Our Best and Worst Financial Moves

published 21 September 2009

At Kiplinger, we strive to give you trustworthy advice that you can use to make smart financial decisions. Of course, we'd like to think that we make smart moves ourselves -- most of the time. But, hey, we're human, and sometimes we make decisions that aren't so savvy.

Here is a collection of our best and worst financial moves. "I felt a little sheepish about 'fessing up to my youthful indiscretion with credit, but I learned from my mistake," says Janet Bodnar, editor of Kiplinger's Personal Finance magazine. "You'll find a lot of good advice -- not to mention a little humor -- in my experience and that of other Kiplinger staff members."

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In the spring of 2008, I went from investing 100% of my retirement account in stocks to putting a third of it in cash. I'd just interviewed David Tice, manager of what is now called the Federated Prudent Bear fund, and I couldn't refute his argument that there was a massive credit bubble that was likely to burst. I asked myself, "How much do I believe Tice's scenario, and how much could I stand to lose?"

It was a recession just like this recession, the dark days of December 1982, when we bought our home in Great Falls, Va. It was structurally sound but nothing special -- a 3,000-square-foot home with three bedrooms and two and a half baths. What made it special was the land: more than 4 wooded acres in an area that was slowly changing from farms to new homes on large lots. The house had languished on the market for months, and the real estate agents could hardly conceal their glee that somebody -- somebody! -- was actually interested.

Every month for the first couple of years, my wife, Diane, and I scrimped to cover the mortgage. It got easier as time went by. We raised three children there. Small home-improvement projects turned into big ones (sometimes too big). Somehow the dramatically renovated dream home I envisioned never came to pass. But the location helped the land appreciate greatly, and 27 years later it's worth almost $1 million. Every Kiplinger editor knows it's not smart to count home equity as a means to a comfortable retirement. But for me, it's hard not to.

My wisest move was buying whole life insurance in the 1990s, precisely when countless books and articles mocked whole life as obsolete. My wife, Debbie, did the same. In the ten-plus years that we've paid $5,000 a year combined into our policies, both from extremely sound mutual-insurance companies, we've built substantial five-figure cash values, can borrow from them instantly at virtually no cost and haven't paid a cent of tax on the earnings.

However, we bought a townhouse, not a McMansion, that was well within our means -- something many people didn't do. We didn't get greedy by taking out an adjustable-rate or interest-only loan; we have a fixed-rate loan with payments we can predict and manage. We might have been smarter not to buy just before the market peaked, but we haven't been foreclosed on, we haven't missed a payment, and our balance gets lower with each monthly payment. I feel very smart for buying with an understanding of the risks and a focus on the long term.

By far the best financial move I made was really a series of moves related to our historic rowhouse on Capitol Hill, beginning just a few months before I joined Kiplinger in 1977. That's when my wife, Anne, and I bought the house for $78,200, a king's ransom at the time and something we were able to accomplish only because we both had jobs and had been ferocious savers since we married in 1972. Oh, and we were lucky enough to augment our savings with a loan from my folks for the down payment.

Over the years, many of our friends left Capitol Hill, usually when their children reached school age. We toyed with that idea several times, and each time we came to our senses. We raised our son and daughter in this six-room, one-and-a-half-bath house, never feeling the need for a grand suburban spread. Over the years, almost everyone we know refinanced -- once, twice, three times or more -- often pulling cash out of their rapidly appreciating homes. We simply plodded away, paying the VA loan we assumed when we bought the place.

This year alone, we've had to repair a dishwasher, replace a problematic bathtub faucet and replace a clothes dryer in the rental house. Small potatoes, right? But wait, I'm not finished: In our primary residence, which we bought as a foreclosure this year, we replaced a broken pipe in the upstairs bathroom that would have caved in the living-room ceiling below it; we repaired the dishwasher twice; and we fixed a leaky pipe under the kitchen sink that was saturating the insulation and would have rotted the drywall beneath the under-sink cabinets. The policies have already saved us hundreds of dollars.

I felt like an investing numbskull. That is, until the recent bear market, when everyone else's college savings lost 40% or more. I got a visceral reminder of the Wall Street axiom: It's not what you make that counts, it's what you keep. As it turns out, my savings plus a minimal return were there when my 2009 graduate needed it. Even better, he's decided to attend the University of Maryland, where the money stretches the furthest.

Consolidating my federal student loans was smart. Right after graduate school, I paid careful attention to the timing of my grace period and searched for the lowest interest rate. I consolidated my federal graduate and undergraduate loans and locked in a sweet fixed interest rate of a little more than 3%. Besides saving myself the hassle of making payments to multiple providers, I cut the cost of interest significantly and established a bearable payment for the life of the loan.

The best investing move I ever made was the one I didn't make. After my previous employer, U.S. News & World Report, was bought in the mid 1980s, my colleagues and I received nice payouts from the termination of an employee-stock-ownership plan. In 1991, the broker I was working with put a six-figure chunk of my money into a separately managed account run by NWQ Investment Management, a value-oriented investment firm. That was, of course, the beginning of the great bull market of the 1990s, so the timing was terrific.

