When I was growing up, the closest piece of advice resembling financial advice that my parents gave me was this: Spend less, save more.
I can see where my parents were coming from. If the majority of callers on Suze Orman’s show on CNBC is any kind of indication, it seems that saving, or rather thriftiness, is largely an alien virtue in some places. Easy credit schemes devised by greedy bankers who are bankrupt in scruples created the illusion that it is probably okay to spend, spend and spend. Who has time (or money for that matter) for savings? After all, money, or rather credit, is there when you need it; why delay personal gratification?
Seeing how the global financial turmoil has affected people in so many ways over these past two years, I am certainly grateful that my parents’ wisdom had taken root in me. But I have also learnt that my financial education was incomplete. Saving is only the first chapter in managing one’s personal finance.
Keeping savings without investing them is like trying to fill a leaking bottle with water. Inflation is the leak in the bottle which erodes future purchasing power and with that, future standard of living. I remember a time when cinema ticket only cost $3.50. And now? Well, I had to pay $10.00 to have my curiosity about braised cucumbers piqued. That latter part about braised cucumbers is, by the way, a different story that's already told in an earlier post.
Anyway, I came to realise that I should invest my savings. That was in 2004. But I did not take any action until 2006. *shakes fist at procrastination* And when I finally took steps to invest, I did not have the benefit of guidance from experienced investors. What I did instead was to pay tuition fees.
I paid tuition fees when:
1. I bought a stock based on a speculative tip given by someone on an investment forum. Right now, I am still sitting on a 50% loss on this stock, and this is AFTER the huge rally from the March 2009 lows to the recent highs.
The lesson: I was greedy, naive and lazy. That the tipper claimed that he worked for the big boys (i.e., huge unknown evil hand stroking a cat and waiting to devour retail investors) is not a mitigating factor.
2. I bought a number of stocks at the peak of the 2007 bull run because market exuberance convinced me that the bull rally could go on. And I then watched the value of my shares drop by between 50% - 90% over the next year.
The lesson: I was naive (again), lazy (again) and adopted an escapist attitude towards investment. Telling myself “guess I’ll just hold this stock for the long term” is a poor excuse for bad judgment and lack of investment skills.
3. The trading house for my contract for difference account decided to drastically increase the margin requirements for certain instruments overnight because it got spooked by the momentum the then-tumbling stock markets worldwide was gaining. What it meant for me was that I received a margin call on my existing long position straightaway and was given zero chance to top up my account. I was forced to realise a loss as a result of this unfair unilateral action taken by the trading house. I remember being dogged by disbelief and mild outrage that whole morning.
The lesson: When it comes to trading, expect the unexpected. In the absence of guaranteed stop losses, agility is essential.
It took me a while but I realised that my old strategies of greed, naivety, laziness, cowardice, reluctance to realise losses are only good for losing my hard-earned savings fast. I considered why I did badly with my investments, and adopted another strategy which has been instrumental in the recovery of my investment portfolio. And I will elaborate on that strategy in another post.