Maddy’s three year investment journey

Last week, Maddy called me up, sounding as if a squadron of seagulls had dumped on her car.

“Andrew, the stock markets keep rising—I’m hating that!”

I was so happy that I could have kissed her.

Maddy gets it.  An American in her mid 30s, she views the stock markets the way a young person should.

  • Rising stock market = Bad
  • Falling stock market = Good

As Buffett suggests, anyone who plans to be a net purchaser in the stock market (for at least the next five years) should think like that.  But it’s really tough to convince most people.

Maddy, however, understands it fully and has applied the tenets of sound investing beautifully.

The Beginning of her journey—when Maddy met Dan

When Maddy started investing in her early 20s, she used Dan’s services, a financial advisor through H&R Block.  He bought her actively managed mutual funds—which tend to generate higher taxes and lower returns than index funds.  And he charged her a 1% annual fee on top of Maddy’s mutual fund expenses.

But that wasn’t the only damage that “Dan” caused her.  The biggest damage of all was the mindset he was creating in this smart young American woman.  He keenly chased funds that had “strong track records” and he taught Maddy that a rising stock market was good for her.  The combination of what Dan bought her, coupled with the philosophy he instilled could have killed Maddy’s hopes of an early retirement.

Maddy Fires Dan

Maddy has a PhD, so she’s no stranger to reading.  She launched herself into a slew of classic investment books, including  Burton Malkiel’s  A Random Walk Down Wall Street,  along with Lawrence Cunningham’s The Essays of Warren Buffett.  None of what she read aligned itself with Dan’s philosophy.  He was a salesman, after all, with an intravenous drip from Maddy’s investment account to his own.

Maddy had no choice.  If she wanted early financial freedom, she had to expunge the source of her hemorrhaging.  So she fired Dan.

Evidence Based Investing Only

Opening an account with Vanguard. Maddy divided her money three ways:

Sailing over volatile waters

Remembering a story that Benjamin Graham (Warren Buffett’s friend and teacher) told about a man named “Mr. Market”, Maddy employed the strategies that Graham espoused.

You can’t get influenced by Mr. Market.  He’s irrational.  Learn to take advantage of him when he’s irrational, but don’t fall under his spell.

When the markets plummeted in 2008 / 2009, SmartMoney  magazine had a cover story headline that most people wanted to see.  It had a photo of a stack of bills with a lock draped over them, and it espoused the best bonds to buy.  Needing to sell magazines, SmartMoney was giving dumb advice—by condescending itself to people’s fears.

Warren Buffett suggests that falling markets are good for young investors.  And he says that they should be greedy when others are fearful.

So when the markets were down, and when Maddy had fresh money to add to her account, she shunned bonds and bought her stock market indexes.

For Maddy, the whole process was a bit like stealing candy from babies.  Stocks are safe when they’re cheap.  And her account benefited from her dispassionate choice to turn away from the lemmings who sold their stocks in 2008/2009.  Instead, she bought stocks.

When Maddy’s bonds rise faster than her stock indexes, she buys stock indexes.  When her stock indexes rise faster than her bond indexes, she buys bond indexes.

Her results speak volumes

The stock market is currently lower than it was when Maddy opened her Vanguard account in November, 2007.  In fact, the S&P 500 and the DOW Jones Industrials are roughly 30% lower today than they were three years ago.  Look below to see where the market was near the end of 2007—and then look to see how much lower it is today. See the comparison here.

An astute investor would have a much higher account today than they had at the end of 2007, if they followed Maddy’s tenets:

  1. Keep costs low with diversified indexes
  2. Rebalance your account when your stock and bond allocation gets out of alignment
  3. With fresh money, add to the lagging index and shun the rising one.

Maddy has also bought a few individual stocks to compliment her portfolio:  Berkshire Hathaway, Coca Cola and Pfizer.  Did she buy them when they were cheap?  Of course she did.

Overall, Maddy’s account has gained (in profits) $27,864.57.  One of the beauties of Vanguard is that you can always see exactly what you have deposited and then what the account is currently worth.  Loads of financial advisors hide that from their clients.

Below, pasted directly off Maddy’s account, you can see that she has deposited $239,400 since November, 2007.  And today the account is worth $267,264.57.

Activity summary

Total value as of 11/01/2007

$0.00

Purchases and withdrawals

The amount of money coming into or going out of your fund or account for up to 5 years, resulting from custodial fees, purchases, exchanges, redemptions, asset transfers, rollovers, loan repayments, or employer contributions to employer-sponsored plans. It does not include reinvested dividends (income, earnings, dividends, capital gains). Only dividends swept to a different fund, account, or bank may be considered cash flow.