In the late '90s, however, NWQ, like many value shops, lagged the market significantly because it didn't load up on high-flying tech stocks. Many of my former U.S News colleagues who relied on the same broker and had also invested with NWQ lost patience and transferred their assets to growth-oriented managers. For some reason-maybe just plain inertia or maybe, I like to think, a recognition that avoiding absurdly priced tech stocks was a wise thing -- I stayed with NWQ.

A year later, when I was out of school and working in Providence, I heard from a bill collector. Incensed that they would come after little old me instead of the college, I decided to pay half the bill and let the rest slide. I probably wrecked my credit rating for a while, but back then nobody tallied credit scores or talked much about getting a copy of your credit report. Pull something like this today and you'll be on the credit-card blacklist for years.

Later Jeremy and I got married, and I inherited that questionable financial choice. I didn't mind the car itself, but rather the debt that came with it, as well as the frequent repair bills we couldn't afford on our newlywed, student budget. After a year of struggling financially with that car, we sold it, did a ton of research and bought a reliable used car that we still drive ten years later. However, to this day Jeremy swears that the look on his ex-girlfriend's face when he pulled up in his new set of wheels was worth the cost.

I got sucked into the Internet bubble because I believed that "this time, it's different." Needless to say, I got killed in 2000. But I learned my lesson. I took the principles of diversification to heart and now rebalance my holdings regularly. Because I was regularly selling off my holdings in real estate and emerging-markets funds as they appreciated during the bull market, I actually made money in those sectors over the past six years, even though they got mauled during the 2007-09 bear market.

I should know better, but twice I lost $2,000 speculating in companies that were in danger of failing and whose stocks traded for $2 a share. If I regarded these stocks as lottery tickets, fine, but I expected a legitimate gain because the industries -- steel and auto parts-were ready to recover at the time, and most of the analyst reports I read suggested that both companies would avoid bankruptcy.

I did have the chance to get out with small gains in both stocks. But I didn't budge; I was convinced that if I waited long enough, I'd be rewarded with monster gains. Instead, both filed for Chapter 11 and the stocks got de-listed, virtually spelling doom. A couple of years later, the stockholders -- including yours truly -- were wiped out in the court-ordered reorganization. The losses weren't crushing, but I felt so dumb to have tried not once, but twice, to make a killing in companies that already had a foot in the grave. The lesson I learned: If you're going to invest in sick companies, buy their bonds, not their stocks.

About that time, our next-door neighbors (and good friends) moved to California. Their house was identical to ours: a three-story brick rowhouse built in the 19th century. Our friends wanted a quick sale, so they set what they thought was a fair price: $220,000. They had no offers before they had to move, so the house sat vacant -- for months. The asking price dropped and dropped: to $210,000, to $199,000, to $185,000. Sitting next door, we felt our friends' pain when they finally sold for $180,000.

But I never saw the gold mine right beside us. Looking back, I'm sure we could have pulled together the down payment to buy the house. (Some friends -and my dear wife-suggest I'm wearing the rose-colored glasses that often obscure the reality of the past.) I wish I had the foresight -- and the courage -- to become a landlord in the early '90s. It was the perfect property: I know the neighborhood; I live close by and could handle problems that might arise; I know the plumbers and electricians and handymen to call for help; I know what fair rents are.

These events happened so long ago that I'm hazy on the details. If you were investing in the late '70s and early '80s, you may recall a tremendous bull market in energy stocks. I decided I would get in on the action by buying warrants on Occidental Petroleum. The warrants essentially gave me the right to buy shares of Oxy Pete at a certain price by a certain date. The terms weren't important. What was important was that was a leveraged play on Oxy's common stock. If the common rose, say, 30%, the warrants could be expected to jump, say, 50% or 60%.

In 1987, using a "play money" account that contained about $10,000, I started dabbling in options. To refresh your memory, stocks surged spectacularly in the first seven and a half months of that year, then crashed in October. During the first phase, everything, it seemed, went up every day. So buying call options seemed like a sure bet. I quickly discovered that winning with options was a lot harder than it looked. After all, when you buy options on individual stocks, you have to be right on the company, on the direction and, perhaps most important, on the time frame. I found myself losing more often than I was winning.

To top things off, after the market crashed that October 19, I decided I'd really be a wise guy. Banking on continued market volatility one way or the other, I decided to buy both call options (a bullish bet) and put options (a bearish bet) on one particular stock, which I determined would be Lotus Development, the software maker that IBM would acquire in 1995. To avoid overpaying, I placed limits on both the put and call orders.

Rachel Sheedy, managing editor of Kiplinger's Retirement ReportI learned several years ago about the price of not paying close attention to fine-print notices from financial institutions. For nearly a decade, I had a small taxable investing account at Wachovia Securities. After years of holding this account, the fee structure changed-from no fee to a fee of $50 a year. Considering my small balance, that was a sizable amount.

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