“Experience is the Best Teacher”

But the lessons learned can be very expensive.  As you could see from my last post, the performance of the stock market over the past five years created a huge opportunity for investors.  Sadly for many people the opportunity was missed as the market “took them to school.”  Perhaps this time the lesson has been learned, that discipline is fundamental to successful investing.

This is not the first time, (nor will it be the last), when the “market” gives us all the chance to learn.  When I began my practice in the late 80’s I had the “crash of 87,” (and recovery) as a clear example of the need for discipline.  Near the end of the Century, the bursting of the “tech bubble” drove home the message that you must stay well diversified.

And now we have the best example (lesson) yet, showing us not only the need to be disciplined but that investing requires a long-term perspective.  A lot of investors and advisors may not have memories regarding the “crash of 87” and even the huge losses in tech stocks 12 years ago seems to have been a lesson “not learned” by many.  But the current lesson is hard to ignore.

I promised to provide a simple example for the under 55 gang showing how costly this last lesson may have been.  Two investors:

Both investors had $1,000,000 at the beginning of 2008 and both were planning on investing $50,000 at the end of each coming year.

With the “market” down 38.5% by the end of the year, Investor A decided to get out of the market and move to cash and like so many others, waited to get back in the market at the end of 2012.  Investor A continued to save $50,000 a year and kept all the money safe in “cash.”

Investor B stayed in the market and continued to put $50,000 in the “market” at the end of each year.

Here are the results as of the end of 2012:

Investor A Investor B
1/1/08 Investment $1,000,000 $1,000,000
2008 Return -38.50% -38.50%
12/31/08 Total 615,000 615,000
Added Investment 50,000 50,000
Total 665,000 665,000
2009 Return 0% 23.50%
12/31/09 Total 665,000 $821,000
Added Investment $50,000 $50,000
Total $715,000 $871,000
2010 Return 0% 12.80%
12/31/10 Total $715,000 $982,000
Added Investment $50,000 $50,000
Total $765,000 $1,032,000
2011 Return 0% 0%
12/31/11  Total $765,000 $1,032,000
Added Investment $50,000 $50,000
Total $815,000 $1,082,000
2012 Return 0% 13.40%
12/31/12 Total $815,000 $1,227,000
Added Investment $50,000 $50,000
Total $865,000 $1,277,000


$400,000.00!  THAT’S PAINFUL!  You can do you own analysis but you will obviously come to the same conclusion.  Investing is about sticking to the fundamentals and not making mistakes.



Filed under Advisors, Investments, Investors

2 responses to ““Experience is the Best Teacher”

  1. Great analogy, sad but true. Investor behavior can be a killer to performance. Turning off the media and not listening to friends with their ideas of how to “beat” the market is very hard to do. Stay diversified, rebalance and keep diciplined to your beliefs.

  2. Deborah Foster

    another great article…keep them coming….people so often forget the power of compounding too, let alone trying to time when to get in and out of markets.

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