October 14, 2008

In A Panic, My Friend Pulled $100K Out Of The Market

My best friend inherited $100,000 when we were in college over 10 years ago. He blew through the money quickly and ended up with nothing to show for it. A couple of years ago, he received a 2nd inheritance of ~$160,000 and swore not to make the same mistakes. He immediately worked with a financial planner, investing $100,000 and depositing the remainder into a savings account.

During our conversations over the past couple of years, I got the impression that he was slowly spending the money in his savings account. Since he is in between jobs and will not likely receive another inheritance, I was worried, but knew that he at least had the $100K invested in a diversified portfolio. Whenever we spoke about money, I reminded him that, if he leaves his investments alone, he will be set when he retires.

Last week, he called to let me know after the Dow plummeted, he freaked out and pulled all of the money out of his investments. I explained to him that it was only a paper loss until he pulled the money out and that with his timeframe to retirement (25-30 years) it doesn’t matter what the market does short term.

It’s tough to see a good friend make such a huge mistake. I’m half convinced that he is going to deposit the money into his savings account and slowly bleed it dry. Because he’s like family, I’ve got to talk some sense into him. I’m going to call him back this week to encourage him to reinvest the money and leave it alone (no matter what the market does short term).


Mr. ToughMoneyLove said...

At my age, I have learned the hard way that some folks refuse to be educated. When it comes to personal finance, your friend may be one of them. Buy him a good personal finance book, encourage him to read it, then relax. You've done your job as a friend.

Budgets are Sexy said...

WOW. that is not good. i hope he listens to you!!! i find that people listen more when i tell them about my blog, else they just write me off as another "one of those" people trying to push advice on them...

either way, it's good he has you on his side :)

Scott Edwards said...

right, let's see I'm 31 and yes I've also finally given up on trying to educate anyone (except the students that pay for it).

this is why there will always be poor people. you redistribute the wealth and in five years all that money will have been transfered back to those who know how to handle it and the rest will be making excuses for what happened.

equality and freedom cannot coexist.

"The poor will be with you always". -Jesus

"Think about how stupid the average person is and remember that half of the people are even stupider than that" -George Carlin

Anonymous said...

I know your pain. I've watched a friend take a loan against their 401k to pay down consumer debt while their company has wave after wave of layoffs. I tried to talk them out of it before they did it, and said that they MUST understand what happens should they lose their job with respect to loan repayment. To their credit, they did ask, but the problem is that they are OK with the default, tax and penalties on the withdrawl. You can't cure stupid!

1MansMoney said...

Thanks for the comments guys. I know this may be a futile effort, but he's like a brother to me so I want to do all I can to help.

Mr. ToughMoneyLove - I've referred him to online resources in the past, but getting him a personal finance book is a good idea. I'm thinking David Bach's "Automatic Millionaire".

J. Money - Even though he's my best friend, I haven't told him about this blog. The only people that know I have this blog are my wife, parents and sisters.

Scott Edwards - I hear where you're coming from, but I'm not willing to give up yet.

“A good exercise for the heart is bending down and helping someone to get up.” - Proverb

Anonymous - At some point in our lives, most of us have caught a case of stupid. God knows I have many times. A few years ago, I took out a 401(k) loan, but after a friend explained why it was a dumb move, I learned my lesson, and paid it back as soon as possible. Now, I would never consider a 401(k) loan unless we were about to be homeless. I hope you friend gets through it okay.


Jagular said...

On that time frame, the market going down would actually be a good thing. As you add to your investment month after month, the market dips allow you to buy more shares for the same amount of money.

Louise said...

what a shame, I hope he listens to you, I'm actually going to start buying some shares while the markets down and while I have a bit of money avialable, it's a great time to pick up some bargains.

1MansMoney said...
This comment has been removed by the author.
1MansMoney said...

UPDATE: I spoke with my friend yesterday and will be posting a follow-up today.