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Do Your Research Before You Invest

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My first foray into investing began when I opened an IRA at age 19. I didn’t know anything about stocks, bonds, or mutual funds, so I placed the money into a Money Market Account where I probably earned an astounding 3.0% return on my money. About a year later, I went to a broker who sold me a long term investment plan in a mutual fund. I rolled my IRA into the mutual fund and was happy.

Then I began to learn a little more about investing, how the stock market works, etc. I read about stock classes and index funds, and I realized the mutual fund the broker sold me, a large cap fund, mimicked the S&P 500 very closely. Too closely in fact. I realized that over the previous ten years, the trends were almost identical. After doing more research, I determined the holdings were almost identical and I was paying 1.50% for a managed fund that was doing no better or worse than the S&P 500 – the same fund I could get for less than 0.20% in fees. Did I mention I also paid a $1,000 front load for the fund? That was when I realized brokers do not always act in your best interest. More research lead me to realize that investment advisors don’t always have a fiduciary duty to act in your best interest. They have total freedom to recommend expensive investments as long as the investment is appropriate in style.

I thought long and hard about the situation, and I finally decided the best action was to roll my IRA out of the investment I was in. Though I was originally told the $1,000 was to be spread out over the course of my investment plan, the $1,000 was really an up front fee to the broker. The loss of the $1,000 hurt, but when I analyzed the numbers, I realized that paying lower fees would allow me to keep more of my money working for me and compounding for a long period of time. In the end, the numbers don’t lie – having the lower fees would give me a better long term return. I counted the $1,000 as a sunk cost and vowed to do better research before ever investing again.

In the end, I am not mad at my mistake of “losing” $1,000. I got into the habit of automatic investing, which is something I continue to do and will continue to do in the future. More importantly, I learned that I need to educate myself and learn how to make my own investment decisions. This is a large reason why I started this personal finance blog – to learn and share information about personal finance. If one person reads this and doesn’t make the mistake I made, then I’ve accomplished something good.


Published or updated December 22, 2011.
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{ 2 comments… read them below or add one }

1 Susan

It’s a great article for the beginners. If you are new in stock market, then you should be ready with a portfolio of several companies or at least that one in which you want to invest. This will clear the picture on how much has to be invested in stocks. It’s definitely a good blog.

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2 Ryan

Thanks, for the kind words, Susan. For most people, it makes sense to begin investing in undex funds or mutual funds, then graduate to individual stocks when they are ready and have the time they can devote to it. Personally, I have everything in funds because I do not have the knowledge to invest in individual stocks.

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