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. Although I still wasn’t really aware of much more about the IRA, such as the Roth IRA contribution limits.
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.