Recently, SimplyFI invited me to give a talk on my journey to financial freedom and early retirement. SimplyFI is a non-profit community of personal finance and investing enthusiasts who help and empower each other to achieve financial independence. They're also the official UAE chapter of Bogleheads and Choose FI.
Giving talks is not my thing. In my previous life, I was an accountant, and it's difficult to imagine why someone chooses to be an accountant. Perhaps, one reason stands out - accountants don't normally have to stand at the front and talk to a bunch of people. We're more back office types.
However, it seems flattery is a good persuader, because before I knew it, I'd agreed to do the talk. So last Saturday, there I was standing in front of fifty or sixty people, who I'm glad to say were polite enough to stay to the end.
In my efforts at complying with presenting tradition, I prepared some PowerPoint slides. It took some time, but that's OK, time is something I have, and it was quite fun in a slightly weird way.
As well as some fun, there was also some shock. Why would that be? Because in doing some analysis, I calculated some figures for the first time. I think my prior ignorance was bliss.
But now that I do know, I'm going to share a few of these stories. If you're working towards financial independence or early retirement, I think they are useful to know.
Useful to know #1 - Know what fees are attached to your investments
That's obvious, right, surely everyone would know this. Well, just because something appears obvious, doesn't mean that everyone knows it. Guess what, I didn't check, and it cost me a lot.
It goes back to 2009, when we had some cash to invest, along with a transfer from my pension scheme from my previous employer. I'd never really invested before, any surplus cash we'd had was put towards our mortgage. Because it was all new, it seemed a good idea to contact a financial advisor.
So that's what we did. We saw three advisors, but one of them really seemed to be on our wavelength. We decided to move forward with him. Having discussed our risk profile and investment objectives, he recommended a plan. He talked us through it, explained the benefits, and because he was our advisor, we figured that his recommendation made sense for us.
Wrong! His recommendation made sense, but not for us, it made a whole heap of sense, and money, for him! He didn't tell us about the 11.5% establishment fee deducted over the first five years. That's in addition to the underlying funds fees.
This establishment fee cost us £70,000 ($100,000). This money should have been helping us towards financial independence. If we'd put this in a S&P 500 low cost index fund, the amount would now be worth around £202,000 ($287,000).
We currently live in a lightly regulated jurisdiction, so perhaps the level of fees was much higher than where you are. But as an example, it serves the point. Please ensure you understand the fees that any investment may incur. It's a basic question that I didn't ask, and it cost me a horribly large amount of money.
Useful to know #2 - Be aware of discretionary management
The same advisor helped us fill the plan application forms. There was a box about discretionary management which was ticked. I can't remember if it was discussed, but I suspect we simply didn't understand it and didn't ask.
I since learned that discretionary management means that the financial advisor or broker can make investment decisions on your behalf. Maybe that can be a good thing in some circumstances, but it wasn't for us.
Another guess what! Our financial advisor made a decision to take £60,000 ($85,000) out of one fund and put it into another. We didn't know this, he did not discuss it with us, nor did he even inform us.
In fact, the first time we found out was when this new investment appeared on our statement with a new value of zero. The new fund had been suspended, and we lost our money. There's a whole back story to this, which will stress me too much to write! Who knows whether I would have known to prevent the transfer, but I would at least have liked the option.
How much did that cost us? If we'd put that investment in a S&P 500 low cost index fund, the amount would now be worth £173,000 ($246,000).
Perhaps my circumstances are uniquely horrifying, but it does make the point. Be aware of what discretionary management means, and think carefully whether you want to give your financial advisor or broker these rights. These days, we sign off on any investment decision before they are actioned.
Useful to know #3 - Never put off for tomorrow, what you can do today
I wish I'd listened to that advice.
We sold our house in November 2014, and we did very well. I count it as our best ever investment. We timed the sale perfectly, hitting the very top of the market. Happy days.
And what to do with the cash from the sale? Put it in the stock market I thought.
But from the lows of 2008/9, the markets had gone up a lot, were they overheating? We had £200,000 ($284,000) to invest, so we didn't want to get it wrong. Probably best to be cautious we thought. We sat on the cash.
Time went past, markets went up, my fear of investing, of getting the timing wrong, continued. My fear led inaction continued for 3 years, until October 2017.
During that time, the S&P 500 went up 26%. We missed out on gains of £52,000 ($73,000). Holy moly!
Adding it up
I'm going to type this very quickly, like ripping off a band aid. Those three misadventures have reduced our current net worth by £427,000 ($606,000). Oh my goodness, that's horrendous.
For my talk, I looked at the original money value of the fees and the lost investment without calculating what those amounts would now be if I still had them invested. I'm stunned by the figures. It's frankly difficult to know what to say.
Thankfully we still managed to achieve financial independence, but we worked very hard to earn our money, and to see that so much effectively got flushed down the toilet is heartbreaking.
The specifics of our situation are probably unique. Our current regulatory environment probably allowed fees and advisor behavior that are not normal. But even if it is not normal, if someone can learn something from my mistakes, then the embarrassment of sharing these stories will have been worth it.
I would hate to think that someone else may suffer even part of the same experience that we have.
Note: We still use a financial advisor (a different one!), but we have learned our lessons, albeit some of them only recently. I now favour low cost index funds, because we have a longer time horizon so feel we can ride out periods of market declines. I'm not passing judgement on financial advisors, many will offer an excellent service. As I said, I just want people to be aware of the mistakes that we made so that they don't experience something similar.