The Worst Investment I Ever Made (and How I Eventually Broke Even)

If you’ve been investing over the last several years (or even if you haven’t been investing, but somehow managed to watch TV), you know the United States financial markets have been on a roller coaster ride.  It started with the hypothetical boom years of the middle 2000’s, which turned out to be predicated on invisible markets, over-leveraged financial institutions, and the ultimate inability of many unemployed and unemployable Americans to pay $500,000 adjustable rate mortgages on mansions.  So, a recession followed, and then for the last (maybe) three years, we’ve been in this odd, “gird your loins”-style stock market rally, which terrifies me because it, too, seems to be built on a house of cards (if the economy were truly healthy, the Federal Reserve would be increasing interest rates, not holding them at zero percent and also continuing to buy mortgage-backed assets every month like it’s 2009 still).

I’m not terribly optimistic about the United States economy over the short-term future  – it’s been only five years since the last recession started, and it strikes me that it should take at least ten years to undo the epic mess we had created in that recession.

But it is also fair to say that, in a vacuum, 2013 has been a good year for the US stock market(s).  The S&P 500 (and if you’re reading this as a beginner, the S&P 500 – NOT the Dow Jones index – is the more accurate barometer of the two, as it has a much larger base of companies included within itself) is currently up over 28% for the year, which historically speaking is pretty damned huge.  And at the moment, I am smiling from ear to ear because my worst-ever investment has broken even for the first time in seven years.  This is the story of my worst-ever investment.

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I graduated from college back in 2006, and received a decent amount of money as graduation gifts from my extended family, right around the time I received a job offer.  My father suggested I invest the graduation gift money, since I now had a job that was going to pay me a steady income, and since it makes a ton of sense to begin investing and saving as early as possible. 

His advice was well-intentioned, but it should have been followed with “and hey, did you ever hear about low-cost index funds?”  Because I had absolutely no clue what to do, I decided to invest my graduation money in a taxable account instead of a tax-free Roth IRA (a bad mistake at the time, but in the long run this could be helpful as it’s important for earners at a certain income level – and I hope to get there someday - to diversify between taxable and tax-free accounts).  I also decided to chase high past returns, by investing in a mutual fund which focused on the “Brokerage and Investment Management” sector.  These companies had been sky-high profitable in the past few years, and by no coincidence at all happened to be the very same companies that essentially caused the Great Recession of 2008 (e.g., Goldman Sachs, AIG, etc.).

Here is the performance of the specific fund I invested in over the last ten years (from 2004 through 2013):

Note that I invested in this fund around the end of 2006; that is, RIGHT AT THE HIGH POINT OF THE CHART.  Hindsight is always 20/20, and for sure, it looked like I didn’t even buy high for the following year or so, as the market continued to bubble upwards. 

But by early 2009, when I’d seen my investment essentially cut down by 70% (and seemingly decreasing in value every day), it was a huge judgment call whether or not I should consider selling the fund and hoarding the cash.  Everywhere around me, it seemed that otherwise-calm financial professionals were shuffling people’s money around in a desperate attempt to chase returns - I still recall my dad’s financial advisory firm putting a third of his retirement assets in cash, out of fear of total collapse; then moving it into gold, as an inflation hedge; then moving it into the “small cap-value” section of the market, hoping to ride the recovery.  (My dad got pissed off and eventually, justifiably, fired these guys.)

I eventually decided to stay put and hold the money exactly where it was.  Thankfully by then I had started reading books on investing, starting with more beginner-friendly books like Henry Blodget’s “Wall Street Self-defense Manual” and then moving along to more mathematical books such as Burton Malkiel’s “Random Walk Down Wall Street,” and lots of what I read seemed to converge on one fundamental truth of investing – a regular guy off the street can’t beat the market in the short term, he can only ride it in the long term (which isn’t bad, actually, because the market tends to beat inflation over the “long term”), so he’s always better off making fewer, long-term-focused decisions.

(BTW, the “you’re always better off making fewer decisions” also strikes me as solid logic for real estate purchases – closing costs kill you when you’re buying, and kill you twice when you’re selling, so you’re almost always better off staying put, from a wealth management perspective.)

So this brings us to the present day – it took almost seven years, but I’m officially right back where I started*.  (*NOTE: Not accounting for inflation, which I technically should account for – this would mean I’m actually still about 8-10% behind, but would also make for a less interesting blog post.) 

What were the good moves I made throughout?  Well, I could have sold low and consequently not ridden as steep of a wave to recovery, but I didn’t. The fund I invested in was very “swingy”, and as a result, its returns accelerated somewhat faster than an S&P 500 index fund has accelerated over the last few years.  I also could have not learned from my mistake and foolishly followed the same philosophy of chasing high past returns in later purchases (I did say this was the worst investment of my life – I’ve made others, all of which were smarter and some of which are up 35% or so this year alone).

But the bad moves I made are more illustrative.  First, I chased a “sexy” fund and I ended up getting bitten in the ass.  That was a dumb move, and thankfully I learned from it at a young age.  I also didn’t pay attention to advisory fees (1.79%, which is super high – an S&P 500 index fund could be as low as 0.15%!), thinking foolishly that investment portfolio managers were worth that cost for their expertise and their ability to perform “above average”.  Lots of research is out there on this, and most of it says that no one is worth 1.79% as an advisory fee, and virtually no one is worth even 1 percent – those fees cut into returns in a huge way over time. 

So that’s my story.  All caveats apply as to me not being a financial professional, but hopefully people reading this get a sense of what I did wrong and what I learned from my mistake.  The ultimate story here is probably that perseverance is key, even moving forward.  I don’t plan to pull my money out of this fund any time soon (a potentially controversial move, but it’s my “pet gamble” – I’ve already been willing to lose it once, so I guess I’m willing to lose it twice), and who knows, in 25 years maybe it’ll fund my early retirement!  (Ha ha ha.)