Financial Mistake #1: Load Mutual Funds

Break out the scalpel and let’s surgically dive in and open up the past.  This will be the first post of many chronicling my financial missteps over the years.  So, without further ado…

Financial Mistake #1: Load Mutual Funds

The year was 2006…

I’ve been out college for two years bouncing around various entry level jobs trying to find my fit and adjust to the new world of corporate America.  Eventually I landed my first career position – a capital projects tracker at a large corporation (basically an admin assist who did accounting work but didn’t get paid like an accountant).

This was real money to me back then, even though it was only an entry level salary.  But as I have mentioned before, I’m a saver, so the dollars were accumulating.  I had also moved back home after college for two main reasons: #1 I wanted to save money and #2, more importantly, I didn’t know where the hell to go?

Concurrently, my little brother was beginning high school and my parents had just attended a seminar where a financial planner had given a presentation on applying for financial aid to colleges.  They had liked what he said, talked with him afterwards and signed up for a free consultation.

Now a quick side note on my parents – they are responsible, hardworking, middle class people who live within their means.  They are good savers, but not investors.  I want to make that distinction.  You can have someone who is great at saving, but if they are not investing their savings, the greater wealth accumulation is not happening.  That was my parents’ case.  Up to this point they had never dealt with a financial planner before and felt it was finally time.

Shortly after their meeting, they had officially become investors – he set them up with a Roth IRA, some mutual funds and a private REIT.  Observing this, I thought it was also time that I sit down with a financial planner and start mapping out my goals.  So I reached out to him and scheduled a short sit down after my parents’ next meeting.

I don’t recall the actual meeting itself, but afterwards I was sitting pretty just like my mom and dad – a shiny new Roth IRA in my name,  active alpha mutual funds and a limited time only private REIT investment opportunity (if that didn’t scream sucka, I don’t know what does) – all with a supposed annual 12% return on these investments.  Now at the ripe old age of 23-24, I was officially an investor, on my way saving towards the promised land – that grand ol’ sipping cocktails on the beach retirement goal at age 65.  Booyah!

However, probably a year or so later as I’m learning more and more about personal finance, I start looking into my investments and here’s what I found:

• The mutual funds are load funds that I pay a 5% sales charge on – basically a load fund is a mutual fund with an upfront sales charge (there are all different types and classes of these funds, as well as different ways to structure the fees, so I recommend reading here to learn more about them).  I had purchased a lump sum of $10K ($500 right out the door) and had an automatic deposit set up each month that kept purchasing them (more 5% commissions going into his pocket like taking candy from a baby).

• I didn’t understand the difference between a ‘nominal’ and a ‘real’ rate of return. (Nominal rates don’t factor in inflation.  Real rates are nominal rates minus the expected rate of inflation.  Financial advisors love to talk in nominal interest rates all day long because it makes the investment look more profitable than it is.)

The next time I sat down with the financial planner I’m not too happy.  I ask him if he really thinks these are good investments.  He gives me the smooth guy spiel: of course, they’ll make you very wealthy with an expected 12% return.

Then I unload.  I tell him if I have to pay a 5% sales charge on these funds, I have to make more than 5% (CAGR) just to break even again – and worse yet, I’ll be paying taxes on the gain.  I’m already in the hole big time.  How is that benefiting me at all?

He answers with something like these are popular funds that cost money to get into because the active managers are so good at what they do.  Then he goes into the 12% returns and how great those will be compounding over the years. 

I push back and break down his nominal 12% expected returns:  If I’m paying a 5% sales charge and inflation is 3% on average, my expected real rate of return is 4% (banks were paying around 4-5% interest just on savings accounts at this time – an entirely risk fee investment).  

So WTF? (I didn’t really say that, but my insides were fuming, he had basically scammed me, and I hate being taken advantage of.  Plus, if this was happening to me, how many other people were getting terrible investing advice from CFPs skimming off the top with their fat commissions?)

He didn’t have a good response for that one.  It was clear that I understood his game now.  I stopped investing any more money with him from that point on.  I kept the investments I had since I had already paid the commissions on them and decided to hold them for the time being (another rookie misstep).

In retrospect, it’s hard to really call this one a mistake since I had the folly of youth on my side and didn’t know any better, right?

Nope.  No free passes here.

This is what happens when you trust someone else with your money and don’t do your homework.  Whatever decisions you make, you need to hold yourself accountable. Educate yourself.  And if you made a mistake, that’s fine, learn from it and move on.  We’re chasing progress not perfection here.

After this experience, I never trusted my money to anyone but myself.

If you were paying attention to the details earlier in the article, I mentioned I had purchased mutual funds and a private REIT from this financial planner.  I should have taken all of my money back when I had the chance.  But I didn’t.  The next financial mistakes post will detail my future sorrows with that REIT.

*Sigh*, the past is the past.  All we can do is learn from it.

Well, here’s to financial mistakes… raise your glasses my fellow FI-ers and enjoy your Wednesday.

Wishing you some happy learning today!

-Q-FI