Author: Rick Hill
I still have vivid memories of my first market decline when I was working as a stockbroker. For the first two years of my career, nearly everything I recommended was going up. I was proud of the value I thought I was providing to my clients and impressed with how smart I was.
By 1969, the Dow Jones Industrial Average was getting close to an all-time high of 1,000. Then it started to decline and just kept going down. It eventually dropped almost 40%.
The situation hit me hard. I felt so bad about the losses my clients were experiencing that I couldn’t sleep and had stomach problems. To make things worse, a lot of my early clients were friends of my parents. When I would go home for a visit, I would call ahead and ask my parents to move their car out of the garage so I could park there and close the door behind me. I didn’t want my parents’ neighbors to know I was home because I couldn’t face questions about why their stocks were doing so poorly. I really didn’t know what to say because I didn’t have an answer. It was during this period that I spent one afternoon hiding out in the movie theater watching a Clint Eastwood triple feature!
Eventually, I went to my manager and asked for advice: What can I do? What should I say? He was surprised by my questions and responded bluntly with, “Keep trading stocks.” That was my job, after all. We were brokers, not financial advisors. We were paid to trade stocks because trading created revenue for our firm whether the stocks went up or down in our clients’ accounts.
Then he added something that turned out to be good advice for me. He said that if the market decline was bothering me that much, I should quit my job and go work in a bank trust department. He was right. I wasn’t interested in selling stocks to help a firm make money whether or not my clients won or lost..I left my brokerage job shortly thereafter.
Obviously, I’ve experienced many more market downturns since that fateful time…because that’s simply what the market does. We just can’t accurately predict when. In fact, there have been 10 times when the market declined more than 20% in the past 50 years—with the two most recent happening in 2007-2009 (down 55%) with the financial crisis and in March 2020 (down 35% in 21 days) with the COVID-19 pandemic.
Lesson Learned: Expect that the market will decline and ignore it when it does.
History shows that market declines are inevitable—higher equity returns wouldn’t be possible without the risk of occasional downturns. Also, market declines are temporary. When you remember these two facts, you’re less likely to let your emotions get in the way of your long-term investing strategy. After all, a loss isn’t a loss until you sell your position.
Of course, ignoring market downturns is easier said than done. I admit that I still feel anxious during these periods, and I know that many investors experience the same sleeplessness and pit-in-the-stomach sensations I felt back in 1969. Today, though, I’m not afraid to face my clients when the markets are bad.
Instead, I like to initiate calls during these rough periods just to ask how they’re feeling and to give them better advice than I could have 50 years ago. Instead of recommending new stock trades, I tell them to do nothing – except the occasional rebalance. This downturn, like others before it, will pass.
Also, I’ve learned, and communicated to all that will listen…especially our clients…to focus on what you can control. The market is not controllable. Your investing philosophy, asset allocation, and personal spending and savings are in your control. Focus your attention, energy, and actions there. And leave the rest to us.
My excitement about investing led me to pursue a role as a stockbroker in Philadelphia right after I completed my MBA. Back in the late 1960s, almost no one bought mutual funds. As a broker, I made recommendations to my clients about which stocks to buy. Then, the trend was to bet big on the next ‘winner’ – not too dissimilar from today’s speculation around cryptocurrency.
As a young broker, I had worked hard to save $3,000. I was ready to invest my money the same way I invested my client’s money. I looked over the recommended stocks list, researched, and narrowed my options down to two companies. One was a mobile home company, and the other was an airline that delivered oil drilling equipment to Alaska’s north slope.
Both stocks were selling at $30 a share. With my $3,000, I could buy a full lot (100 shares) of either one. The airline stock had a more exciting story, so I bought that one.
I watched both stocks closely over the next several months. Unfortunately, the airline stock took a severe nosedive, falling to $3 a share, a whopping 90% loss, while the mobile home stock doubled to $60 a share. After many agonizing days, weeks, and months, I sold my airline investment for $300, suffering a loss of $2,700.
With my annual salary of $9,000, my finances took a significant hit. I just blew up my nest egg! I kicked myself for not buying the mobile home stock and earning $6,000 – a net difference of $5,700! That much money could have changed my life. I could have bought a nice car, taken a European vacation, or used the money for other exciting adventures. Regret reigned supreme. Mainly I questioned why I didn’t split my investment by buying 50 shares of each company – at least then I would have spread out my risk.
