From Episode II

Financial awakening

What happened to my retirement savings?

While at Chrysler, as soon as the benefits of the 401(k) retirement savings plans were explained to me, I signed up and saved the maximum amount allowed out of every monthly paycheck. David did likewise at General Motors. The company match seemed to make it a no-brainer.

In addition to saving consistently, in March 1999, a month before our 50th birthdays, David and I accomplished one of our major goals, which was to pay off the mortgage. This was the year when I knew that I would be able to start piling most of my earned income from Chrysler into savings outside of 401(k) as well at an accelerated pace. In terms of basic needs, I could eat only so much in a day; I had enough clothing to last a lifetime, and shelter was paid off. As a result, not only were pre-tax monies already being saved into my 401(k), I also started saving 75% of my after-tax income every month. David and I were being told by several financial advisors throughout the 1990s, even before the accelerated savings began, that we would have to pay a lot more in taxes during retirement than during working years if we were not careful in how we invested. This was because, with the amount of retirement savings we were putting away, we were going to have so much money in tax-deferred retirement accounts. Minimum required distributions would keep us in high income-tax brackets long after retirement. I believed that I was doing everything right to prepare for a comfortable retirement.

Around this time, casinos opened in Detroit and I began to be interested in gambling as entertainment. I knew that I was going to be “gambling,” or putting at risk my hard-earned money. Consequently, I was not about to go into the casinos without learning how to play to increase my odds. I studied and practiced video poker at home on my PC until I felt comfortable betting my own money. I learned how to pick the better pay-out machines and which cards to choose for every hand being dealt. Once I was comfortable with my ability to play correctly, I was able to play the machines with higher denominations. After all, whether one is playing the quarter machines or the five-dollar ones, how one plays the game remains the same. The casinos give all sorts of incentives and rewards to players. If one budgets how much to lose, it can be a fun entertainment. I still enjoy the game but, in recent years, I have cut way back on gambling. I have simply been too busy managing our investment businesses instead.

In 2000, I began noticing an odd phenomenon in my retirement savings statements. Despite the fact that I was setting aside such a high proportion of my disposable income into savings, the statements showed a smaller account total each month. It was as if the money was going into one giant black hole. During the financial market decline in 2000, I noticed that my total retirement savings were eventually being cut to less than half their original value. The losses in my tax-deferred mutual funds became so large that they began to shake me to the core. Never before had I felt such a heavy, sinking feeling in terms of where my financial future was headed. The notion of a comfortable retirement was shattered. My lifelong goal of financial independence was at risk. Never did I think that the savings in my retirement accounts would be at risk. I was gambling with my own retirement funds on Wall Street and didn’t realize it. I was naive. I was ignorant.

 

Shift in focus from Chrysler to my financial future

All these years since 1984, my passion and focus was on Chrysler. In terms of preparing for retirement, putting the maximum allowed into the 401(k) program through payroll deductions meant that investments happened automatically. Naively, I never suspected that my retirement savings would be put at jeopardy – although at one point I did joke to those close to me, “I hope no one messes with my 401(k).” I assumed, incorrectly, that those who managed our retirement funds were charged with fiduciary duties to protect our hard-earned money. When I needed to state my risk-tolerance level, I answered “aggressive” without any solid financial basis for my choice. I based it purely on my general nature, which was that I was a risk taker. I say “investment” and “invest,” but it was not investing in the sense of the word as I know it today. Instead, I was simply throwing money into mutual funds with the shallowest of knowledge. That was worse than not knowing the subject matter at all and, therefore, choosing not to do anything with it. An MBA degree requires students to attain some basic knowledge about finance and accounting. It prepares most students to become employees within a corporate environment. It also prepares them to become business owners if they so choose. The degree does not, however, in and of itself, prepare them to become investors. Investing requires skills that are outside the skill set acquired by earning an MBA degree.

The huge financial losses in 2000 made it abundantly clear that I needed to begin understanding what it meant to invest. Never before have I paid a higher price for my financial ignorance. After the shock of the huge losses, I began my search for answers as to what had happened to my money and, more importantly, what I needed to do to protect my financial future. The books I read at home in my spare time became increasingly on investments and far fewer on automotive topics. At the age of 50, by necessity, I finally began to scratch the surface of what it meant to invest.

