Pondering Money

A truly wise person learns from other people’s mistakes, so I’m going to share another of my mistakes so that you don’t have to experience it yourself.My wife and I bought a new home in 2002 with a 6.75% 30 year mortgage. That was a good rate at that time and we never had trouble affording the payments.  We love our home, but I never loved having a mortgage!  Over the next couple of years I made some additional payments toward the principle to try to get rid of the mortgage quicker but I completely ignored interest rates.  That was a pretty big mistake because I missed not one but two great opportunities!  In 2003 and again in 2004 I could have refinanced to a 15 year loan in the mid 4% range.  My monthly payments would have been about the same, but refinancing would have helped me in two ways:

• I could have saved over $10,000 in interest.
• I could have been mortgage free 4 years earlier!

I did eventually correct my mistake and refinance down to a 5% 15 year loan in 2007.  Today rates are really low again- according to Bankrate.com a 15 year fixed mortgage is at 4.56%!   If you have a mortgage at a higher rate shouldn’t see if refinancing could save you thousands?   Don’t make the same mistake I did and ignore the opportunity from low rates!

While reading Large Amounts Matter Too a quote from JD really got me thinking: “You rarely make financial decisions involving tens (or hundreds) of thousands of dollars.”    I agree people generally don’t spend huge amounts every day, but are the big opportunities really that rare?How many opportunities don’t we recognize?  Or just barely miss?  How many start small but turn into big wins over time?  Finally how many big wins are really summations of many small actions?

Unrecognized Opportunities

How can you take advantage of a big win unless you recognize it?  I’m very guilty of missing big opportunities.  I’m sure I missed at several million dollar opportunities.  I used the Mosaic Browser in ‘92 and I recognized that it was revolutionary compared with text based Gopher clients… but I didn’t recognize that the company to commercialize it would make a fortune and try to get in early with Netscape.. or even try to get some Netscape stock.

Missed Opportunities

I was at Stanford for most of the 1990es, ground zero for a lot of internet startups.  I knew people in the CS PhD program too.  Did I miss some chance encounter that would have put me as an early employee of either Yahoo or Google?  I wonder how many big opportunities we all just barely miss?

Small Seeming Big Wins

Some big wins seem are very small in the short term, but it the long term become huge.

• Choosing to Invest Early - When you choose to start investing early it may not feel like a big win, but consider if you invest $1 for forty years it becomes:
  • $21.72 @ 8% interest
  • $31.41 @ 9% interest
  • $45.26 @ 10% interest
• Investing with Index Funds - Saving a few percent in fees doesn’t seem like a big deal… unless you understand that interest rates really matter, and a 0.75% difference in fees could cost you over a quarter million dollars!  You also won’t waste time trying to outperform the market, especially if you don’t have the half million dollars to make it worth your time… even if you are the next Warren Buffett!
• Diversification - Instead of chasing after the latest hot sector you can own them all and let rebalancing automate buying low and selling high.

Big Wins that Require Small StepsSome big wins are really the result of a multitude of small steps.

• Investing - Most people save a bit at a time, small steps but those steps can lead to financial freedom over time.
• Successful Marriage - The I Do is just the start!  It takes a lot of small (and some large) efforts to really make a marriage work.  That has to be one of the biggest wins in terms of both happiness and finances.
• Practice - To be a master at anything takes years of practice- and those individual practice sessions are small actions with small effect but the sum is an incredible win.

Maybe the big wins aren’t really that rare, we just have to be more aware so we don’t miss all of them.  What do you think?

Buying a stock on a hot tip is exciting, but it can be very expensive excitement don’t make the same kind of mistake I did…

Turning Back the Clock

In 2000 I sadly followed a hot tip and bought 15 shares of Sycamore Systems for about $1000. Pure speculation and not very wise on my part I was caught up in the irrational exuberance of the Internet bubble. It was pretty exciting, especially when the stock more than doubled!

What goes up…

The internet bubble popped sending stock prices through the floor. As it plunged I could have at least my original investment back… but I hung on, and on, and on… Hindsight is 20/20, so I know I should have sold, but who knew at the time that it really was the end of the bubble? Today, it’s a stock I’m likely to never sell. Don’t misunderstand, it isn’t that that it’s a wonderful investment. It’s that it is worth so little now (~$42.30) that it is worth more as a reminder to NEVER again buy a stock on a hot tip!

A Saner Alternative

What if instead I had bought $1000 of the S&P 500? Today it wold still be worth $760. Yes, that seems like a pretty big loss but when you include nine years of dividends I would actually be pretty close to break even… That’s even after buying at a truly terrible time to buy stocks!

Don’t Try This at Home

Being older and wiser, I’m not planning on repeating this folly. I’ve realized that I don’t need to get 100% yearly returns to reach my goals.   Slow and steady is far more likely to get me there- even if it is boring!  Please take my advise- forget the hot stock tips, buy low cost index funds and reap the rewards of owning a piece of capitalism.  The alternative is that you have your own $1000 reminder.