The stock market came off a great year in 2013, and continued rising through the first half of 2014.
On Saturday, June 28, 2014 I loaded up my book bag with bills and personal odds and ends that I needed to catch up on; one of my favorite spots for doing this sort of activity is at an out-of-the-way table at the community library.
I unloaded the contents of my book bag and organized the clutter into neat piles.
One of the piles consisted of financial stuff. Out of curiosity, I took out my pocket calculator and multiplied the number of mutual fund shares (mostly within the Federal Government’s Thrift Savings Plan) that I owned times the most recent closing share price.
The sum registered with seven digits and two commas ahead of the decimal point. I double-checked by running the numbers a second time: same answer again.
I sat there as it swirled and sank in. To say that I found it a good feeling is an understatement – but actually, it is surprisingly-hard to put what I felt into words.
But mostly I reflected and reminisced over the events that had allowed this to come to pass over the course of my thus-far career (it is in its late twenties), and what I had done so that it really did happen.
Budgeting and Living Below Your Means
The story can in large part be traced back to December 31, 1989. At the stroke of midnight on that New Year’s Eve, I put out the butt of a Marlboro Light cigarette into a just-emptied sixteen-ounce Budweiser can and set it on a shelf in my apartment. I haven’t used alcohol or tobacco for nearly twenty-five years now.
I also began a strategy of keeping my pickup trucks for a long time, starting roughly at around a decade and a 150,000 mile target. I had already discovered that the new car smell goes away a long time before the payments ever go away! I just felt that meticulously maintaining the older pickup so that it would last a whole lot longer made better sense (for me, anyway) than periodically just going out and buying a new one.
One of the more immediate effects of all this was that my wallet had much more money left in it at the end of the month.
I developed a formal, written savings plan to which to adhere, and directed this into regular bank savings; I was still young enough then that I was largely ignorant of the financial markets; I mostly thought of and engaged in outdoor recreational pursuits.
Investing for the Long Haul
My chosen career path had the potential to include required occupancy of government housing, and I did foresee that someday, I might have to be in a position to purchase a house at the end as well as having built up retirement savings.
So I began developing an interest in money matters – because I knew I had to, and along the way I enjoyed and learned from newspaper columns such as Humberto Cruz’s The Savings Game and Susan Bondy’s Bondy on Money. The financial markets are not as boring as you might think at first glance, since you soon come to understand that there is a lot of human drama and that the emotions of fear and greed hold such sway over the potential outcomes.
It seemed that the best way to achieve financial success came from long-term investing in stock mutual funds, even after factoring in those scary and sometimes-severe declines that can happen along the way.
I bought a magazine on mutual funds from the rack at the neighborhood grocery store and studied what it had to say, and then branched out from there, pursuing and researching in greater depth the portions that seemed to hold the most promise.
So, twenty years after I first bought that magazine, I can attest to the truth of the projections that those charts and graphs – and the TSP calculator – illustrate: that by making regular contributions – and contributing the maximum that you can – an ordinary, run-of-the-mill person can indeed become a millionaire. It is not just smoke-and-mirrors or a mirage and while it doesn’t happen overnight, it can happen over time.
For myself, my government career can very roughly be divided into thirds: about the first 1/3 was spent working various positions between GS-3 and GS-7. The next 1/3 was spent as a GS-9, and only in the third to date have I reached a GS-11.
So I am not particularly remarkable in this regard, nor am I boasting or bragging. In fact, just the opposite: By not having climbed all that far up the career ladder myself, I am simply pointing out just how possible that it still really is; this would seem to be a goal well within reach of a lot of everyday folks. And if the markets cooperate and deliver exceptionally-robust returns, it could happen sooner than you think.
But the absolute worst thing you can do is convince yourself that accumulating substantial wealth is simply not attainable; if you do that, you’ll defeat yourself before you even get started. I think it was Henry Ford who said, if not verbatim, something to the effect of: “Whether you think you can, or you think you can’t – you’re right.”
Compound Interest: The Eighth Wonder of the World
Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.
~ Albert Einstein
Even if math is not your strongsuit, the most important mathematical concept to grasp for your financial well-being is compound interest, and this thankfully is not particularly tough to understand.
To put into perspective how much compound interest can cause your original investment to snowball: Back in 1986, an acquaintance of mine came into an unexpected windfall of $12,000. That would be a nice sum of money to drop into your life from right out of the blue today, but due to the effects of inflation, it had far greater purchasing power back then.
In 2014, I plug that $12,000 figure into the TSP calculator along with 28 years and assume an interest rate of 10%, not an unrealistic expectation for large company stocks over such a long period of years.
Had he invested this money instead of buying an ultra-fancy motorcycle, he’d be sitting on a sum of close to $175,000 today.
If he had chosen the rougher and rockier ride of small company stocks and, given a corresponding return averaging 12% over those 28 years, he would now have nearly $287,000.
What struck me the most was that he had already figured out how to spend his windfall before the ink on the check had even finished drying.
To paraphrase a former boss of mine, whether we realize it or not in the present, we are making choices that will affect us in the future.
Staying the Course
So as retirement draws closer and I look back on it all, what did I learn?
You need to carefully develop a plan, and you need to stick with your plan through thick and thin. This in turn hinges upon your own temperament and tolerance for risk. A good financial advisor can help you develop and stick to a plan.
While stocks might prove to be more lucrative than bonds over time, the ride may be more painful, and especially with small company stocks. You might incur losses of 50% – or even more! – and while recovery might occur over a fairly short time span, it could take many years to recoup a loss of this magnitude.
When there is a bloodbath in the markets, I’d suggest just avoiding those stories of horror and hysteria in the headlines. Stay away from the popular press and the electronic news media, and forget the financial section newspaper for a while. You need to keep your wits about you, keep a cool head, get a grip on yourself and avoid panic.
In short, you need to just keep on keepin’ on.
That wraps up my two cents worth, and I wish to you the greatest success in charting the course of your own financial future.
Dan Magneson is a Fish Biologist in the National Fish Hatchery System with the U.S. Fish and Wildlife Service. He has worked as a federal employee since 1985.