed me to at least get started. This was about three to four years ago, and I've learned quite a few lessons since then.

I no longer really like the Foolish Four, though I still own a couple of those positions (as it turned out, I like them for reasons having nothing to do with the FF today � funny how life works that way sometimes, isn't it?). I made a couple of other individual stock mistakes � not mistakes in the sense that they went down in value (though some did), but mistakes in the sense that I with all my education and reading I still should have done even better research, had an even bigger margin of safety, an even better understanding of the business, and an even better investing thesis. But you know what? I learned from each and every one of those mistakes... and those mistakes are how I got started.

It's about four years since I took that first financial analyst job, and I do pretty much the same thing for a different firm today. In those four years I've gotten adequate life insurance, long-term disability insurance, set up a sufficient emergency fund, and continue to save and invest. I re-examine my goals all the time... continually monitor my holdings, make sure that I'm putting enough away. I've started a Roth IRA too.

I just love saving and investing... frankly, for me it's a great deal of fun � and it's a subject I've absolutely loved ever since reading "The Wealthy Barber" as a teenager. As a matter of fact, if you were one of the high school kids who worked at one of the theaters I managed over the years, you probably found yourself once or twice being told by your manager all about the power of compound interest over time, and how it works for you and against you both in investing and with debt. I'm sure a few of the 16 year-olds rolled their eyes at me (behind my back of course, I was their boss), but I wasn't deterred. With all that time before them, I would think it a crime for someone not to tell teach them at least this simple lesson... give them the start that I got.

Where do I go from here? Not sure... then again, that's no different than it's ever been. I stumbled into picking business as a degree choice... stumbled into my wife... stumbled into a great many of the things that give my life meaning today... maybe I'll stumble into the next one soon.

One thought I've had nagging at the back of my mind, however, I think I'd very much enjoy a career as a financial planner � it's something I love, a subject I understand, and a passion of mine to help others along this path... if you don't believe me, just ask one of those former 16 year-olds! Yes, I'd need to go back to school once more in order to become certified � and I still have some to learn. I like to consider myself an expert in some of the very important areas I need to master to be a good CFP (certified financial planner), but I know I don't know nearly enough about some others (estate planning being one... it just hasn't come up as a need in my life, so I haven't learned much about it yet).

So I've been squirreling extra money into my e-fund recently... building up a reserve... just in case... just in case I do decide to give up my secure job, secure salary, and switch gears once more. The prospect scares me a little. What if I don't get enough clients? I'll have spent that money for school, chewed through savings while getting started... what if it doesn't work out? We'll see what the future holds... and at worst I do have a backup plan - even if I never switch careers during my working life, what a wonderful 'hobby' to have during my retirement. Then it might not matter so much if I don't get enough clients right away to make a go of it.

I don't know how many of you have read this far down in this long, rambling post � but for those still with me, I admire your endurance! I guess I'll leave you with this final thought:

Whether talking about planning for a normal retirement, an early retirement, finance, investing, or just life in general, I'd like to offer this...

Don't worry so much about getting it 'perfect'. It's much more important to get started. Most of my initial investing decisions were mistakes � heck, someday in the future I'll probably come to the realization that some of the decisions I'm making today are mistakes... but the even bigger mistake would have been to not have gotten started because I worried about making mistakes.

And sometimes... quite often in fact... the most wonderful things in life happen by simply 'stumbling' into them... and you'll never 'stumble' if you're not taking steps forward.

Regards,

Eldrehad


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