Never did I think that saving money through Wall Street was the biggest gamble of my life. The worst part is that I didn’t know I was gambling. It appears that satisfying customer needs was a foreign concept to those on Wall Street. Who would have thought that casino management in Las Vegas was far more ethical and fair in dealing with customers than those on Wall Street? Those running the casinos know that they need happy customers to keep them coming back. Casino management knows that the odds of winning for the house are much higher than for the players. So they give gamblers comps – based on the level of play – to ease the pain of losses. Even for those of us who study and stick only to those games that we know how to play, we still win some and lose some. After all, it is gambling. It is entertainment and most of us know when to stop playing, too. With actual gambling in Vegas, I cannot even begin to lose the kind of money I lost on Wall Street. If I did, I would have been considered a “whale” and provided with unimaginable amounts of comps and perks. If I knew, up front, that sending my hard-earned money month after month to Wall Street was to be such a gamble, I would have studied how to play the game thoroughly to increase my odds of winning the game of investing.

In my humble opinion, some of the key decision makers on Wall Street did much disservice to the concept of capitalism. As a die-hard believer in capitalism and free enterprise, it saddens me to think that what was allowed to happen – with no sense of fiduciary duties to the unsuspecting public, most of whom entrusted their entire retirement savings – did happen. Then again, they forced a whole new generation of investors, including myself, to get back to the basics of what it means to sustain individual freedom and independence in a capitalistic society. In a nutshell, I think it comes down to this: As a responsible adult, I must understand every aspect of financial affairs inside and out myself, including investing. And if this is the price I must pay for freedom, I shall gladly oblige. I wish I had learned this lesson much sooner but better late than never.

 

Done everything right, or so I thought…

What an awakening it was to have lost over half of the value in my mutual funds both inside and outside of 401(k) in 2000! That period of financial catastrophe became the turning point for me in terms of how I began to view the economy, Wall Street, society, work, and my future. Hindsight is 20/20; I should have spent time understanding everything there was to understand about my “investments.” By devoting myself full time to working, however, by the time I got home each night, I was mentally exhausted. I wanted to unwind. The last thing I wanted to do was to review prospectuses. The sheer number of them to be reviewed, due to my diversified portfolio, was overwhelming. Whenever I tried reading them before going to bed, they became the most effective sleep inducers. To my dismay, I eventually figured out that my diversified portfolio was not diversified at all. The so-called financial advisors with whom we came in contact were all sales people. Their goal is to sell financial products by teaching potential clients just enough so they feel they understand what is being said. If I knew then what I know now, I would have hired an independent, fee-only advisor who is required by law to act as a fiduciary for me.

After a long soul search, I drew my own conclusions as to what I needed to do to remain independent. I came to America to secure a life of freedom and independence. I did not come here to become a financial burden on American society. Becoming dependent on the welfare system is the antithesis of independence. When one lets others control one’s sources of funds, one risks independence and freedom. Therefore, I do not wish to put myself at the risk of having to rely financially on anyone other than myself. During 2000, the decline in the value of my retirement funds was so fast and steep that I actually had to think about the possibility of such a worst-case scenario. That was a rude awakening. As a result, my passion began to shift from Chrysler to protecting my financial future. Slowly, I began making plans to leave the company four years later, in 2004, upon completing 20 years of service, to devote myself full time to investing. Remaining naive about money was no longer an option.

 

Money: Life-stage transitions

To those who know me as an investor, what I’m about to reveal may come as a surprise. At various stages of life, money either didn’t have any meaning or meant different things to me. When I was growing up in Japan, there was hardly any discussion about money in our household. The only thing I learned – and implemented later in life – was that saving money for a rainy day was very important. Aside from that, for the most part, money was a forbidden topic. As mentioned earlier, at one point, I was even told that, “A proper young lady would not concern herself with money.” Knowing what I know today, I think such comments were made, at least in part, because my parents did not know how to address money. The schools did not teach anything about money, either, despite the fact that all of us must concern ourselves with how to handle money in our adult lives. My father had a good-paying, upper-middle-management job at Kokusai Denshin Denwa. He controlled how much money was to be allocated for the household, and put my mother on a very tight budget.

