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The Return of Capital II:

Photo by Duncan Steiger-Bowers

Two weeks ago I wrote an article titled The Return of Capital that talked about the role of fees in the financial services industry.

Fees aren’t anything new to investors and are virtually impossible to avoid. Yet minimizing your exposure to fees can have a significant long-term effect on your returns when you have the proper information and perspective to avoid excessive fees when possible.

In The Return of Capital I introduced DSC (deferred sales charge) fees that are often hidden in managed mutual funds as a deterrent for fund holders to sell or switch out of a specific mutual fund or group of funds. These fees can run from 4-6% of invested assets and are a serious hindrance to investors who wish to pursue a different strategy for their investments.

I had the opportunity to sit down with a new DIY investor who agreed to conduct an investor interview about his experiences with mutual funds, budgeting, DIY investing and the financial services industry.

Thanks for taking the time out of your schedule to conduct this interview John,

It is my pleasure to do this actually. I have been surprised and grateful about the number of helpful and patient people that I have met on forums that have helped me learn and understand investing better. If I can give information back to the community and help other beginner investors it would be the least I can do.

Can you take a moment to introduce yourself and tell readers more about you?

I am a 32 year old married educator. My gross income is $60,000 I own a $280,000 house that has a mortgage of $174,000. The mortgage difference is more because of the increase in value of the real estate market than aggressive payments, but that is changing. My spending habits are fairly frugal, but occasionally they do build up and a rare impulsive buy happens. I try to concentrate on being content, separating wants from needs, waiting seven days before making a purchase, and realizing how small purchases can impact the big picture. My wife and I do not agree on everything but, I am happy to say that we have both compromise and really try our best to work with each other.

When did you first become interested in investing?
How did you find a financial advisor and select your funds?

I first became interested in investing when I was 19, I knew it was something that I needed to understand and I read The Wealth Barber during a trip to Thunder Bay. The good news is that I started early the bad news is that I didn’t learn much after that until recently. At 19 I thought I knew it all, you paid yourself first and bought mutual funds and retired. Although this is a good start I should have paid myself more and spent more time on budgeting and fund selection.

I have a relative that is an investment agent, so I never really thought through the process of selecting the best agent. In fact, I trusted the relative’s judgement so much that I never took any real responsibility for my present or future finances. It is embarrassing to admit that I invested with my relative for 13 years and I never selected or researched any of my funds.

What did you understand about the fees that were involved in investing when you first started?

Nothing. You can applaud the industry for being very smart with hiding their fees. I always knew that real estate agents and car sales people had fees, but I never really thought about how the investment industry got paid. I see it now; at work I have now noticed people getting birthday cakes and entertainment tickets from their financial advisors.

What motivated you to change your investments at this present time?

My motivation came from MoneySense. I am not sure why but during the summer of 2008 I bought a copy and then I started reading their free back copies on their website. The Couch Potato and Pay Less, Get More articles made me start asking questions about my own situation. At the same time the economy started to turn and I could see that professionally managed funds were suffering despite being professionally managed. If the Canadian economy stayed stable it would have been more difficult for me to become motivated, but all these factors created a perfect storm for motivation to learn more and examine my personal situation.

The Mark vs Nurse article (Part I, II & III) on the TMWTS website helped me see the impact that initial losses can have on final results. Emotionally, I would really like to start in a fresh direction and be finished with my current situation, but I will wait. Expensive lesson learned!

How much in DSC fees would you be charged if you pulled out all your money today?

If I was to transfer everything into a couch potato portfolio there would be a total penalty of approximately $1700. The RRSPs are between two different fund companies who both charge a declining percentage of DSC over six years. Presently, I do not think it makes sense to pull the money out so, I will wait a year at a time and pull out whatever amounts no longer have DSC charges on them. When I get down to the final two years I will see if it makes sense to be charged lesser DSC fees or not. Either way it is a long painful process to get my money out.

I had no idea that it would be so much, in fact I almost pulled the money without checking. The investment industry is so good at hiding fees that I may have never noticed.

