Budgeting

Interview with Wade W. Slomea, author of “How I Managed $20,000,000,000.00 by Age 32″

With all that’s happening in the current market and so many conflicting opinions in the news everyday, how do you recommend people approach investing today?

The most important thing is to NOT invest emotionally, but rather objectively. The average investor is panicking now and piling into low yielding investments like CDs, savings and money market accounts – the equivalent of socking cash under the mattress. For some wealthy individuals, late in retirement, this may be prudent. However, for most investors, significant future damage may be occurring from this seemingly comfortable, short-term, benign strategy. The problem is that life expectancies are stretching; boomers/retirees are more active, and inflation (i.e. healthcare, food, vacation, etc.) will eat away at these so-called safe investments. The fact of the matter is there are a lot of opportunities now – especially as fear levels have risen so dramatically. And the opportunities do not only lie in the stock market. There are a lot of excellent investment prospects in the fixed income market as well.

Is it true that people haven’t actually lost their money if they don’t sell their stocks for a lower price?

Stocks in some respect are no different than other asset classes. You can think about stocks in the same way you think about the value of your house. If you are in the process of selling your home and the house price craters, you will experience a loss in home value. The prospective buyer will encounter a simultaneous gain, in the form of a lower price (the buyer gets to keep more money in his/her pocket). It is true that lower stock prices on unsold positions are only “paper losses,” and if prices rebound above the prices purchased then there will be “paper gains.” True gains or losses will not occur until the stock positions are sold.

The media buzz is that this is a great time for people to make a lot of money; can you explain that?

The old adage of “buy low, sell high” rings true during volatile periods like now. Most domestic equity indexes corrected by more than -40% from the peak levels experienced in late 2007. Historically these terrifying periods have been the best times to buy. For example, take the 1974 bear market, which experienced a price correction of about 50%. During that period we were in a deep recession with 9% unemployment, we had just come out of the Vietnam War, and President Nixon resigned after impeachment hearings. At the time, the S&P 500 index bottomed out at a level of approximately 61. Last Friday (2/6/09), the same index closed around 868, a 1,300%+ increase over that period (excluding dividends). Not too shabby.

The economic environment wasn’t pretty either if we fast forward to the 1990-91 period when we were knee-deep in the first Iraqi war, going through a recession (8% unemployment), and digging our way out of the S&L Crisis (Savings & Loan). Yet again, this was a great opportunity to invest as the markets have about tripled over that period, excluding the benefit of dividends (S&P 500 bottomed at around 295 in late 1990).

After the 2008 mark downturn, many people are afraid to invest. What do you suggest for them?

Unfortunately, there is no silver bullet. Everybody’s situation is different. My suggestion for a 29 year old in the wealth accumulation phase of his career would be dramatically different from a 79 year old retiree that is in the distribution phase of her investing cycle.

The best thing people can do is to educate themselves about investments. There are a lot of aggressive sharks out in the investment waters and to survive in the long run investors need to equip themselves with relevant questions to ask financial advisors and institutions in order to protect their investments. There are some great low cost tax efficient products (e.g. index funds and exchange traded funds) and strategies that I discuss in more detail in my book.

In light of current events, how can investors improve investment performance over the long run?

The low hanging fruit for investors is to drive down excessive fees and transaction costs charged by brokers and financial institutions. John Bogle, the very successful founder of The Vanguard Group, did an eighteen year study (1984-2002) showing that individual investors underperformed the “do-nothing” index strategy by more than 10%…PER YEAR. The cause, a standard fee structure of approximately 2.5% (1% load, 1% management fee, .5% transaction costs) that many investors pay, which doesn’t even account for additional tax expenses. The annual -10% underperformance is not only due to fat fees, but also from poor emotional decisions tied to the “herd” trading mentality. A sensible, unemotional approach to investing should also incorporate a “dollar-cost-averaging” strategy that purchases additional shares for each dollar invested as prices decline.

What should people do that have stocks that took a nose dive?

It really depends on the particular investment. Each stock should be thoroughly reviewed on a case by case basis. If fundamental investing is the driving force behind your investments, then I believe individuals need a systematic strategy to buy securities and sell securities. As part of this disciplined approach, I urge investors to have a thesis (basis) for ownership and if that thesis changes you can use that dynamic as a foundation for your sell signal. There will be winners and losers as we work our way through this financial crisis and recession, but with each recession and bear market there is a renewal of leadership that builds for the ensuing bull market. Tax loss considerations can play a role in the sale decision of underperforming stocks, but should not be the key determinant.

Lastly, do you have any tips for someone who may be considering investing for the first time in the current economic climate?

Now is a great time to start investing relative to a year ago. Don’t get discouraged by the market volatility. First time investors have extremely long investment horizons, therefore heightened volatility can be viewed in a beneficial light. Diversification through fund investing is another important principle that new investors should embrace. As experience levels expand for newbie investors, expanding exposure to individual stocks can become a larger priority. Until then, my advice to first-timers is to take a more conservative stance.

NOTE:

Wade is also offering a free ebook which shares excerpts from his book, for a limited time. Be sure to stop by his website to get a copy www.Sidoxia.com. This is your chance to take a look inside the book and to learn additional information about Wade Slome and his business.

For more information about Wade Slome and his virtual tour, check the schedule at http://virtualblogtour.blogspot.com/2008/12/how-i-managed-20000000000-by-age-32-by.html