Transcript
Paul Winkler: And welcome to The Investor Coaching Show. Paul Winkler, along with Jim Wood, hanging out with me in the studio.
Young Investors
So I remember my first job was working as a dishwasher in a restaurant and nobody thought about retirement planning. I was just thinking about getting some money just to go out and blow it. And you know, the last thing on my mind was saving though. Didn’t think about saving any money for the future. Didn’t really think about saving money for the future, with my next job. Next kind of real job, which was another dishwashing job at a restaurant.
Burger King was my third job. And then my next job after that was in a garden center and we didn’t think about retirement planning and that one didn’t think about putting any money aside for the future. It was just whatever I could do to get by. I thought, anyway, then I got a job working in a company. It was a computer company. Now this is my job through college, working at a computer company. So computers were just in their infancy really at this point in time. But you know, I worked at this company. I don’t remember that they had a 401(k) and I remember it was a great mystery, Jim, you know, this 401(k), it was like, we got this benefit plan.
If you want to put money in it, you can guess how much I put in it. Zero, zero, didn’t put anything in it. Now it would be really interesting to see what that would have grown to over this period of time if I had done anything. Younger people aren’t doing, they’re hardly investing at all. They do this other stuff and they’re paying off debt. They have other things that they’re doing with the money, but you think how much are they foregoing by not actually splitting the goal?
The 401(k)
So I want you to talk to Jim a little bit, you know, so if you know, you get your first job and you’re a younger person and you look at the 401(k), you look at, what was your, what was your impression? Did you have a 401(k), like a first job? And what was your impression of that?
Jim Wood: Yeah, not my first job, but actually I did have one early on. I mean, my first job was hosing off a snowy parking lot in Washington state and then I was stacking wood and yeah. But anyway, the first job that I had a 401(k) available was I was working in a hotel and I was, you know, I didn’t, I was a banquet waiter and a bartender and did other stuff, but I started hearing about this 401(k) thing. And then, Hey, there was a, there was actually a match. And so this was back in the eighties, but there was actually a match and they had three funds. Did you do it? Yes, I did. You did to get the match.
There were three investment choices. So you could diversify, there was the stock fund, the bond fund and the cash fund. Oh, that’s a hoot and didn’t know anything about it, but I’d been in it probably for a year. And somebody said, you should put your money in the stock fund because we’re making all this money. So I put money in a stock fund and then of course it immediately went down of course, but I didn’t pull it out and make changes, but even, you know, that little bit, which I didn’t make much and a small match on not making much, wasn’t a lot of money, but it was money that I later converted to a Roth IRA.
Paul Winkler: So you still have the money from that? I do get out. No, you are so weird because most people are, they do. They actually cash out when they change jobs. Yeah.
The Temptation to Spend
Jim Wood: And, and I tell you that there was probably some temptation to do that at times. Right.
Paul Winkler: Right. So it’s found money, you know, I have a change in job. Maybe I won’t get paid for a couple of weeks. Hey, I got this other money or I see something in a store that I really want or yeah. Or I, you know, see a little fancy toy that would be really cool to have.
Jim Wood: And, and that was all, I mean, I made probably pretty close to minimum wage at that time. So it wasn’t that much because a lot of my income was on tips, which of course I didn’t get any 401(k) match on my tips, even though the IRS started making people claim them right about that time. But the whole point is, yeah, it was just a little bit, but it’s added up and I’m glad it kind of gives me some satisfaction to see that today.
Paul Winkler: Right. Right. So, you know, just to put numbers on this thing and, you know, because we don’t really think necessarily in terms of this type of thing, but let’s say that we, we just say, okay, so let’s say that the return on that money was 10%, which if you look over a 40-year period, large US don’t have any returns that’s under that. You know, really it’s a, I think maybe 9.9 or something like that, it’s the worst. But you know, it’s around 10 is what we look at. If we’re just looking at the lowest performing area of the market, historically, which is large US stocks. If you have under $5,000 balance and you worked for a company you’re kicked out of the plan. You’re just kicked out, you know, when you change jobs. So I’m going to use a $5,000 balance and say, what would that be worth today? Well, about $226,000.
