There’s a tradition in China during every lunar new year that elders would give their young offspring a red pocket filled with cash. The origin of this tradition has been disputed however the most credible I’ve read is because people used to believe such money would protect the youngsters against evil spirits that roam around during the new year when the town is empty.
The amount varied but when I was young, I would normally receive between £50 to £200 per elderly (which includes all of my parents’ colleagues who would visit us). So I would happily take in at least £2,000 per year, every year!
Except I didn’t!
My parents would always snatch the treasured red envelope off me as soon as the guest had left, leaving me feeling deprived. Unbeknown to me, my parents opened a savings account under my name and deposited all of the red pocket money in there, untouched and left it to grow from the age of 5.
The day I turned 19 (a few days prior to starting university), my father gave me two things:
- A savings account now worth over £35k
- A book called The Intelligent Investor written by Benjamin Graham
He told me that both now belonged to me and I could use them whenever I saw fit.
Almost 10 years later, I’m happy to report that the pot of nest egg is still there and had almost doubled in size. However, it wasn’t without ups and downs. Here are a few lessons that I had learned along the way.
Lesson 1: Luck matters!
I took control of the money in late 2008 and just left it in what must have been the last of the 6% saving bond in issuance, for 2 years. Anyone who’s familiar with the subsequent history would know that I was an extremely lucky guy:
- The US stock market dropped by almost 40% between late-2008 and mid-2009 due to the Great Recession.
- It then started the longest rebound in the financial history, which is still continuing at the time of writing.
- I didn’t bother reading The Intelligent Investor until 2010.
- Central banks started quantitative easing and slashed interest rate to historical lows (0.5% in the U.K.).
Piecing all of the above together, it meant that:
- I avoided one of the biggest downturns in the financial history;
- At the same time, I earned handsome interests on the fund, all the while oblivious to the outside world, which was turning into a pile of flaming turd, without even knowing how to open a brokerage account.
Were they conscious decisions? Absolutely not, I just got lucky.
Outcome: Definitely positive. the 5.5% difference over 2 years on £35k added up to £3,850.
Lesson 2: Don’t spunk your nest egg
When the saving matured in 2010, instead of investing all of them wisely in the once-in-a-decade market recovery, I blew the first £10,000 on gadgets, booze and a luxurious 2-week holiday with friends in Majorca. All gone, in a matter of 5 weeks.
Had I saved that money instead, the pot would worth at least 30% more than it’s current value. It was definitely a costly financial choice!
The lesson here is that when life throws a golden hen at you, pick it up and treasure it rather than making a roast!
The ironic twist of the story is that it was in Majorca where I started and finished reading The Intelligent Investor and opened a brokerage account to make my first stock investments. So the glass-half-full part of me had always viewed the £10,000 as my initiation fee!
Outcome: A massive red! £10,000 down the drain and then the opportunity cost of that over 8 years.
Lesson 3: To drip feed and To lump sum?
The first dilemma I faced after opening the brokerage account was whether to drip feed my money (i.e. investing a small amount at regular intervals) or to concentrate and invest as a lump sum. To that end, I spoke to many seasoned investors and like many things in life, I got 12 different answers from 10 people!
My take the issue is that it really boils down to whether I cared about the short to medium term market volatility.
If I woke up to a 30% market sell-off and wanted the peace of mind provided by cash (which by definition doesn’t lose its nominal value) and the dry powder to take advantage of the cheaper valuation then I should probably drip feed.
If I could invest and then shut my eyes and pretend the market is shut for the next 10 years like Warren Buffett, then the lump sum strategy will work in my favor because the capital would have had the longest exposure to the market, generating far greater returns in the long run.
I knew that my temperament is no way near as developed as Buffett. However, I also knew the advantage of lump sum investing. So I decided to go with a hybrid approach:
- I invested 60% of the capital as a lump sum in individual shares;
- Another 20% was drip fed and invested into the portfolio as mutual funds alongside with any additional monthly spare savings I could muster;
- The last 20% was always kept as cash.
This was the most comfortable strategy I could live with as well as being the most cost-effective one with my broker.
Outcome: thanks to one of the longest bull market in history, this strategy has worked out very well for me. We will see in the next downturn how well it’s protecting my portfolio.
So here we have it:
- Luck does matter!
- However, you can improve your odds by not wasting your nest egg.
- To drip feed or to lump sum is really down to individual preference, but I suggest a mix of both.
- Don’t forget cash!
What are the 3 most valuable lessons you wish someone had told you about investing when you were young? I’d love to see them and broaden my horizon.