When I retired over six years ago I had a simple dual-budget strategy. My baseline budget was fixed by two sources of income: social security and an annuity. My discretionary budget was dependent on my investment income. This investment income was variable and highly dependent on one factor: how well I did with my investments. I have IRA funds in several self-directed accounts, meaning I directly control how the money is invested: what stocks and bonds are bought, when they are bought, and when they are sold. The relationship between these two budgets is this: I could get by on the baseline budget but I would be quite limited in what I could do. More specifically, I would not have been able to buy the 31 ft. sailboat that I own, nor would I have been able to extensively refit the sailboat like I have, nor properly maintain the home I own in Ohio, nor travel to the conferences I’ve been able to attend, nor spend money on birthday gifts for my family, nor winter in Florida, nor lastly, pay significant medical expenses. Most of these things were paid for by my investment income. Obviously, it has had a huge positive affect on my retirement quality of life.
People might think that I must be a pretty good investor. The truth is, not nearly as good as I’d like to be. A key lesson I learned over the years is to never, ever pull your money out of the stock market soon after it has had a big drop. And yet, it is surprising how many people do this, at the same time swearing they will never invest in the market again. However, years later these same people see Everyone Else making money in a raging (bull) market and they jump back it – usually close to the top of the market. This is known at the “sell low, buy high” strategy of stock investing and it is guaranteed to lose money.
One reason why I’m not a great investor is that I have largely missed out on the recent run up in the market; the one starting after the November 2016 election. Oh, to be sure I did make some money since I always have some money in the markets. However, I could have easily made 10% if I’d made the same moves that the Smart Money folks made. Specifically, they invested in banks that would do well with expected rising interest rates, and they invested in corporations that would benefit either from the promised corporate tax restructuring, and/or the repatriation of money held overseas.
Consequently, this has been another learning experience for me that I will add to my sizable lessons-learned notebook on investing. Still, it is hard to say how things will play out in the coming months. If interest rates rise slowly and the promised tax changes get bogged down in Congress, the market may go sideways or even pull back. Then again, if the economy continues to improve these tax issues may not be that important to stock performance in the near future.
Clearly, I’m not as happy about my investments as are the Smart Money people. And yet, I could have done worse. According to recent data released by the Census Bureau, 68% of workers in America are NOT contributing to any sort of retirement account. Sadly, these folks did worse than I did in the recent run-up – they didn’t make a dime.