Portfolio Toolbox
Highway 24

Getting Started

I began investing in a 401k at my first job out of college back in 1993. I didn't start investing because I knew what I was doing or had a good strategy. I did it because everyone else was doing it and thought it was a good idea. I was sold on the 4% company match because it was free money and that sounded pretty good to a 25-year-old. I couldn't tell you what my investments were back then or what my investing expenses were, I just read through the dozen or so investment descriptions and picked what sounded good at the time. Although this was the first time I invested real money in the stock market, it wasn't the first time I heard about it.

My first exposure to the stock market was in my 10th grade economics class. We played the stock market game where each student was given a hypothetical $1,000 and all the students competed against one another. We were allowed to buy and sell any stock listed in the newspaper. I remember pouring over the daily stock quotes for weeks looking for a good stock. I settled on a "penny" stock that traded between 3/8 (37.5 cents) and 1 3/4 ($1.75). Back then, stocks traded in fractions, sometimes as small as 1/16. Today stocks are traded in dollars and cents, and sometimes fractions of a cent. I did fairly well in the stock market game and my interest in the stock market was born.

In college, I ran across a stock market game called Megabucks which was fun to play, but it was a single player game. Being computer science majors, my roommate and I decided to take it up a notch and wrote Gigabucks, a multi-user stock market simulation. Players on the campus network were able to play and compete against one another for $1 million. We programmed a large number of S&P 500 stocks into the simulation and randomly selected 60 of them for game play. We generated prices around a randomly increasing or decreasing sine wave function. We built a trading process which allowed users to place buy / sell limit orders so they could "buy low & sell high".

My first job out of college lasted six years and I had accumulated a tidy sum of money in my 401k out of sheer luck, definitely not skill. The stock market did pretty well during the 90's dot com run up. One of my co-workers at my first job recommended that I start investing with a company named Vanguard. While he made this recommendation to me in 1997, it wasn't until 2004 that I started moving my investments into Vanguard. If I could go back in time, I would tell my younger self that I should have listened to my co-worker. If I had started with Vanguard in 1999, I might have an additional 15% in my nest egg today because of lower expenses and compounding.

They barely teach personal finance in school. They teach you to open a bank account, how to write checks and play the stock market game in economics class. They cover budgeting in home economics, but until you pay bills for the first time, it doesn't really hit home. They certainly don't teach investment strategy or teach you about expenses associated with investing. While investment expenses have come down over the years due to competition, I still hear stories of people getting fleeced unnecessarily with high fees. In my humble opinion, it is worth spending time learning how the finance industry makes money and know that some investment products are much better than others. You don't need to become an expert and manage your investments on a daily basis. You can simply invest in a target date retirement fund with a low expense ratio. (e.g. 0.08%) Many mutual fund investments carry a 1% expense ratio. While 1% doesn't sound like a lot of money, a 1% expense ratio with an 8% return compounded over 40 years results in 31.71% of your returns lost to needless expenses. In the chart below, the area shaded in red is the amount of returns lost to expenses.

Compound interest is the 8th Wonder Of The World. He who understands it, earns it. He who doesn't, pays it. Albert Einstein

Rules to live by

It's easy to make mistakes with money, and not learning how to deal with money can be hazardous to your wealth. Here are some money management rules I use.

An investment in knowledge pays the best interest. Benjamin Franklin