Expensive Investment Lessons Learned

February 12, 2019

I recently sat down with “John” a thirty-year-old insurance professional who just received a large year-end bonus. This is the fourth year in a row he received a six-figure bonus from his agency. John was feeling good about his income and his potential to become wealthy but is very concerned and frustrated as to how he should invest the proceeds.  Unfortunately, he has learned some tough lessons on investing over the past three years that have made him reluctant to invest his money.

2016 – Investing With Friends And Family

John is a very good insurance producer and building close relationships with his clients comes natural to him. John had a client who is very successful, and John had the upmost confidence in his client’s ability to make money. So, when his client asked John if he wanted to invest $100,000 into a new business venture, John was flattered to have been asked to invest, as he was only asking his closest friends and family to participate. Eleven months into this “can’t miss” investment it was deemed worthless as their unique technology didn’t perform as expected.

Investing in privately held companies can be a very risky proposition. According to data from the Bureau of Labor Statistics: about 20% of businesses fail in their first year, and about 50% of small businesses fail by their fifth year. Before investing in a startup, one needs to understand the risk and be certain they can afford to take on that risk. With this $100,000 being John’s first large bonus it accounted for almost half of his overall net worth.

2017 – Cash Not Always King

The S&P 500 was up 21.83% for the year ended December 31, 2017. Naturally, after losing his first $100k bonus, John was gun shy and didn’t feel comfortable investing his 2016-year-end bonus. He sat on the sideline during 2017 frustrated, watching the market go up while his cash earned less than a percent sitting in his checking account.

2018 – Not So Merry Of A Christmas

After sitting on the sideline and missing the market returns of 2017 John was determined to get invested in 2018. He slowly began to dollar cost average back into the market on a monthly basis. With the market up close to 10% at the end of the third quarter, John was feeling confident and invested another $100,000 into the market. On this past Christmas Eve, the S&P 500 experienced its worse Christmas trading day in its history – down 2.7% for the day. With the S&P 500 close to dropping 20% from its peak, John could no longer watch the value of his account decline and he sold out of all equities. Of course, right after selling out of the market John watched the market bounce back quickly missing out on over 6% return in the week after he sold out. Patience and comfort with market volatility will be necessary for John to become a long-term investor. John needs to have confidence in the long-term prospects of investing in the stock market.

2019 – Time To Learn From Past Mistakes

As John ponders what to do with the pile of cash, he has accumulated from his 2018-year-end bonus, he must learn from the valuable but painful lessons he has experienced. John needs to have a strategy for investing. This is best done through a long-term goal oriented financial plan. A sound financial plan will provide the confidence and appropriate risk tolerance that will integrate John’s career and family goals with his investment strategy.

John’s biggest assets are time and his earnings potential. John is young enough to recover from his past mistakes, but it will take a plan and discipline to accumulate the wealth needed. I hope we can all learn from John’s mistakes.

BDF’s Commercial Insurance Practice Group understands equity compensation and the valuation of business and uses this knowledge to help insurance professionals develop financial plans while minimizing tax bills. Whether working with a producer or business owner, we focus on one’s individual goals, family involvement and living a full life.

Jim King, CPA, CFP® is an owner and wealth manager at BDF where he leads the Commercial Insurance Professionals Practice Group. He uses his understanding of the insurance industry to help insurance professionals maximize their prime earning years, develop a discipline around saving those earnings and put a plan in place to best utilize assets. His focus on creating financial blueprints for his clients has earned him recognition as a “Five Star Wealth Manager” by Chicago Magazine.