$239,400.00

Investment return

The increase or decrease in value.

$27,864.57

Total value as of 10/08/2010

$267,264.57

What else does Maddy love about Vanguard?

Anytime she wants to withdraw money from her non IRA investment account, she can do so without generating a fee.

On two occasions during the past two years, Maddy has needed money: once for a family emergency and once for a home purchase.

She was able to do that quickly, and nobody hit her up with a fee.

If you’re curious about seeing all of Maddy’s deposits, withdrawals and investment returns, I’ve pasted them below.

Maddy’s proud of her account.

And she’s hoping for another stock market crash sometime soon.  

Month-by-month activity

Month

Beginning Balance

Purchases/Withdrawals

Investment Return

Ending Balance

Oct’10

$263,214.83

$0.00

$4,049.74 

$267,264.57

Sep’10

$247,711.28

$1,800.00 

$13,703.55 

$263,214.83

Aug’10

$246,786.20

$1,800.00 

–$874.92

$247,711.28

Jul’10

$232,739.05

$1,800.00

$12,247.15

$246,786.20

Jun’10

$250,012.56

–$18,200.00

$926.49

$232,739.05

May’10

$263,288.53

$1,800.00

–$15,075.97

$250,012.56

Apr’10

$262,866.51

$1,800.00

–$1,377.98

$263,288.53

Mar’10

$274,045.75

–$19,200.00

$8,020.76

$262,866.51

Feb’10

$246,825.24

$21,800.00

$5,420.51

$274,045.75

Jan’10

$242,313.49

$1,800.00

$2,711.75

$246,825.24

Dec’09

$239,927.17

$1,800.00

$586.32

$242,313.49

Nov’09

$220,394.15

$11,800.00

$7,733.02

$239,927.17

Oct’09

$220,781.59

$1,800.00

–$2,187.44

$220,394.15

Sep’09

$202,937.91

$11,800.00

$6,043.68

$220,781.59

Aug’09

$195,780.54

$1,800.00

$5,357.37

$202,937.91

Jul’09

$157,545.97

$26,800.00

$11,434.57

$195,780.54

Jun’09

$156,714.12

$1,800.00

–$968.15

$157,545.97

May’09

$148,825.62

$1,800.00

$6,088.50

$156,714.12

Apr’09

$137,301.09

$1,800.00

$9,724.53

$148,825.62

Mar’09

$126,174.57

$1,800.00

$9,326.52

$137,301.09

Feb’09

$136,922.54

$1,800.00

–$12,547.97

$126,174.57

Jan’09

$132,027.69

$14,800.00

–$9,905.15

$136,922.54

Dec’08

$113,989.02

$16,800.00

$1,238.67

$132,027.69

Nov’08

$109,157.94

$9,800.00

–$4,968.92

$113,989.02

Oct’08

$123,724.91

$1,800.00

–$16,366.97

$109,157.94

Sep’08

$116,178.86

$11,800.00

–$4,253.95

$123,724.91

Aug’08

$114,759.69

$1,800.00

–$380.83

$116,178.86

Jul’08

$114,832.00

$1,800.00

–$1,872.31

$114,759.69

Jun’08

$112,471.78

$9,800.00

–$7,439.78

$114,832.00

May’08

$94,040.56

$16,800.00

$1,631.22

$112,471.78

Apr’08

$88,929.17

$1,800.00

$3,311.39

$94,040.56

Mar’08

$87,437.26

$1,800.00

–$308.09

$88,929.17

Feb’08

$71,426.31

$16,800.00

–$789.05

$87,437.26

Jan’08

$72,776.64

$1,800.00

–$3,150.33

$71,426.31

Dec’07

$73,412.71

$0.00

–$636.07

$72,776.64

Nov’07

$0.00

$72,000.00

$1,412.71

$73,412.71

Total


$239,400.00

$27,864.57

 

 

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

You may also like...

13 Responses

  1. Great post. I'm going to link to this during the weekend so that hopefully my readers see this.

    Some people just don't get it. 🙂 They think I'm crazy when I express disappointment at my increasing portfolio or the increasing market in general.

    Specifically as a buyer of passive streams of income (dividends), I want to get the most yield and growth for my money, so a low market is best. Companies in my portfolio are companies that, for the most part, I consider to be of very high quality, so I want to continue buying them. I'm not satisfied with one-time gains; I want to continually buy into great companies at great prices. Once a company gets too overbought, I can't reasonably buy it anymore, so I'd much rather it stays low.

