It’s been a little over 10 years since I invested my first dollars in equities through my retirement plan at work. At first, these dollars were like tiny drops that dripped into a bucket. It didn’t feel like they were amounting to much, but every pay cycle kept filling up the bucket a bit more. Fast forward to a decade later, and this bucket, along with Mrs. Enchumbao’s equally-sized bucket, is almost big enough to declare us financially independent.
I began my investing journey by contributing enough to get the 4% employer match in a 401(k) plan. Even though the company started matching my contributions a year after my date of hire, I started contributing right away. Why would I contribute right away when there was no match? I took immediate action because I didn’t want to get used to the extra income. I thought it would be much harder to adjust to a lower take-home pay a year later.
In retrospective, that 4% savings didn’t reduce the paycheck by much since the money was pretax but one can always find an excuse to not save. That’s why saving should come first in households that tend to overspend, and let it run on autopilot.
Savings rate and retirement
Paying yourself first should be the key action you take if you want to become financially independent. Not many people do that in this country and, by default, we suck at saving. As a country, our personal savings rate has been hovering around 5% for the past five years. Why should we even be concerned with this low number? Well, because your savings rate will determine how soon you can retire. With a tiny savings rate you can expect to work for a very loooooong time. It would take 62 years to retire with a 5% savings rate! (You can play around with this calculator to see how much time you have left to retirement.) So pump up your savings rate, so that you don’t become one of those haters that despise others that have the option to retire early. 🙂
Looking back to my pre-FI days, with the employer contribution and my 4% contribution, it would have taken me up to 39 years to retire! There’s nothing sexy about that. I wouldn’t have the same endurance that I have now. It’s a lot harder to hike mountains in your seventies.
I didn’t discover FIRE until much later, so I thought I was doing great by contributing the minimum. I even thought I could stand showing up to a 9-5 until my sixties. What the heck was I thinking!?
Saving was not always a priority
If I had the mindset that I have now at least 10 years ago, I could’ve had enough money to retire by now, but I was caught up in the same nonsense as the average American. I was having a spending problem. I had cash that was flowing mostly into the home, transportation and finance charge categories, leaving very little for savings.
“It’s not your salary that makes you rich, it’s your spending habits.” – Charles A. Jaffe
With the new job also came lifestyle inflation: the house with a pool, the new car, the 52” flat screen TV and home improvement projects that followed. My paycheck was depleted by material things and most of these expenses could have been avoided.
I don’t like to dwell on the past, but if saving during my initial investments years would’ve been as disciplined as my most recent ones… Damn!!! I’d be writing a different story now. But this is my story and it had to unfold like this in order for me to be in this situation now. And it’s an awesome situation to be in. I’m living a life of gratitude that brings me true happiness with the love of my life. Have you found your formula for true happiness?
My initial investment years (2006-2011)
I didn’t know jack about investing in equities when I first started. I didn’t get some stocks as gifts when I was a child from an uncle or grandparents. There were no family members who knew how the stock market really worked. My parents invested in real estate and farmland, but the stock market was a complicated and untouchable world to them. Little did I know that a whole different world of investing was about to unfold in front me when I opened my first investment account.
During my first 5-6 years of investing, I continued my minimum 401(k) contributions into a target date fund. Choosing a target date fund was a smart decision during that time because I didn’t know much about investing.
A target-date fund is a mutual fund in the hybrid category that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor. – Investopedia
Once you choose a target date fund close to your retirement date, the fund allocation in your portfolio becomes more conservative as you get closer to retirement.
I kept saving for a retirement that seemed very far away because, in my mind, I thought it was something that you reach when you become a senior citizen. I knew I had to save something for retirement, but I wasn’t enthused about it. There were no bloggers that retired in their 30s talking about early retirement, nor was I interested in reading about the topic. Retirement was something that I could look forward to, somewhere in the year of 2035. Now, the definition of retirement has totally changed for us and it’s something that we look forward to. We’ll retire from a job to do things that we truly enjoy. Who doesn’t want that!?