Why don’t we have that? Well, typically because of the rules of investing that get broken and the myths of investing that we fall prey to that we talk about all the time. Right.
Jim Wood: Well, allow me to expand on my story. Oh, okay. All right. Because of the way, because I had just literally started in the, you know, investment business with a broker dealer in 1998, and immediately had seen, you know, tech, tech companies and things, making all this money. And I had put the money into a small cap value fund that was run by one company that I worked with. And so I waited and waited for a whole year and a half, got real impatient and sold my small cap value fund. What do you think I invested in? Tech and just for a chuckle for you. And I think I’ve told you this before, but it was something called the dent demographics trend fund.
Paul Winkler: That’s right. I forgot it wasn’t, it was not necessarily tech. It was the demographics fund, which was based on this premise. That seems so bulletproof, that baby boomers are going to be spending a ton of money and younger people that are in their mid-twenties also spend a bunch of money, but baby boomers especially are going to be spending a lot of money over the next 10 years. And that these, these particular markets are just going to rock.
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Lessons Learned from Making Mistakes
Jim Wood: Yeah. And so, yeah, it seemed like a great decision for about four months, like a rock. Yeah. And then March of 2000 hit and, you know, so that fun immediately cratered and pretty much cratered over the next year to the tune of about 80%. Now I finally sold it and bought a more diversified fund around somewhere after losing a bunch. But that small cap value fund that I had sold, I know, had done phenomenal. Oh yeah. It was huge. So you would talk about performance for that area. That I was a licensed, you know, representative for the registered representative for the broker dealer and giving people advice on their plans on their stuff.
And yeah. And so it was a great lesson for me to learn early in my career.
Paul Winkler: Yeah. That’s gotta be a story that you tell a lot. I do. It’s just, it’s just because it is so perfect that, you know, so many people think that just because a person is an investment advisor, it means that they know a lot and they have knowledge that they’re given credit for. That just is not necessarily their past a couple of tests. Wow. Yeah. You got to not mess it up along the way. Now you, what you did. I got great credit for it. At least you got involved in the plan. A lot of, a lot of younger people don’t do anything. And you know, you might convince yourself, well, I gotta get out of this college debt first and that’s not a bad thing I’ve always learned for, for me having two different goals simultaneously and working on both those goals at the same time, it’s just, for me, it’s been huge because I would, you know, be my knee jerk would be, yeah, just pay off debt, pay off debt.
But for me, having paying off debt and saving at the same time happened to work better. And that has, that has been kind of how I’ve done. It’s how I’ve done things for the past 25 years, not forever, but for the past 25 years, I did start doing things that way. And why is it just, because I just think that if I’ve got two things that I’m focused on, I will be a little bit more vigilant on doing both of them. I’ll get the debt paid off. Cause I hated debt, always hated debt. But I found if I saved when the debt was finally paid off, I had a victory because there was a bunch of money there.
Is It Better to Invest?
Jim Wood: Well, it’s a question we get asked, ask a lot online, you know, because you have limited resources and what to do, is it better to pay down the house or is it better to pay down the student loan? Is it better to invest? And a lot of times it’s exactly what you said. You try to do a little bit now. There’s definitely one you might focus on more, depending on the interest rate you’re paying on your student loans and things like that. But you know, there’s also other things, well, is there a match on the 401(k)? You know, well, at least get the free money there. Right? And, and then there’s, you know, everybody just sometimes is a little bit different in terms of, you know, they might follow the philosophy and, you know, debt is just the worst thing in the world I want to get at first. But I do think you’re exactly on point in terms of you don’t just do one at the exclusion of others.
Paul Winkler: Yeah. I think that’s, that’s a good thing. The other thing that I did as well, because I made the mistake early on, my grandfather begged me not to make this mistake, which was to buy a new car. Now I’m not against new cars now. I, you know, because I’m established, I can do it. It’s a choice. But back then it was a really bad move, in my twenties to go and buy a brand new car simply because I couldn’t pay cash for it. You know, now anytime that I get anything, it’s always cash and, and I don’t finance anything. I’ve had people argue with me, car dealers argue with me, saying “we can give you a 0% financing level on that.” And I know they’re able to do that.
