When I was a sophomore in college during the financial crisis, I was an assistant (TA by another name) for a senior that was best friends with a professor. The senior I was working for was an accounting major, and she would frequently discuss individual stocks and general portfolio management with the professor in question.
One day, in 2009, the professor said, “I just lost a million dollars officially. I can’t do this anymore.” She sold all her individual stocks, mutual fund holdings, and went to cash. I didn’t say anything because (1) I wasn’t part of the conversation, (2) I was an English major, and believe it or not, millionaires don’t want financial advice from teenagers that sit in the atrium reading Charles Dickens, and (3) my real-life personality is such that I don’t talk finances unless I’m invited to do so because I don’t take unsolicited advice seriously and it’s not my position to impose on others (especially those in what society would recognize as being in a superior position).
But still, the actions of others do have effects on me and I’m allowed to pick up life lessons vicariously so that hopefully I’ll make less than my fair share of mistakes in life.
Even though I knew much less about finance back then compared to now (side note: it was studying Warren Buffett’s life—real life, not the manufactured story of it that most finance sites cover–for more than forty hours per week in 2011 as if it were a full-time job that brought me up to speed with understanding investing), I was able to recognize that I was watching a regrettable decision being made.
Good financial planning begins with a deep reflection about yourself and what you can practically handle, rather than what you can theoretically handle. The understanding that a stock price can fall 50% while the business is actually growing more profitable is not a notion that is truly appreciated by everyone, and the good news is that the stock market isn’t the only way to build wealth.
I happen to like blue-chip investing because it is the only high probability way to build wealth I know in which you can be an “absentee owner” that only has to contribute cash and the long-term compounding of 8-12% annually takes care of itself while giving you cash to live your life so that you don’t have to sell assets to have walking around money in your pocket.
The worst thing you can do, though, is try and tap into the promise of 10% annual returns with common stocks but not be able to handle the inevitable volatility of 30% or more that shows up in every generation. It’s like a predetermined formula for growing poorer with time.
If the volatility of the stock market bothers, you’ve learned a valuable lesson about yourself: your general temperament is not cut out to have ownership stakes in things that are priced daily. You can still do very, very, very well for yourself by owning real estate or government bonds, or in some cases, private businesses outright.
It would be a disaster for someone to take $300,000, put it into the stock market, and then sell when that turns into $240,000 five years later because something like a 1974 or 2009 came around. If you sink that into two rental properties instead, you could generate $30,000 in rent, about $15,000-$20,000 of which you will be able to keep after taxes and other expenses. You’re not missing out on life by collecting $1,200-$1,700 in spendable cash income from your real estate investments every months—in fact, you would be receiving a benefit that most stock market investors don’t have by getting such a high starting income upfront that it might be worth the trade-off for what you sacrifice in growth. You’re not going to be bothered by turns in the real estate market as long as you can drive by the house and “see that it is there” and receive actual checks from real people living there.
There are only three common ways that people with lots of disposable income to invest screw things up: (1) they fail to properly diversify among different revenue streams, (2) they fail to maintain proper liquidity, or (3) they believe that they can handle price fluctuations when they really can’t, and thus sell low. There are lots of ways to get rich beyond stock market investing—and there is no reason to lie to yourself about it. The United States has a $15 trillion economy. There’s lots of ways to get where you need to be.