Two years after I started investing, the market tanked and took half of my 401(k) balance with it. Fortunately, it was a tiny bit of money at the time, otherwise I would’ve been crying like a baby without knowing what to do next. I had little investing experience.
The Great Recession made its mark. The savings that were left of the carnage were locked up in a 401(k). There was no good way to free that money if I wanted to sell and run. I wasn’t going to withdraw money and deal with a 10% penalty! I kept pouring money in and it took me a couple of years to recoup my losses, just like everyone else that stayed put and didn’t sell in a panic.
During the downturn, I also opened a brokerage account and bought a few stocks, but I wasn’t investing. Rather, I was speculating and learned some valuable lessons in that arena.
In 2009, I decided to get more educated about investing and play a more active role in my investments. I took it upon myself to learn about investing as much as possible: I read some books. I learned about the market and the mutual funds in my plan. It’s amazing what you can learn on your own when you put your mind to it.
“Invest in yourself. Your career is the engine of your wealth.” – Paul Clitheroe
By 2010, the wheel started to turn. I switched my contributions from the target date fund to other index funds that were in my plan.
The best investment years, so far (2012-2016)
How things have changed since I initially started saving for retirement. We are now looking to an early retirement date no later than three years! How did I advance the retirement date by 16 years? First, I had an epiphany, second, I realized that my relationship with money needed to change and, third, I met a partner that shares the same goals in life as me. We’ve been working hard by delaying some gratification to be able to invest all that we can. The only caveat is that we make sure that we enjoy the journey.
The past four years have been the best so far, financially speaking. After realizing that the most important luxury money can buy is our freedom, I paid off all my debt and started maxing out my 401(k). No more saving a minimum for a match and hoping for the best. The chart below shows the steady progress made throughout the years. In 2006, I accumulated 1% of my current balance all the way through 100% in 2016.
By investing in our retirement plans, Mrs. Enchumbao and I have become a well-oiled FIRE couple, Enchumbao style! Her numbers are not included above but are pretty similar since she started working a year after me. We do our own investing and have an asset allocation that works for us. And the most important thing is that we know the why of our investments. We don’t just buy an investment because someone recommends it–it needs to make sense for our goals. There’s a valid reason why we own every investment in our portfolio.
I enjoy investing and continue to learn about rate of returns, tax harvesting and different kinds of market sectors. However, I didn’t get to this point without making mistakes. There were not huge, but significant enough to teach me valuable lessons.
“An investment in knowledge pays the best interest.” – Benjamin Franklin
Some mistakes that I made, such as buying a few stocks instead of funds, caused me losses and I choose to see these losses as the cost of learning. I’ve also learned a great deal along the way just by being invested in the market. I feel that most of this stuff is basic, but sometimes we make it complicated by not applying the basic principles of investing.
Lessons I learned in my first decade of investing
1. Don’t speculate, invest
I didn’t grow up around people that were invested in the stock market and, therefore, had limited exposure to stock market investing. Latinos, by and large, become wealthy by pursuing entrepreneurship and business ownership. Anytime I’d hear about the stock market, it would be because of: a) News of a guy who lost a fortune or committed suicide due to a market crash. b) Someone or a friend of a friend who made a killing with stock trading. c) The Spanish channels sounding off the alarms that la bolsa de valores (the stock market) is crashing.
I wasn’t exposed to the good stories of long-term investing so, to me, stock market investing sounded like a gamble. A place where you place bets on a rising stock and plan to dump it once you make gains. I learned that that is not investing, but speculating.
Speculating and investing are so not the same. I learned this lesson the hard way. In late 2008, I bought a few stocks and traded them back and forth looking for a quick profit. I was looking for short-term gains, and there were good days and then there were bad days. By early 2009, as the market continued to hit bottom, I grew impatient, gave up on that game and took my losses (probably lost a couple of thousand dollars). After that I decided to concentrate on my 401(k) investments and invest for the long-term.
2. A stock is not just a ticker symbol
As Warren Buffett says: “Price is what you pay. Value is what you get.” When I invest in a fund, I look at the stocks and bonds in the fund because all the stocks in the fund represent businesses. When I’m buying a stock, I’m buying a piece of a business.
