Stocks, Mortgages and my 401(k): Money Lessons Learned in 2010

2010 was quite an eventful year for me in terms of finances. I had already been investing my spare cash in dividend and growth stocks, paying what I could on my mortgage, and setting aside the leftover money for my 401(k) account. I had watched my investment portfolio grow quite nicely due to reinvested dividends and several occasions of day trading. Then, in August, my father died and I became attorney in fact for my mother. In the process, I took on my parents' investments and redirected them into other areas, namely, dividend and growth stocks. What did I learn in the process?

Buy stocks, not certificates of deposit (CDs). When my father passed away and I started going through my parents' bank accounts, I found most of their money invested in CDs. I systematically closed down every single CD I could find and redirected that money into stocks. Why did I do this? Because, personally, I could not fathom how banks justified keeping money parked in CDs that were earning interest rates lower than that of the consumer price index. One of my parents' CDs was actually earning an APR of 0.5%! My parents' newly purchased stocks are earning a yearly return of at least 9% now, and this return is many times higher than what the banks were offering.

My house is not an investment. I used to have a 15 year mortgage on my house. Then, when I became divorced, I refinanced and chose a 30 year loan. While seeing my new and much longer amortization schedule did give me some angst, paying about $300 less on my current mortgage allows me to save money for long term goals and emergencies, and to invest more often. I finally realized that, no matter how much money I'm paying towards my house, that money is gone once it leaves my hands. Alternately, in lieu of paying more towards the 5.1% APR mortgage, I can take the extra cash and earn an APR of 9% or more on it via dividend stock investments.

I can't say no to free money. I never kept a retirement account at any of my places of employment. My rationale for not having a retirement account was that my stock investments were a form of IRA, an this IRA would not penalize me if I chose to withdraw from it early. However, after finding out that my workplace matches 401(k) contributions up to 6%, I too jumped on the retirement account band wagon. After all, how can I say no to free money?

Determine my trading strategy and stick with it. I typically purchase dividend stocks just before their ex-date, which is the date by which stocks must be purchased in order to earn a dividend. When the money is not invested in dividend stocks, I do daytrading. I recently went off of my typical trading strategy when a dividend stock that I'd been planning to purchase in a few days started increasing in price. Fearing I would end up spending even more money to purchase it, I bought the stock quite high- and then watched its price fall over the next two days. Had I stuck to my guns and purchased it the day before its ex-day, like I usually always do, I would've saved about $3,000. That stock depreciation will now take about three months to make up through dividend payouts.

In summary, what 2010 has taught me is that dividend stocks can make me (and others) a good passive income, that my house is not an investment, that free money via 401(k) is good, and that I need better investment discipline.