Do Pilots Really Know How to Invest?
 

Following my own follies at trying to beat the market and pick the best stocks and hot mutual funds, I've gotten killed. Talking to lots of pilots that I fly with, this same story has also happened to them.

Even guys who read Barron's and the Wall Street Journal and delve into stocks really deep have mistimed or picked the wrong stocks and taken a shellacking.

What I think I've learned from the whipsaws the market takes and the fact that not even the average professional mutual fund manager cannot beat an index like the S&P 500 is this:

Pilots can fly airplanes, but they make lousy do-it-yourself investors.

This year I switched to one ETF, iShares S&P 500 (Symbol IVV), and Vanguard's VFINX. I figure if I keep dumping a steady stream of money over the next 20 years, I'll make market returns and make out OK. I won't have lost a large chunk of it due to trying to outsmart the market.

I'm honestly convinced that the better somebody starts doing in the market by picking hot stocks and mutuals, the more risks they start taking. So that when the market turns south, they're caught with their pants down. Even with stop-losses-- I figured they would save my skin and they didn't.

Sorry to pontificate here, but I believe that I'm not the only one who's been hit broadside by an airline pilot's investing ego. Just because we can fly planes doesn't mean we know diddly about picking smart investments.

Don't try to beat the market (like I tried so many years to do), as even if you do for one, two years, eventually you'll get clobbered and all those gains will get erased.

In sum, I now try to 1. invest conservatively, 2. invest often (IRA, 401(k), etc.), and 3.invest as much as I can possibly afford to.

Also, if pilots stick to the conservative funds on offer in their 401k plans they can stay out of trouble. You might not beat the indexes over 20, 30 years, but at least you won't have your you know what handed to you.

Index (VFINX is the one i invest in ) do it consistently and start as early as you can afford to and you'll be in good shape..Also, invest in your 401k (at a minimum do the amount needed to get company match...) and max out your IRA (I recommed a Roth) every year...

V/r,
Go Cajuns...

Bogle's essential rules of investing - taken from article on indexfunds.com
 

Bogle outlined four "Essential Rules" of Investing:

One, pare costs to the bone. "Realize that in investing you get what you don't pay for. Whatever future returns the stock and bond markets are generous enough to deliver, few investors will succeed in capturing 100% of those returns, simply because of the high costs of investing—all those commissions, management fees, investment expenses and taxes."

Two, diversify. Own American business and hold on to it. "Not one company of industry, but a broadly diversified portfolio of lots of companies and industries. Buy such a portfolio, never sell, and hold it forever. No one knows what stocks will do tomorrow, or even what they'll do over the next decade, but over the long pull the dividends and earnings growth of American business will be reflected in rising stock prices."

Three, don't forget to allocate your assets prudently between stocks and bonds. "As the years roll on, we have more wealth at stake, less time to recoup losses, and begin to rely on our investments to provide income. Each of these critical factors suggests that, as investors age, we should own even larger bond portions."

Four, don't do something, just stand there. Stay the course. "Once you get your costs down, your stocks and bonds diversified, and your stock/bond balance right. Not only expenses, but emotions, are the investor's greatest enemy."

Sasquatch:

I completely understand where you are coming from. There is a delicate balance between risk and reward. The more risk you take on, the more reward you should expect to receive.

“Don’t try to beat the market(like I tried so many years to do), as even if you do for one, two years, eventually you’ll get clobbered and all those gains will get erased.”

This is correct in that market timing, theoretically, will result in a loss over the long-term almost every time. There is a good chance that if you are trying to time a buy and sell, there are other professional investors that have already seen the information and beaten you to it.

I like your “new” investment plan of dumping a steady stream of money for the next 20 years instead trying to beat the market all the time. However, I don’t believe that this takes the greatest advantage of the assets you have to work with. Just because you are in indexed funds does not mean that necessarily reducing your risk significantly. Look at 2001 (S&P -11.94%) and 2002 (S&P -21.55%).

I believe that diversification is the key.

While the S&P 500 includes more than three fourths of the market’s capitalization, it leaves out most mid and almost all small-cap equities. While these should be used sparsely, they do have a place in your portfolio. I believe that your account should have a minimum of 8 funds in it. This can provide for the proper allocation and risk management.

The one other cautionary area is the fact that the two investments you are looking at are very similar. They have an extremely high correlation with one another. The top ten holdings are all the same and since IVV has an expense ratio of .09 and VFINX has one of .18, it seems that you should just use one and not both. I am not sure what trading platform you are using but I would most certainly think that the less trading you do, the less expensive it would be. Thus the suggestion would be to consolidate these two funds and then find 5 to 7 other funds to broaden your risk.

We specialize in portfolio management and use Morningstar Advisor Workstation software for our research needs. After flying all over the country in our Malibu Meridian to meet with clients, we found that the pilots we met along the way needed our services as well. Today, we specialize in the management of Delta and UPS 401(k), MPP, and pension plans but have pilot clients all over the country involved with many different companies.

Your summation of “1. invest conservatively, 2. invest often, and 3. invest as much as I can possibly afford to.”, is right on the money.

Hope this info helps.

Great points you raised, Adam. Your insight is based on years of knowledge, it's quite evident!

Thanks for bringing the redundancy and lack of true diversification on my selections. I will fix this ASAP.

Blue skies and green retirement accounts-

Why dont you try investing your money elsewhere? The stockmarkets not the only place that offers money. Real Estate is a huge investment. I may not do it, but my father does. About 7 years ago he started on one house, now hes a millionaire. Your choice.

I'm sorry, did I say millionaire? I meant multi millionaire. Silly me :o

Youre right, and I've done well in that one area. I won't put all my eggs in one basket, however.

Plus, over any historical period of 20 years the stock market has outpaced r.e. if I'm not mistaken. But it's a good component of diversification, you're absolutely right.

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