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In a previous post I recounted how luck and stupidity kickstarted my retirement savings journey, but I glossed over one important detail: the cost.
In the mid-eighties, high-fee front-loading was standard practice, and these products were typically sold by people whose entire compensation depended on shifting them. The pressure to sell was enormous, and the salespeople were good at their jobs.
My twenty-year-old self walked straight into one of them. He was slick, he was persuasive, and he played on the benefits to my future self while glossing over what any of it would actually cost me. I didn’t understand what I was signing, and I suspect he knew that. In any honest account, I was being taken advantage of.
And yet. I’m genuinely grateful.
The reason comes down to something simple: time in the market is the single biggest driver of long-term returns. Not timing. Not stock picks. Not discipline or vision or any of the things people write books about. