The High Cost of my Financial Ignorance

I was shredding very old paperwork a few weeks ago when I came across the brochure and policy documents for the very first retirement account I opened in the mid 1980s. It made me shudder looking at it and I was glad to shred the evidence of my past financial mistake.

I think I’ve been quite fortunate in life when it comes to making bad financial decisions. If I’m honest, I think it’s been a total of two missteps in the last forty years. But boy, did they cost me.

My first blunder was the recently shredded pension policy documents. At the time, I was very proud of myself. I was only 19 and was way ahead of the curve with regards to any of my peers in actually having opened a retirement account, many didn’t reach that stage for a further ten or twenty years. But the major mistake I made was not understanding the product had very high front-loaded fees combined with high charges for the individual funds.

I later discovered that during the first ten years of the policy, only 98% of my contribution actually went into the fund; the other 2% was immediately deducted to cover commission and administration. This meant every dollar I saved started life at a 2% deficit. The impact this would make on future returns, combined with high annual management fees, was substantial.

I can’t quantify exactly how much I lost because of the structure, but it was compounded by the fact I never revisited my choice of provider for nearly 20 years. At that stage, I was much more financially literate and felt queasy when I realised how awful the retirement account was. I soon remedied the situation by moving to a low-cost provider. My best guess is that my portfolio at that stage was at least 15% smaller than it potentially could have been with a better product.

My second painful financial mistake was our first mortgage. At the time, my wife Suzie and I went for a product that was, I think, unique to the UK market. Basically, it was an interest-only mortgage prepackaged with an investment product you contributed to each month. The concept was simple: over the term of the loan, the prepackaged investment portfolio would grow in value and pay the mortgage capital at the end of the term, possibly providing you with an excess of tax-free profit if it performed well.

That was the theory. In reality, the payment vehicle once again had high front-loaded fees and excessive maintenance and management fees that compromised the portfolio’s ability to achieve its function of paying off the loan capital. My mistake once again was not understanding the product and believing the bank’s sales team.

It took the banks nearly fifteen years to admit the product was a total disaster and inform the policyholders. When I became aware of this, I used the value of the massively underperforming fund to pay some of the mortgage capital off and refinanced into a basic repayment mortgage.

Looking back, I can honestly say I was lucky. Just two major financial blunders in forty years is a decent batting average. But those two mistakes, the pension and the mortgage, shared a fatal, expensive DNA. They were both the product of a system designed to look out for the seller, not the buyer.

The real mistake wasn’t taking out the products; the mistake was not reading the fine print and believing the sales pitch instead of the maths. Both products had an identical commonality: they were structured with high, front-loaded fees that immediately cannibalized my contributions, putting me instantly on the back foot. And in both cases, my subsequent inaction, the twenty years of silence on the pension, the fifteen years of slow decline on the mortgage investment, compounded the initial error.

So, if you’re pulling out dusty old policy documents, or even looking at something new today, here is the short, sharp lesson I paid dearly for:

Performance is speculative, but fees are guaranteed: Always hunt for the lowest possible cost, because an extra 0.5% charge will savage your long-term returns.

Sales is Not Advice: The people selling you the product are paid to move stock, not to secure your future. Assume their motivations are purely self-serving until proven otherwise.

Inertia is expensive, financial mistakes compound: If you find a bad product, the only solution is immediate action. Changing providers or restructuring a loan might feel like a hassle, but it’s the most valuable financial chore you can do.

I may have shredded the paperwork for the proof of my mistakes and financial products have moved on. But the lesson is timeless, buyer beware.