The Dark Days
I began investing in the early 1990s, when I was a university student, by contributing $50 a month into an investment account I had at my bank. I devoured various books on investing and learned about mutual funds, which were all the rage at the time.
Mutual funds (similar to unit trusts in the UK) are basically pools of money managed by banks or investment companies that purchase different types of investment ‘instruments’ or ‘securities’ such as stocks (also known as ‘shares’), government and corporate bonds, mortgages, and sometimes more esoteric instruments.
In North America, the mutual fund industry is massive, the marketing is relentless and investing is as easy as sending an email. What I didn’t realize at the time was how expensive management fees on mutual funds affect your return and, most importantly, why you should trust yourself rather than the ‘experts.’
By the late 1990s, I had saved and invested about $4,500, which had been transformed into a ‘fortune’ of over $13,000 largely because I happened, on the advice of a financial planner, to have invested in one particular mutual fund that invested in internet and communications technology. As global stock markets soared on the ‘dotcom’ tech boom, my investments tripled in a matter of months. Sadly, like countless others, I confused blind luck and a stock market bubble with being clever.
In August 2000, after the technology-heavy NASDAQ stock exchange was already months past its peak (fools always come late to the party), I withdrew all of my money from mutual funds and threw it into shares of skyrocketing tech companies including, shares of Nortel Networks, one of the darlings of the technology bubble.
I was to learn very quickly that randomly throwing money at shares and hoping they go up in value is ‘speculating,’ not ‘investing’.
Thinking I was about to score big and be able to pay off my $8,000 student loan and maybe even set me and my wife up for life, I borrowed or ‘leveraged’ $16,000 on two lines of credit. I used this money to buy an array of shares in Nortel and other technology companies, following the advice of a fee-based subscription investing service. This ‘expert’ advice, which I’d come across reading a book on the so-called ‘new era’ of internet and technology investing, set me back $500, a cost I felt was insignificant in light of the serious money I’d soon be making.
The fee-based subscription investment system I purchased was based on the idea that internet and high-tech companies – so-called ‘new economy’ companies – were part of a ‘new economic paradigm.’ These ‘new economy’ companies, I was told, were different from traditional ‘old economy’ companies that sold tangible products such as cars, oil or cleaning products.
New economy companies, so went the storyline swallowed by me and millions of others, were ‘leveraging’ the then-new power of the internet to leapfrog old economy companies and redefine economics itself. It was a compelling story, and the incredible stock market value of companies seemed to provide the evidence that a new paradigm really had dawned, which spurred on people like me to dump their life savings into these very same companies, driving their values ever higher.
Of course it was all a sham.
So-called ‘new economy’ companies that produced nothing but the promise of a high-tech fantasy were in fact subject to the same fundamental economic laws of gravity as the old economy companies that actually produced things that people needed. So when the tech bubble finally popped it really exploded. The technology-heavy NASDAQ stock market index went from an all-time high of 5,132 on 10 March 2000 to 1,840 in March 2001, a drop of 64% in 12 months. By Sept 2002 the index was below 1,200 and investors had lost $5 trillion in the dotcom meltdown.
During the bust, Nortel Networks went from an August 2000 share price of C$124.50 on the Toronto Stock Exchange (TSX) where it comprised a staggering 36.5% of the entire stock market index and a market value of C$398 billion, making it one of the highest valued companies in the world, to C$0.47 per share and a market value of C$5 billion by August 2002. Have a look at the peak and crash on the Nortel stock chart.
Why didn’t I get out before I lost it all? Well, the drop was so rapid that millions of investors, me included, were stunned into inaction, paralysed by the unthinkable. We saw the initial drops of $15 to $20 on a ‘bellwether’ share like Nortel as minor blips – perhaps even a buying opportunity for us clever, savvy investors to ‘double down’ before the next big upward run. But in the end it was a catastrophic tidal wave that sank Nortel and hundreds, perhaps thousands, of other tech companies, and millions of people’s retirement funds were obliterated.
When the dust settled for me in January 2001, I had lost $15,500 in borrowed money and all but $4,300 of my original pool of capital. My total losses in about 6 months were $24,200, of which $15,500 was money I didn’t own and was paying interest on. At the time I was only working part time and earning about $1,800 per month, so the situation was dire. To make payments on the debt I eventually withdrew the remaining $4,300 from my registered retirement fund, paying a tax penalty in the process, and used it to pay down part of the debt, leaving me with $0 savings and $11,500 in debt on my lines of credit, and another $8,000 in student loans.
My net worth had gone from $5,000 – my $13,000 investment portfolio minus $8,000 in student loans – to negative $19,500 in 6 months. In effect I had more than twice the debt as when I graduated from university nine years earlier. I’d been steamrolled by the markets, pulverized by stupidity and annihilated by blind reliance on so-called ‘experts’ spinning a tale of gold.
The Sunny Days
Fast forward 10 years to early 2011 and the world is a very different place. During the past decade, my wife and I moved to London, paid off all debts, created a robust investment portfolio using many of the methods I’ve distilled into The Child Millionaire. We’ve also managed to travel to 40 countries and in late 2010, we finished a 14 month round-the-world trip financed by investments. Our diversified nest egg, built in only a few hours per month, has ensured our financial future. Mia, our first child has just been born and has an investment portfolio that all but guarantees she is already a ‘time’ millionaire.
So how did we do this and, more importantly, how can you?
Click on ‘buy now’ button to find out or explore more about the Child Millionaire methods by poking around the site.