I was reading an interesting post about having a financial epiphany and realized there were some very interesting comments from some heavy hitters in the personal finance blogging community and some who have newer blogs. Financial Samurai, Mr. Tako, Financially Alert, and others were talking about various inflection points in their financial independence journey. All of these bloggers are financially independent and have written extensively about their personal journey and their philosophy of investing and creating passive income (among other things). As I’ve mentioned before, getting to read about how other people progress to their net worth goal can be very exciting and instructive. It’s like having multiple successful mentors who will share with you the lessons they’ve learned in becoming financially free.
I’m hoping to one day become one of them. Part of the reason I would like to do so is to help others further their understanding of personal finance fundamentals. I’ve watched in frustration since I was a teenager as friends and family have made poor financial decisions that have set them back years in reaching their goals.
Others simply don’t have goals and are unaware that by automatic saving and investing in index funds they can amass a significant amount of money to become financially independent.
What is the Best Financial Decision You Have Made?
So as I thought about all of these interesting financial epiphanies I wondered what some of the best financial decisions some of you have made? This could be a one-time decision or a commitment that you made and have stuck to over the years which has worked out really well.
There are many possibilities and it may be that there are multiple good decisions that when taken together have yielded very good results. Sometimes there are defining moments where it is abundantly clear that a particular decision was pivotal in your success.
The Best Decision I’ve Made
Personally the best financial decision that I made was to open a brokerage account in my early teens to begin investing. Unfortunately, I didn’t immediately begin automatically saving a portion of my income and investing it in a relatively aggressive index fund! However, I do think that by opening a brokerage account I began a process of education that opened up my mind to the various products and approaches that are used in the investing world.
This happened back in the mid to late nineties and the stock market was really taking off. The internet was relatively new and I had opened an online trading account which was a very new development. Remember AOL? I was using my AOL internet access and the DLJ Direct brokerage which has since been a takeover target and may or may not still be in existence.
These were interesting times where semiconductor stocks like Qualcomm were all the rage. There was much talk of finding the next big technology and making thousand percent returns – and some people were doing it. Mutual Funds that focused on technology abounded.
I can’t say I was immune to the hysteria but I had enough wise people around me to direct me to read some legitimate investing books which focused on investing for the long-term.
My initial investments included names like Micron Technology. Books on investing abounded and not all of them were helpful. Eventually the “.com” bubble came and I am thankful that I had no part in that hysteria. I remember Overstock.com, Pets.com, and the like were going public with massive valuations but no sales.
I also began reading about stock options, futures, and foreign exchange. Because I was mainly focused on the stock market and individual stocks, stock options became my biggest interest. I read book after book about how to invest in such a way as to make money when the stock market was going up, when it was going down, and when it was going sideways. Many of the strategies required access to capital that I did not have at the time. I was working as a laborer on a horse farm, a construction worker, and an unpaid intern at a stock brokerage. I had to start somewhere!
When you only have about $1,200 to invest it is hard to get approved to trade options, much less to execute a covered call strategy. Those were the kinds of issues that I was dealing with at the time and it was awesome! I was finally excited about something that I could study in college. Nothing previously had sparked my interest. Now I had a goal: study finance and go work for an investment bank. After a few years at a bank I intended to work for a Hedge Fund or start my own.
More on where I ended up later. But starting that brokerage account was the single best financial decision I made. It allowed me to experiment and learn about different products and strategies. By using my own hard-earned money I had a level of focus and interest that I would not have otherwise had. Lessons I learned in my first five to ten years investing on my own have stuck with me to this day.
The Worst Financial Decision I Ever Made
As I mentioned, I was very interested in stock options. Can you guess where this is going? I mean what teenager learning about investing for the first time is not going to be interested in stock options? By the time I reached my early twenties and got my first job and purchased my first house, I was finally approved to have a margin account with OptionsXpress which is my current brokerage. This included the ability to trade options.
My good friends, boss, and others warned me against options trading. However, after much reading, I decided that writing call options was a good way to pick up income while I owned a stock for the medium to long-term. The only problem was that I picked a horrible stock in an industry that I did not understand. Furthermore, the management was very poor and was constantly being replaced. The company had very concentrated revenues and had a storage contract with Compaq computers… yeah that wasn’t a great situation. Compaq and other companies essentially cancelled their contracts with Overland and their revenue base dropped by over 30%. Obviously the stock fell dramatically and I had written call options against it.
For the stock to fall a little is great when you’ve written a call option. This means the option won’t be exercised and you basically collect a fee. However, when the stock tanks you are losing much more money on the stock than you collect in your fee. I essentially held the stock for too long hoping it would turn around. Let’s just say it never happened and I learned a great lesson! I was dating my wife at the time so we both learned it together because I shared what happened with her.
Now I use stop-loss orders and am never afraid to sell a loser. I also don’t utilize stock options any longer. If I want to hedge my positions I use futures contracts. I have been thankful to have had very good success in using futures as a hedge.
What are some of your best (or worst) financial decisions?