I don’t like financing anything because I don’t know if I could have gotten it, maybe I could have gotten a lower price on the car. I don’t, I don’t know. You know, it’s, it can be kind of hard to see through the sales pitches sometimes when it comes to that. But, you know, so I don’t want to argue that, but the point that I do want to talk about is just building up a sinking fund for big purchases. It’s just a good discipline to get into. It’s a good feeling knowing I don’t have to make a payment every single month, you know, on a vehicle or on, you know, sometimes people will borrow too.
I’ve seen people borrowing to buy furniture. I just shake my head regarding that or financing musical instruments. I see that all the time, you know, or financing, there was something I was looking at. What was it the other day? I can’t remember what it was, but it was a payment plan for something. And it was a couple of thousand dollars to buy it cash outright. And I was, well, why would I finance this? And I thought, wow, there are a lot of times people don’t have that because they haven’t gotten into the discipline of saving. And what I always did was this, I made it a bill and this is probably going back and you’re saying, well, Paul, you know, you make a lot more money than you did back then.
So you can afford to pay cash for things. No, no, no, wait a minute. This is a discipline that I started when I was making less than $20,000 a year. So it is, and that was not, that was not rolling in money by any stretch of the imagination. It would be the equivalent of maybe $35,000 today, you know, somewhere in that neighborhood, which is well below the average family income. Okay. So this is not a discipline. I set up when I was rolling in money. So I don’t want to hear that. But what I would do is this is I would actually have a bank draft. And I don’t know if Jim, if you ever did it this way, but I had a bank draft where I would actually have money going to a savings account.
And that was my discipline. That was my, I made it a bill. I mean, is that kinda how you, you thought about things?
Being Disciplined
Jim Wood: No, I wasn’t that focused on something like that. I mean, I did the 401(k) given the opportunity, that type of thing. And I was always a pretty good saver, but I didn’t really do anything that disciplined other than, Hey, I have some extra money I’m going to just, you know, stick in my savings account or do something like that with it. But I ever, you know, like a big, you know, spin thrift. And I did, you know, generally could spend most of my life keeping even credit cards down, even in the toughest times and having credit cards, I never had just a horrible amount of credit card debt. It was a little bit at times when first going into business and having expenses and stuff like that, that I probably had more than I ever would have liked. But once they got paid off, they stayed, paid off.
Paul Winkler: It just hit me as you were talking where the discipline of doing it paste on bank, drafting it and having it go toward savings. You know, where that came from for me, it came from the insurance industry. And now that I think about it, because I, in my deep dark days, I’m kidding. Only say that because I don’t have a problem with insurance agents. I just don’t think that people that are selling stuff that’s based on commission ought to be giving financial planning advice. But you know, back then what we would do is we would, now I don’t recommend this whole life insurance as a saving savings vehicle, permanent life insurance, but that’s the way we that’s the way we sold it.
It was a discipline saving. And it was, it comes from a guy that used to talk about it this way. And he’d say, I got two vehicles. One when you put money in it, a vice comes down and closes the lid on it. And it doesn’t earn any interest. I got this other vehicle over here makes 5% now at the end of 10 years, which, and you got open access to it at the end of 10 years, which one do you think will have more money in it? And we’d all answered beautifully. Well, the one that the vice comes down on it and he goes, right. No. Why? Because you can’t touch it. And, and it was, it was just this discipline.
And, you know, he made a really good point. We are emotional beings that we’ll go and grab money from when we have access to why do you think 401(k)s have tax?
Jim Wood: That’s right you made that point? I was just like, that was exactly what I said. Yeah, absolutely. Because will you pay an extra 10% to access that money twice in case things like that? Absolutely.
Paul Winkler: Yeah. It makes you think twice. And then you add taxes on top of that, and it makes you think twice about pulling that money back out. So I think that that’s a really good thing to keep in mind that these penalties on retirement plans are there because it serves a psychological purpose that is really beneficial to people. So let’s do this, we’ll take a quick break and just, you know, cause it’s kind of fun. Talk a little bit about some of the mistakes that people make when they’re younger and how to avoid some of these mistakes and just basic financial planning, things that we ought to keep in mind.
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