“Investing simply and in strong companies may not be the sexy way to invest nor will it produce the amazing returns that off stocks produce or that option income can produce. But, it will help you build a strong portfolio of companies that you know, understand, and know are capable of rewarding shareholders over the long run.” – Bert, Dividend Diplomats
I don’t do any individual stock-buying nowadays, but if I do decide to buy them in the future, you bet that I’ll be looking into the business behind the stock. I wouldn’t just buy by only looking at its price history and name familiarity or simply because Pablo at work thinks it’s going to increase in price without sound reasoning.
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher
3. Use proper investment vehicles according to time horizon and risk level
There are so many different schools of thought when it comes to where to allocate your money. A rule of thumb that I follow is that if I need the money within 5 years, I shouldn’t have it in stocks. We could have it in bonds, CDs or any other low-risk investment vehicle, but not in stocks. An example of some money that we have partly invested in stocks is our house fund. But we do this because we don’t feel forced to buy a house, we can always continue to rent. A house for us is a wish and not a must have, and therefor could have a longer time horizon than 5 years.
4. Allocate assets properly
A proper asset allocation helps in reducing the risk of being overweight or underweight in one asset class over another. Without a proper asset allocation, I was doing some market timing a few years ago. One of the mistakes I made was putting a big chunk of the investments into cash in the 401(k)s thinking that after such a bull run the market was destined towards a correction. Then, the next year the market had great returns! I missed out a bit by retreating from the market instead of following an asset allocation. I didn’t lose money because I still made a profit, but I could’ve gotten some dividends from that portion of the portfolio at least. After that I decided to just put the money back into the market and let the market do its magic.
We spent about a year studying different asset allocation models to see what would work for us and, once chosen, were happy to just invest our money accordingly. With an asset allocation, there’s no more guessing on where the contributions should go and no temptation to make irrational investment decisions.
5. Market timing is a fool’s game
It’s almost impossible to win at market timing. The problem with trying to time the market is that you have to be right twice: when you sell and when you buy. When I decided to put a portion of the portfolio in cash, I couldn’t figure out when to go back in because the market kept going up. No one has a crystal ball on the market.
I also learned that is about time in the market, not market timing. I’d rather have the money in the market yielding dividends and expecting a longer-term return than sitting in a money market fund. We can sell shares if we need the money, and not because we’re trying to time the market and go into cash.
6. Stock market long-term trend is up
The market can be down for days, weeks, months and even years, but it you look at the stock market trend for a much longer period, you realize that the trend has always been upward. This tells me that as long as I’m investing for the longer term, I should not worry about the short-term trends. I don’t pay attention to the headlines or even listen to the daily news cycle.
7. Pick a specific day to invest
It’s important for us to have a specific day to invest whether if it’s weekly, monthly or quarterly. By investing on a certain day, we don’t worry about the ups and downs of the market. If I just invest on any day without any rules, I might feel tempted to wait if I see that the market is up. As I already mentioned, we don’t know what the market will do the next day. It could be up again, and again. So we invest on payday and move on with our lives.
8. Investment fees matter
We’ve always been DYI investors and always will be. We’re very cautious of investment fees and realize that what one can pay in fees can really impact returns. One feature that I like about Personal Capital is that it lets us know how much we pay in investments fees and also gives projections of fees over time.
9. Have multiple sources of income
Besides investing in equities, we also have a rental property that provides monthly cash flow. We plan to sell it before retiring, but it doesn’t mean that our income will only come from our portfolio of stocks and bonds. One sure way to bulletproof our cash flow after retirement is by taking advantage of other investment opportunities. We’ll take the next two years, before we retire, to research other investments, possibly in real estate.
“The real key (to wealth) is to have multiple flows of income that are indestructible due to economic conditions or technological developments.” Grant Cardone
10. Take advantage of tax loss harvesting
Tax loss harvesting is the practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. It can be hard to comprehend at first and there are rules to follow to make it work. I wasn’t familiar with tax harvesting until I saw bloggers discussing the topic. This year we’re implementing this strategy on our non-retirement accounts.
