Core Principles Series – Scenario #1
John and the lump sum of cash

As we walk through each of the 10 core principles of smart investing, it will be helpful to have some real life examples of circumstances and decisions that people have made to help with our discussions.

John and the lump sum of cash – John and Kathy are in their fifties and are regular people just trying to make it all work. The kids have mostly grown and gone. John works as an engineer and has been at the same place for 20 years. Kathy works as an administrator for a local high school. The last few years have been good but its been a real struggle mentally, physically and financially caring for John’s mother who has been in a care center due to dementia / memory issues. John’s mother has now passed away. After taking care of the funeral and the medical people, John has a $70,000 death benefit from his mother’s life insurance policy that he has just received. John and Kathy feel like the money should be saved for their own future and want to invest it in something more than the savings account at the bank that has an interest rate less than 1%.

They decide that they want to put the money in the stock market but are not sure where. John exercises each morning at a gym down the street and is interested when he hears two guys in the locker room (both of which drive nicer cars than his) talking about the success of a stock from a technology company that’s grown more than 20% this year alone. Later during his drive to work, he’s surprised to hear the finance analyst on the morning news show that he listens to profiling that same stock and highlighting how well it has done. The company has done better than both forecasts and analysts thought and is truly at the top of their game. John and Kathy talk about what he’s learned and decide to purchase that stock. John opens an online trading account and moves the money into that stock. John was careful to make sure that he used a no fee or low fee service and purchases the stock.

The following month, the stock continued its incredible journey. John and Kathy made 5% on their investment the very first month! The following month was different story. A few things had changed on the global stage and their now seemed to be a trade policy problem that stopped the firms expansion. Quarterly growth targets were missed and the stock dropped 10% from the prior month position. For John and Kathy, that change was hard to take but they recognized that stocks go up and down – they would just watch and see how the next few months panned out. The following month a news article called out some ethical concerns of the technology company and stated that the COO was being investigated for falsifying some records. The market change was immediate – the stock dropped 15% in a single day.

John has had the stock for less than 90 days but has lost significant value. After thinking about it carefully, he decides that he’s made a poor decision and that he’d be better off getting out of the stock than to see it drop further. He sells the stock at a 20% loss from his original investment. Kathy mentions that people at her work had been talking about a packaging company that was doing really well and is forecast to double in size over the next three years. John and Kathy move their now significantly smaller pool of cash to the new packaging stock and hope for the best.

We’ll use this scenario to discuss the “10 principles to smart investing” over the coming days. As a reminder, those 10 principles are:

Ten core principles of smart investing:
1. Don’t put all of your eggs in one basket
2. If it sounds too good to be true, it probably is
3. Urgent and only available today = wrong
4. Follow the money
5. Buy low and sell high
6. The balance of risk and reward
7. Fail to plan, plan to fail
8. The endowment mindset
9. Whose money is it?
10. Fact based on an observation of one

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