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My personal finance journey over the past 20 years

By: Dennis Ho

(This article was originally published on The HumbleDollar, a personal finance blog run by Jonathan Clements, former personal finance writer for the Wall Street Journal and Forbes. Republished here with permission.)

As of yesterday’s market close, the S&P 500 was down 25% from year-end 2019 and off 29% from Feb. 19’s all-time high. Worse yet, interest rates are near zero, with the 10-year Treasury note yielding a paltry 1.15 %. In a few short weeks, the markets turned from euphoric to disastrous — and there seems to be no end in sight.

At age 43, I consider myself fairly young. But as I watch the markets, what’s been most surprising to me is how many times I’ve seen this situation before.

I graduated in 1999 and was fortunate to land a job with a large insurer in Philadelphia. One of the first things I did was to begin contributing to an IRA. The S&P 500 returned 20% in 1999, so my savings grew nicely. I began to think this investing thing was easy and I was on my way to a comfy retirement.

Then the combination of the dot-com bubble bursting and 9/11 led to three straight years of negative returns: 2000, 2001, and 2002. My gains in 1999 were wiped out and then some. Fortunately, by 2003, the markets turned positive, with the S&P 500 gaining almost 30%, including dividends. Because I had a stable job and enough income to cover my expenses, I was able to continue contributing to my IRA during this period and benefited from the depressed stock prices.

Over the next several years, the markets stabilized and had positive returns for four straight years from 2003 through 2006. Everything seemed fine again. By 2007, I had started a new job on Wall Street and was getting married in a few months. But almost immediately after joining my new firm, you could feel the economy was on shaky ground.

In 2007, stocks eked out a small positive return. But things got far worse in 2008, with concerns about subprime mortgages mushrooming into a full-blown crisis of confidence. I’m a long-term investor, but this was a tough time. With Lehman Brothers going bankrupt and dozens of companies getting government bailouts, it wasn’t clear who was going to survive or whether our financial system would continue to function going forward. In 2008, the S&P 500 nosedived 37%.

Think about that: 37% of your savings gone in one year. My wife and I didn’t liquidate any of our holdings, but we did slow down our investing. Buying on the dip seemed like a gamble at best and suicide at worst. We continued to make contributions to our retirement accounts, but diverted our other regular savings into cash. Fortunately, at the time, we didn’t have a mortgage or kids, so we could easily adjust our spending. We lived in a modest one-bedroom apartment in Fort Lee, New Jersey. As long as we could pay our rent and cover our food bills, we would be okay.

In 2009, the markets snapped back, with a 26% total return for the S&P 500. That year would kick off a tremendous 11-year run, with the S&P 500 generating positive returns in every year except 2018. The compound average annual return for the S&P 500 from year-end 2007 to year-end 2019 was 9%. This means that, even after the 37% drop in 2018, a $100,000 investment at the end of 2007 would have grown to more than $284,000 by December 2019. If those numbers aren’t a testament to buy-and-hold investing, I don’t know what is.

That brings us to today. My personal situation is very different now. My wife and I have three young kids and a mortgage to pay. I also left the corporate world two years ago and started my own business. With near-term liquidity critical, we decided to move a good chunk of our savings into a money-market fund until the business becomes self-sustaining. This way, we have the comfort of knowing we’ve got a good amount of runway to fund our personal and business expenses without having to liquidate long-term investments. You might think that, with the recent market selloff, I’d feel pretty good about our decision, but I don’t. Yes, a good bit of our savings has been spared from the recent market drop. But that same money also missed out on 2019’s 30%-plus stock market return.

Where does that leave us? In reflecting on the markets over my career, three important lessons jump out.

First, don’t be afraid to change your investment strategy as your life changes. Many market experts advocate holding stocks forever or buying on the dip. But there’s no one-size-fits-all strategy. How stable is your income or the company you work for? What does your cash buffer look like? Do you have disability insurance? How easy would it be to reduce your fixed expenses? Do others depend on you financially?

My financial profile changed dramatically from 1999 to today. While I was happy to buy on the dip in 2001, it would not be prudent for me to do so today. I used to have more than 90% of my savings invested in stocks. Today, I have much less. It was a difficult transition. But I’m okay with that change, because it’s the right strategy for me.

Second, don’t underestimate the value of a cash cushion. It’s critical to prudent financial planning and, at times like this, an even larger buffer might be called for. Make sure to revisit your potential cash needs over the next six to 12 months. Have a plan for where to get liquidity in an emergency. If you don’t have enough liquidity, consider building up your cash reserves in the next few months, by diverting your savings to cash investments or reallocating your portfolio.

Finally, don’t neglect retirement. Given current market conditions, it’s natural to focus on the short term. But as history has shown, markets eventually turn around. Even if it means cutting expenses elsewhere, be sure to continue taking advantage of the tax breaks that comes with contributing to 401(k)s and IRAs, as well as any employer match offered by your company plan. Skipping just a few years of contributions early in your career could reduce your retirement savings by tens of thousands of dollars. During the depths of the financial crisis, my wife and I stopped eating out so we could continue contributing to our retirement accounts. Today, we’re thankful we did.

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