11. Keep learning
I keep learning and the more I do that the more I realize there’s always so much more to learn. Sometimes I drive Mrs. Enchumbao crazy with new investing strategies, but I don’t mind changing my mind based on new information. It’s about finding new logic and new ways to thinking. Also, I like to make informed decisions when investing because it helps me to reduce risk and improve performance.
12. Keep tabs on asset diversification and net worth allocation
We have a diversified portfolio right now, which is important, but having diversified assets will be even more important in retirement. We’re building a portfolio that needs to last at least 60 years and having different kinds of assets would allow us to sell some while others might be down. The key will be to continue to buy low and sell high.
I also keep a tab on our net worth asset allocation. It’s good to get a view of the entire panorama. We still have a long investing path ahead of us and, as our assets in the stock market continue to grow, we’ll eventually move some of the gains into other hard assets, such as real estate.
13. Asset location is just as important as asset allocation
It’s important to know where we hold our assets in our portfolio for tax purposes. This was a good lesson to learn as we formed our asset allocation. Different type of investments get different tax treatments. We make sure to keep bonds in our retirement accounts, so that the interest doesn’t get taxed as ordinary income. That just one of many ways to save on taxes.
14. When dumb money follows smart money, the party is over
This header was a quote that I picked up somewhere along the way and it stuck with me throughout the years. Whenever you have a supermarket clerk handing you their realtor business card, you know that the party is over. This is because when people are running for the door, the smart investors are coming in to snatch opportunities. Whenever you have 100 personal finance bloggers popping up every day and showing how great their investments are performing, you know that the party is over.
It’s a lot easier to make money in a good economy or when the stock market keeps going up in a bull market. I’m not trying to put down people or discourage PF blogging. On the contrary, I like it when I see more blog launches and I tend to follow many of them on Twitter. That means that more people are waking up, taking better care of their finances and want to share their story to help others. My challenge to all of us is: let’s not follow the smart money, let’s become the smart money! One of my favorite smart money bloggers is Financial Samurai because this guy is always hustling and showing how he finds investment opportunities.
15. Practice the KISS Method
Probably the most valuable lesson has been to “keep it simple, stupid”. Investing doesn’t have to be complicated. I’ve learned that more complexity doesn’t equal higher returns. At times, I found myself complicating it and realized that investing just needed to be kept down to basics. Just because an idea sounds sophisticated and almost like a foreign language, doesn’t mean that it will make money. Screw having so many confusing spreadsheets to prove a point or holding a ton of funds in a portfolio, that replicate the same results. Simplicity makes life more enjoyable. I choose to invest to live not live to invest.
I think that I can sum up my first investment decade into this: slacking on the first half and getting my act together on the second half. It’s like that college student that buckles downs come junior year to be able to graduate with a GPA above 3.0.
After a decade of investing, all I can say is that it’s been a great journey so far and I can’t wait to see what the future holds for us when we retire to live off of our investments. Even though I had a learning curve, we still managed to get over an 8% rate of return during our first decade of investing.
I’m very optimistic about the second decade of investing, as I’ll be learning more about other investments vehicles and start switching part of our allocation into physical assets.
Mrs. Enchumbao, my partner in crime and shareholder, is there with me along the way. What else could I ask for??? 🙂
I’d like to end by commenting on one last quote:
“People value and spend their money more wisely when they acquire it by their own efforts – also known as work.” – Larry Elder
When you work hard to become financially stable, you’re going to appreciate the freedom that your efforts provide a lot more than if money was just given to you. The journey is more enjoyable when you forge your path with your own hands.
When people go around spending and thinking that a dollar is just a dollar, they’ll never have a hundred dollars. So take care of that dollar and the bigger bills will take care of themselves.
We want to hear from you. What investment lessons have you learned over the years?
Risk disclosure: All investing involves risk, including the possible loss of principal. The material contained on this website is for discussion purpose only and should not be misconstrued as financial advice.
Featured image by Alexa’s Fotos
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