I had thought about calling this article "Confessions Of a Retired 1st Year Dividend Muddler," playing on Bob Wells's SA contribution, "Confessions Of A Retired 1st Year Dividend Growth Investor," his first contribution to what has become a brilliant series of 34 articles now followed by over 1,800 people. But I didn't want anyone to think that I was presuming to write something as well-crafted as Bob's article. Another telling difference is Bob's use of the word "investor" in his title and my use of "muddling," which I think characterizes each of us quite accurately.
Nevertheless, I saw that the first part of my article would indeed have to be a type of confession, too. I feel, the way Bob seemed to feel, that it's necessary to present a little of my background so you can understand where I was in 2011 when I started my DIY investing seriously.
I retired for the third and last time in 2000. Until 1991 I had been a university humanities professor at a state University in the South for 25 years. Which is much the same as saying that I didn't have any money to invest. I did, fortunately, have a defined pension plan with TIAA-CREF. My only input into that, however, was how my contribution would be split between TIAA and CREF.
Then, in 1988, I got an idea for a software application and started to develop it on the side. A friend of mine who was a very talented businessman went into partnership with me and contributed the capital. To make this part of the story short, in 1991 we sold the business to The Learning Company of Fremont, CA for what to me was a great deal of money. At that point I retired from the university and went to work for The Learning Company, which at that time was the leading educational software company in the country. Eventually I became Vice President of Research and Development.
Shortly thereafter, TLC was acquired in a hostile takeover by a very different kind of software company, Softkey International, which, after the takeover changed its name to The Learning Company. I was asked to stay on in my position. I really didn't want to, but the offer was generous and I wanted to do whatever I could to ease the transition for the people who had worked for me.
As an interesting aside, after the takeover I reported directly to Kevin O'Leary, whom you know if you've ever watched the TV program, Shark Tank. I can tell you that in "real life," he's exactly the way he comes across on the show. I left Kevin and TLC about a year later and retired a second time.
Shortly thereafter, I co-founded a company called GlobalEnglish with the former founder and Chairman of TLC before the takeover and two other people. I stayed there until 2000 when I retired for the third and last time. In October of 2000 my former wife and I moved to Costa Rica where we spent a glorious five and a half years. Eventually we decided it was time to return home.
During that period in Costa Rica, I had no investments at all and was living from my pension and social security (which I started to collect at age 62 in 2000) and just used the capital I had accumulated to enable us to live in a style much more comfortable than would have been possible on just the pension and social security.
Not too long after our return, we divorced and l bought a house (in the city where I had taught at the university for 25 years), and I continued living an enjoyable life as I had previously done without doing any investing at all.
A couple of years after that, in 2007, I married a long-time friend. I was 69 and she was 59 and employed as a high-school teacher. We were quite comfortable with our nest egg and pension and social security and her salary. Additionally, we had no debt whatsoever.
I really wanted her to retire so that I could have a playmate, and a couple of years later she did. It was about that time, in 2010, that I realized that now that we no longer had her income (though she did start collecting her pension and social security), we would need to invest our capital to produce income, otherwise our nest egg would never last us. We also had some large expenses. We were supporting and educating my wife's daughter and I was putting a young man, the son of my very poor neighbors in Costa Rica, through law school.
Neither of us obviously knew anything about investing having never done it before. The very first thing we did to get us started was to buy about $100,000 worth of municipal bonds. I figured that these were really a safe bet for an investing dummy like me and would start to augment our income while I tried to learn how to go about investing. It turned out to be a fortuitous purchase because just by luck this was before muni interest rates really started to fall. I was able to buy 5% and 5.5% bonds without paying any premium, in fact, I bought some well-rated bonds at a discount.
We soon decided that we really didn't have enough confidence in ourselves to undertake investing our money alone. So after a lot of research (which turned out to be some of the worst research I ever did) we made our first major mistake and decided to work with an independent broker/dealer and financial advisor associated with LPL Financial in August, 2010. We opened 2 accounts: a rollover of my wife's IRA and our investment account.
We stayed with him for a year, way, way too long. We eventually realized that the fees we were paying simply did not justify the return. Much later we were able to see that the portfolios were typical boiler-plate allocations in high-cost, front-load mutual funds as, for example, a bunch of DFA Investment Dimensions Group funds, Optimum funds from Delaware Investments, non-traded REITs, etc. We were like lambs going to the slaughter. Of course we had absolutely no idea what was going on and how we were being exploited. And even after we got out, it took us a long time to realize that we had been the classic, know-nothing retirees who wound up in the grasping clutches of a "financial advisor" while paying exorbitant fees to both the advisor and the companies.
But even we finally saw that the substantial fees just didn't justify the return. Additionally, my wife and I had no control over what was going on. The "advisor" certainly "consulted" with us a lot, but was always able to demolish our ideas about the direction of our portfolio. We finally called it quits in July, 2011.
Back in May, 2010 we had opened an account at Charles Schwab where we had our munis, which we had been adding to. Additionally, we had inherited an investment account from my wife's mother in 2011 that was at Wells Fargo. We transferred those equities to our Schwab account. The stocks we inherited included some solid names such as Pfizer (PFE) and Raytheon (RTN), the latter of which had been in my wife's family since shortly after the company's founding in the 1920s. Additionally, there was a not insignificant amount of cash.
When we finally escaped our advisor, we transferred all our holdings from LPL to our account at Schwab except for the non-traded REITs, of course. One of them, Cole Credit Property Trust III, we were able to redeem, which we did. The other, CPA:17 - Global, Inc., we still hold without a broker at WP Carey. It pays a solid 6% every quarter and we have a lot of confidence in WP Carey, which was recently bolstered after Brad Thomas spoke highly of their publicly traded REIT here on SA.
We also opened an IRA account for my wife at Schwab and transferred that from LPL, too.
And that's how we got to the Summer of 2011 when we began our long, muddled journey trying to learn how to invest intelligently all the while trying not to sustain any great losses and to generate the income we need to maintain our lifestyle.
I hope that our experiences up to this point in the story might help some aspiring, newly retired, DIY investors avoid the kind of mistakes we initially made with our financial advisor. We were impressed with the fact that he was a fee-only advisor. That, obviously didn't protect us from all the other pitfalls awaiting those who turn the management of their funds over to others like this guy for whom one size fits all.
I also hope that the rest of the story might help those same investors who are doing it themselves get some insights into one way to struggle with the risk/income conundrum that we all face as I discuss the extensive portfolio we now have, how we got there, and the changes we're now making in order to get closer to our goals, changes, I might add, that to a great degree have been inspired by reading the work of some of the first-class minds here on Seeking Alpha.