Lesson Learned: Diversification can help you get better results with less stress.
Diversification is a way to spread your risk, increasing the chances of your exposure to potential winners; a way to own the haystack rather than searching for the needles. Also, different countries and sectors perform differently at different times – it’s almost impossible to predict when each will have its day in the sun. If you are deeply diversified, you increase your chance of owning the winners, and at the right time.
Back then, I would have told you I was investing. With the wisdom that comes with age, I now know that I was gambling. Why? I put all my eggs in one basket by betting on one company. Also, even though the insight helped me learn my lesson, I would never call buying two stocks proper diversification. Today, our clients have access to expertly-designed mutual funds that make it easy to own around 13,000 stocks from around the globe. A strategy that is much better than betting on one airline!
I was lucky to learn early on that – both financially and emotionally – diversification deserves a key place in any long-term investment strategy. No one can accurately predict which investments will win and which will lose, and take it from me, you can drive yourself crazy watching to see whether your bets are going to pay off.
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Why would a stockbroker leave the office for lunch and end up spending the afternoon at a movie theater watching a Clint Eastwood triple feature? It’s hard to imagine a broker abandoning work in the middle of the trading day, but that broker was me. To understand what drove me into that darkened theater, you need to know what I was going through at the time—and how that experience contributed to one of the most important lessons I’ve learned during my 50+ year career in finance.
My fascination with the stock market began when I took my first investment class at Wharton Business School in 1967 during my MBA program. Investing was a new world to me (my father and grandfather weren’t investors—they both had pensions), and from that day on I wanted to learn as much as possible. I read investing books, followed the market’s movements in the newspaper and on TV, and listened to many so-called experts. It’s no surprise that this interest led me to a career in the investing world.
Along the way, though, I discovered that most of what you hear and read doesn’t teach you what you need to know to be a successful investor in the real world. Too often, investment “advice” is focused on specific products, like the stocks or mutual funds, or annuities, that someone wants you to buy. However, you can’t make sound investment decisions and manage your emotions without a grounding in the principles that lead to financial success. For me, I had to gain that knowledge through experience.
Some of those experiences were painful and humbling. Others were empowering. Now, more than 50 years into my journey to become a better investor, I want to share some of these stories and their lessons. I hope you can take something from my experiences to help put you on your path to investment success.
Investment class at Wharton—1966
A particular moment from my first investing class at the University of Pennsylvania made a big impression on me. One day, our professor asked us to calculate how much money we would have at retirement according to the following assumptions:
- We saved 10% of our starting salary the first year after graduation and continued saving 10% of our salary for the next 40 years
- Our salary would grow by 5% a year
- Our investments would earn 10% a year
I assumed a starting salary of $12,000 (which was a little optimistic—it turned out to be about $9,000), and then I began doing the math. We did not have computers back then, so I had to use manual calculations to work through all the figures. When I was done, I had an ending value of $1 million at age 64 in 2007.
I remember thinking this had to be a mistake. A million dollars was practically unheard of back then unless you were very wealthy.
I checked my work and got the same result. That’s when I realized that it was possible to become a millionaire by age 65 with a couple of reasonable assumptions—and a disciplined saving and investing strategy.
Lesson Learned: Compounding works wonders if you let it work.
Every retirement guide will tell you that starting to save early and keeping it up is the key to success. But it can be hard to stick with that approach because you must be willing to delay your gratification and ignore the noise around you – good and bad.
Investing doesn’t reward you consistently year after year. Some years you might not make much progress; other years, you might fall back a bit. Likewise, compounding isn’t exciting from one year to the next. Over long periods, though—like the 40 years you might spend saving for retirement—it’s going to make a big difference.
Clients and team members I work with have already experienced what compounding can do. They’ve been saving and investing for long enough that they can look back to where they were 20 years ago and be satisfied. Those of us in this fortunate position can help our younger friends and family members grasp the power of compounding.
When my granddaughters were around ten years old, I explained the Rule of 72 to them. It’s an easy way to quantify the benefits of compounding by calculating how long it takes for your savings to double. You divide the expected annual return of your investments into 72. For example, earning 10% per year means you’ll double your investments roughly every seven years, or six times over a 40-year career. And remember, compounding continues to work even after you retire—so your savings can double a few more times in your lifetime.
Check back each month for the next lesson from Rick Hill’s long view career.