Later in life, my parents considered themselves upper-middle class. This was true by the time I got into college but not so when I was much younger. I remember my mother taking me shopping to get new shoes every so often to replace the old ones that had holes in the soles. That was a major event for me. Although I did not like having to wait until my shoes were worn through, I really liked and appreciated my new pair each time. I don’t recall feeling embarrassed about my worn-out shoes. The only thing I disliked was the wetness on my feet when it rained. Economically, after the war, perhaps everyone else was in the same shoes – no pun intended – and there was nothing to be ashamed of about wearing an old pair. Surprisingly, after I met David and had this conversation I learned that he also had a similar “holes in shoes” story. In any event, at that age, I didn’t think much about money. Today, I still tend to wear and use things past their prime. I used to think I was being cheap but then I learned the correct word for how I am is “frugal.” I really like getting good value for what I spend my money on and getting good products at sale prices. It has been very helpful in our relationship that David and I are of the same mind in terms of frugality.

Since arriving in the United Stated in 1972 and starting a family, I had to recognize that money was part of everyday life. Beyond the need to provide for my family and save for rainy days, however, I was still not in tune with money the way I am today. As a young adult, I used to think that if I saved for a rainy day in a bank with compounding interest, I should always have enough money. I thought that by saving regularly, I would have plenty of money by the time I’d be ready to retire. Our financial advisors said so, too.

As an adult, I thought I was in tune with the subject of money but, clearly, the 2000 market crash made it painfully obvious that I was not. I was simply too busy making sure that I was putting aside enough money to send our sons to college and for retirement. Nor did I think to teach them anything about it while they were growing up. Because I did not explain to them what I was doing, they sometimes made remarks that gave me the impression that they must have thought money grew on trees. Knowing what I know today, it would have been wise to make it a point to teach them what I was doing and why I was saving for their college expenses. Of course, I did not figure out how to be a truly good steward of money until recently, after the first major financial disaster, which I did not know was coming until it hit me in 2000.

I think it is vitally important for children to learn to keep what they make by investing wisely. I also firmly believe that children are capable of learning cash-flow management and investing, just as they are capable of learning mathematics and science. Once they have learned the skills to be good stewards of their own money, they will have eliminated one of the most critical difficulties of life that cause so many adults so much headache and heartache.

Until the market crash in 2000, it never dawned on me that devoting the majority of my waking moments working for someone else in exchange for money, and saving for retirement by relying on so-called experts, would be risky. Why is it risky? It’s risky because I asserted little control over decisions being made by others. I had to begin thinking in terms of how I could remain financially independent for the rest of my life, and what I needed to do to accomplish it. My relentless determination to remain financially independent touches upon the meaning of individual responsibility in a free society.

I have always liked the term, “rugged individualism.” It has a uniquely American nuance. Little did I know that I was about to embark on a path to experiencing what “rugged individualism” feels like.

 

A new set of financial goals

With the market crash of 2000, the price of ignorance was substantial, inside and outside of 401(k) combined. Many others, including David, experienced similar paper losses. The joke of the day was, “My 401(k) became a 201(k).” I was also beginning to internalize Chrysler’s overall performance in the marketplace and what may be in store for most of its employees. I could not help but notice the changes taking place in the broader economy – high unemployment, sluggish economy, etc. – and what they meant to me personally as I advanced in age. I began to realize that the only way to retain my freedom and independence – the core of why I had dreamed of life in America – was by achieving the following three goals by the end of 2014 at the age of 65:

1. Not to be dependent on company pension payments.

2. Not to be dependent on Social Security payments.

3. Not to be dependent on company or government-sponsored medical coverage.

When I determined these fundamental goals, I had no clue where to start. I simply knew that I had to achieve them – so as not to become a financial burden to this country, which accepted this immigrant with open arms. All I knew was that spending the majority of my time working for someone else, putting my hard-earned income into mutual funds blindly, and not making the time to pay close attention to my money was no longer going to cut it. As of 2000, I only had 15 years to accomplish these goals.