My 500k Lesson – a trip down memory lane

This is a story from my life – my 500k lesson. It is accurate to the best of my recollection.

Let the Good Times Roll

The year was 2006. Graduated from college a couple years prior, married one year and working in retail banking. Average job, average income, average life. Student loan debt, apartment life, some travel, no kids, just living. My public-facing job offered a front-row seat to the greatest financial collapse in my lifetime – the Great Recession. Located in an affluent DFW suburb, customers I primarily interacted with were upper-middle class and held well-paying jobs in IT, management, sales etc. It was a time of no fear and little concern for risk and a lending heyday. Regular people became real estate flippers and investors through high leverage and easy lending. With a high credit score, the self-employed opened small-business lines of credit fairly easily. Have home equity? Open a HELOC (Home Equity Line of Credit) with zero fees and put in that pool. They trained us to sell credit aggressively and many took us up on the offer. I wasn’t a mortgage originator, but interacted with customers as they went through the process. I overheard talk of how easy we made those deals for the self-employed. Lower-middle class folks jumped into day trading, investing in high-fee mutual funds and individual stocks. The only warning bell I remember came from a real estate professor in graduate school. He spent the first 20 minutes of each class projecting finance-related newspaper articles. We discussed those articles – a mini current events session. He questioned me more than once around easy-money lending practices – openly critical of the current asset bubble. He called it out. And this was way before anyone talked about bubbles.

Warning Bells

Fast forward one year, fall 2007. Still in my MBA program and working for the bank. Now influenced by a financial advisor, I took out a 10k 401k loan, placed the proceeds in a taxable brokerage account and bought naked call options on obscure international stocks. Two I remember specifically: China Mobile (CHL) and DryShips (DRYS) – now a private company. Not smart. I lost 50% of that money in 4-5 months. I bought call options into the teeth of the worst stock market decline in 80 years.

Warning bells began to sound. The clearest were the TWC (Texas Workforce Commission) debit cards that began showing up in customer’s wallets at the bank. I observed upper-middle class people losing executive and middle management jobs rapidly. Further into their careers they had significantly higher monthly expenses. Large expensive homes come with large expensive mortgages, housecleaning, lawn care, pool maintenance, etc. In addition to travel, golf and dining out there were the cars. The parking lot resembled a luxury dealership, with all the familiar brands: Mercedes, BMW, Lexus. What a house of cards.

The Great Recession deepened and pain increased. When interacting with people at their bank you observe financial emotions. Stress, uncertainty, fear and impulsivity increased.

My Costly Mistake

Meanwhile, what did I do with my remaining 401k money? Too long ago to locate statements with exact figures. My approximations:

Emotional investment decisions caused this. Had I followed a solid Investor Policy Statement and focused on a clear long-term vision, I’d have stayed fully invested. I invested arrogantly. As a current MBA Finance student, I thought I was smarter than the rest of Wall Street and Main Street – that I could correctly time the drop. When I should have reminded myself that as a 25-year-old, I had many more years ahead of me than behind to invest. I should have consistently plowed money straight into the market all the way down – a tremendous buying opportunity. Instead, for 2.5 years, I sat in money market. From the table above you see that so far this decision has cost approximately $68,500 – more when I run the numbers out over the next 25 years.

Takeaways

A few takeaways from this trip down memory lane:

• When times are good don’t let your lifestyle inflate to unsustainable levels. Leave financial margin in your life.
• Just because a bank will give you money, doesn’t mean you should take it.
• If you have time on your side, stay invested through market downturns. Timing the dip is a mirage.
• Don’t be a day-trader. I was a Finance MBA student, banking industry professional and still got ripped to shreds. You don’t have the resources to consistently beat the rest of the market.

This is a story from my life – My 500k Lesson.