In 2006, I worked for two ex-investment bankers in a startup up financial company and I asked one of them for a general good advice for investing in the stock market. His response was, “Protect Your Principal.”
I was baffled by his advice. I was young, in my twenties, at that time and I always thought that when I’m young, I should take more risk and not worry about losing my principal. He continued, “You’d always want to protect your principal investment…” Basically his point was that if you don’t protect your principal you could end up losing everything and then you would end up with no capital left.
I was surprised that I hear this advice from an ex-investment banker, who I would expect to be more aggressive. I did not fully understand or accept his advice during that time, because I felt that I was young enough to take all the risk in the world and can take a heavy loss. I’d think that I would have all the time in the world to make those money back.
To say the least, I did not follow his advice. Subsequently, I placed large bets in the stock market, particularly in the financial sector during 2007 and continued to pile in new money after bad investments throughout the financial crisis. I lost almost all my principal, which was over $150,000. I had taken too much unnecessary risk and lost all my savings.
At that time, my mind was only thinking about the positive scenarios. I had not thought about how difficult it would be to make back the losses. If I were to invest $10,000, I would have to make a consistent 10% return for approximately 15 years just to break even, not to mention the loss of time cost of opportunity. I could have used this 15 years to make more money, if I had not lost the principal.
Thinking back to the advice from the ex-investment banker, I realized it makes a lot of sense to me now. If I had preserved my principal investment and protected it, I would still have at least $150,000 in my bank account. Furthermore, I could have deployed this cash and used it to pick up safe stocks during the market downturns.
Instead, I had founded myself short of cash and had to pass up great opportunities in the stock market because I had no cash available. I had made the mistake of not heeding to the advice twice — once during the financial market crisis and again during the oil price crisis. I hope not to make this mistake a third time. The advice given to me nearly 10 years ago resonates much stronger today than before. That’s why I have come to start picking stocks that are relatively safe and have learned to diversify my holdings across different sectors. My lessons learned have led me to the start of my DGI Portfolio.
What do you think of this advice, “Protect Your Principal?”