Has your advisor been supportive of your decision to change to an investing strategy that meets your needs?
How have they helped or harmed this process for you?

My advisor indicated that he is not overly familiar with index funds and then gave me four reasons not to do it:
1. Questioned if I really knew what I was doing
2. Stated that I should wait until the market rebounds to regain my losses
3. Stated if index funds were so good everyone would be doing it
4. People come up with new investment ideas just to sell books

Also, I noticed that my advisor took a long time or did not get back to me with some questions, like are there any penalties, I think he thought I would just eventually lose interest.

In the short term the above did slow my progress and put doubt in my mind, but in the long term it helped show me what the industry is really like and motivated me into taking control of my situation. I am no longer doing anything through the agent and just getting my required information from the head office 1-800 numbers.

What has been your experience with the amount of education you have received from your advisor?
Is it adequate?
Inadequate?
Why?

I recall asking about some specifics in the past and I was given a 20 page booklet on the fund or company, I don’t really know because I never read it. The booklet was technical and not designed for a beginner investor. Also, I was told it was best not to worry about funds as they are part of a long term strategy and not something to be checked regularly. Although, the advice/education may have been inadequate, it is still my responsibility to understand my situation.

What has been your biggest challenge trying to educate yourself on investing?

There is not one perfect solution for all investors, but when you are starting out this is what you want and it is hard to create your own solution with limited experience.

I also struggled with grasping the actual how to. I agreed with the theory, but what are the actual steps to make it happen. I look back and laugh some of it is very obvious now.

What resources have you used or sought out to receive educational material on investing?

Magazines:
· Moneysense
· Canadian MoneySaver

Websites:
· http://www.nurseb911.com/
· Moneysense – every back issue is available, excellent beginner resource
· Moneysense forums
· Globefund
· Morningstar
· Webring forums
· There are some other blogs that I have subscribed to but I don’t have the time to read them much – frugal dad and million dollar journey

Can you tell readers a little bit about your new budget?
What is your new focus?
Where have you trimmed costs or focused your additional savings?

I always had the belief that I did not have to budget because I really only purchased things that I needed. I was wrong. Can you believe that I found out that we spent $1,400 on groceries one month, how is that even possible, but it is true!

I tried quicken first and I am unsure if it is because budget software and its functions were new to me or if it was just quicken but after two months of aggravation I switched to Microsoft money. Although money is not as flexible it is much more simple and straight forward to start with.

Recently I have trimmed some costs on increasing deductibles and reducing monthly payments on house and car insurance. I have never made a house claim and have not made a car claim in over six years, when I did the math I felt sick. Back to the grocery budget, we are trying to hit $800/monthly and it is still not happening, so what we are trying now is to spend $200/week. Over a month the goal and the expenses are not present, but over a week they are. So far this micro/mini budget seems to be working out. Even if we don’t stay under $800/month we are spending less and I put the savings into extra mortgage payments.

What is your definition of financial freedom?
Where would you like to be at 55?

Over the next 23 years I am certain that I will have different answers to this question, so I simply want to build enough to cover my current expenses as early as possible.

I read the MoneySense article, Retirement: A number you can live with, that you should multiple the amount you need by 25 to give you your retirement goal, 25 x $45,000 (approximate expenses) = $1,125,000. The article goes on to say that I can take 4% of my savings each year so 4% of $1,125,000 = $45,000. This is another area that the created a budget helped me examine and plan my future.

$1,125,000 is shockingly high to me and may not be right, but it does give me a concrete number and huge motivation to examine what I am doing today for tomorrow.

What is your understanding of how fees affect returns now in retrospect?

In retrospect, I view my previous financial situation as parasitic. I was silently losing small amounts of money in many different areas. Over the long term I can see that making small adjustments will have a large impact. It amazes me to say this because only a year ago when I heard someone mentioning budgeting or retirement I thought I had it all under control, now I have become more detail orientated and thinking about the long term effect time has on money.

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