After graduating college with a degree in Financial Planning and working as a credit analyst at a prominent bank, I thought I knew more than most when it came to personal finance. My god was I wrong.
I was 23 years old, a little over a year into the working world, in a serious relationship and living at home at the time. I was feeling pretty good about the nearly $10,000 in my bank account and decided it was time to start thinking about the future. That meant saving for a house. I didn’t really know if or when I would want to buy a house, but saving for one seemed like the responsible thing to do.
How did I go about trying to accomplish this goal? I decided it would be wise to invest in a couple fancy actively managed mutual funds from JP Morgan Chase.
How did I end up with this awful investment? Well, I was assigned a financial advisor from the Chase branch near my house and scheduled a meeting. At the beginning of our 45-minute discussion, I let the advisor know I was hoping to invest with the goal of partially funding a down payment in 6-7 years.
He proceeded to show me a bunch of incredibly confusing mutual funds (all from Chase) and quickly explained the benefits of each one. We then narrowed it down to a stock-focused fund and a bond-focused fund and I decided to invest in both to smooth out the risk.
Why not? JP Morgan Chase is a reputable financial services company and this guy seemed to know what he was talking about. And me? I was an overly-confident financial planning major. I wanted these sophisticated investments in my portfolio. I was sold.
But could I tell you what exactly these funds were invested in? Nope.
Could I tell you the exact fees I was paying? Nope.
Could I tell you anything about this financial advisor other than he worked at Chase, his name was Mike and his hair was slicked back so tight it looked like it hurt? Nope.
But I can tell you that my two mutual funds treaded water for over three years and eventually went down in value. Our one brief meeting was the only interaction I had with that advisor. He never called, never checked up on me and when I tried calling him a year after I made the investment, he was no longer with the firm.
Then came the fall of 2016. The stock market was at all-time highs despite the uncertainty surrounding the US election. I truly believed that no matter which candidate won, the market was going to fall, hard. So I made the rash decision to sell all of my investments from my Chase account, keep it in cash and wait for the market to plummet.
What happened? The market soared after the election and I missed out on all of those gains. I lost well over $2,000 after all was said and done.
Here’s what I learned
Be incredibly wary of financial advisors trying to sell their own products.
They most likely have a substantial conflict of interest between getting paid a commission and giving you the best advice that fits your unique goals and risk tolerance. Mike was clearly motivated to earn a commission by offering me a suite of expensive Chase products and could care less about me or my financial goals once he booked the sale.
If you decide to work with an advisor, you need to be extremely confident that he or she is putting your interests ahead of their own. That’s not to say that all financial advisors are out to exploit you, in fact, there are plenty of qualified Certified Financial Planners that will make the very best decisions they can based solely on your financial goals. Just be careful and ask plenty of questions.
Actively managed funds are almost always bad investments. Keep it simple.
If I remember correctly, I paid a 2.5% fee up front to invest in each Chase fund and annual fees on top of that in excess of 1% each. Those fees may seem small, but they ate at my returns and I was left with less money than I started with. The 2.5% fee is called a front-end load and is complete BS. You will only find these ridiculous and unnecessary fees in actively managed funds.
Here’s the most frustrating part. If I had instead put my $10,000 in a low-cost S&P 500 index fund with a 0.05% annual fee and continued to hold it, my investment would have grown to well over $16,000 by 2017. Actively managed funds have much higher costs and have a very slim chance of outperforming the market over the long term. Keep it simple. Stick with low-cost, passive index funds.
Market timing is a horrible idea and can derail your financial plan.
I follow the stock market every day for my job and I still have no clue what it’s going to do. I have my suspicions of course, but I continue to be amazed at how many times I am wrong. You want to know the truth? No one knows.
Fidelity recently completed a long-term mutual fund study that analyzed the investment performance of its clients. Can you guess which group of investors performed the best? You may think it was the rich, savvy investors that spend a large portion of their day analyzing the market looking for an edge. Not the case. Not even close.
So who did Fidelity find were the best performers? The clients that were dead and still had their accounts open.
And any guesses as to which group of clients came in a close second place? Those that forgot they had an investment account with Fidelity.
My point is this: if you are able to tune out the noise of the “experts” around you and just stick with a simple buy-and-hold strategy, your portfolio will generate higher returns than nearly everyone else over time. It is scary how easy it can be to sell your investments in today’s online world and most investors sell at the completely wrong times based purely on emotion and not on reason.
It’s great if you want to stay informed about what is going on in the finance world and following the news can be a responsible thing to do. But the press is notorious for sensationalizing events and making it seem as though the sky is falling. Bad news and bold predictions lead to more interesting stories, higher ratings and more money for the networks. Following the news is totally fine, just don’t trade on it. Better yet, laugh at it.
Learn From My Mistakes
Make sure you trust that your advisor is putting your needs first, avoid higher-cost actively managed funds claiming to outperform the market, and have the humility to know that neither of us can predict future stock prices.
So invest in the market consistently, stay in the market, be careful following the financial news and you will be absolutely fine.
I hope you learn from my mistakes so that you can be smarter with your money. The decisions I have made in the past – right or wrong – have defined who I am today, what I believe in and what I will certainly avoid in the future. I don’t live my life with regrets, I just try to learn and grow from the choices I make.
But I promise there are plenty more stupid mistakes to share with you, so stay tuned.