    Highly-valued markets are more difficult to deal with than lowly-valued ones. That's when asset allocation really kicks in and I have to start looking for other ways to generate decent returns, because buying overvalued dividend stocks just won't cut it.

  2. A great read Andrew, and well done Maddy!

    To quote William Bernstein: "Performance comes and goes, but for active mutual fund managers and their clients, expenses are forever, and few can surmount these hurdles in the long run."

    Totally agree with the wish for the declining market – anyone who is not planning to retire in 5 years should be on their hands and knees praying for cheap (dividend-paying) stocks to invest in! That's definitely me 🙂

  3. Thanks Mark,

    You're so right about fees. Working in a school where we don't get pensions, I'm often given investment accounts to look at. And it sometimes keeps me awake at night after I've "run the numbers" on accounts set up by the financial advisors that frequent the international teaching community. There are regular actively managed fees for funds, and then there are wrap fees through a company called Raymond James Financial. A handful of reps make a fortune on the international school circuit, selling actively managed funds and then charging up to 1.75% on assets as a wrap fee. When someone like Maddy gets it figured out, it really makes me happy. Here's what really kills me with the typical Raymond James account:

    If a combination of bonds and stocks makes 6%

    Then the average actively managed account would make 4.5% after expense ratios, 12b1 Fees and internal transaction costs

    Then the advisor would take 1.75% as a wrap fee, leaving just 2.75%

    Taxes would take a further 1% (actively managed funds aren't tax efficient because of their turnover) leaving just 1.75% net

    Then inflation takes at least 2%

    Result = No net gain

    I've seen more than 30 different Raymond James investment accounts since I've been at this school. When I backcheck their results, not one (not one!) had kept pace over a 5 year+ period, when compared to a benchmark combination of stock and bond indexes.

    My fear is that most international teachers will never be able to afford to retire.

  4. Impressive record…… and it is impressive she realizes falling markets are good for buyers.

  5. @The Biz of Life

    Cheers Biz,

    I first spoke to Maddy about this in 2004. And I'm so happy that she took the bull by the horns and learned this stuff so thoroughly.

  6. @Dividend Monk

    Hey Matt,

    You're right about people not really getting it. I think it might be a wiring. I've talked to people about this a lot, and there are those who I don't think can invest money (no matter how much training they get). This might sound odd, but I don't think most people (including advisors) are wired for this game. Sinking prices really power dividend reinvestments as well. Who wants to pay higher prices for the oranges at the grocery store? It's no different with investments but most people don't understand that. You and I can celebrate if the market takes a drumming.

    Thanks for the link!

  7. larry macdonald says:

    It's remarkable that a relatively new DIY investor was able to keep rebalancing during the last bear market. I find many people don't learn that lesson until they've been through a few cycles. Looks like you coached her well, Andrew.

  8. People simply gotta learn to see things that way. I didn't use to see a falling market as advantageous, but given my current plans and the fact that I invest for the long term, I do now.

    Another success story, Andrew.

  9. @larry macdonald

    Hey Larry,

    I think there are people who can tell us what should be done (ie. buy stocks when the markets tank) but few can actually do it. When markets fall, so many people turn into speculators—either afraid to invest on the lows, or waiting until the markets fall further. I alluded to this before, but I don't think the Big 5 Canadian banks' balanced mutual fund managers rebalanced when the markets tanked in 2008/2009. Otherwise, my friend Harry wouldn't have such a huge lead over them. Part of his lead is based on his lower fee account, but part of it had to do with the fund managers' unwillingness to rebalance.

    Maddy seems like she was wired to do it. Perhaps working with a guy who celebrated more and more, the further the markets fell, probably didn't hurt her. I certainly grew happier each day the markets dropped—and it bummed me out to see such a short recovery.

  10. Relating to the above comment, it bummed me out that the stock market recovery in 2009 came as quickly as it did.

  11. @Kevin@InvestItWisely

    Kevin,

    I think that having a community of bloggers is going to help a lot of people when the markets tank. Take Blogger ABC for example (I made him up for an example, of course) But assume that the markets tank. Assume that Blogger ABC has been espousing that people should be greedy when others are fearful. But human nature being what it is, despite Blogger ABCs wise words, he can't exhibit wise action when it's crunch time. This, perhaps, is where we can urge each other on to do the right thing: not to speculate or become afraid. The Blogging community can help each other.

  12. Peter says:

    I now check the markets hoping for a serious drop as opposed to big gains. Looking to buy some good stuff on sale soon!

  13. @Peter

    You'll make plenty of money with that kind of thinking Peter. Well done!

Leave a Reply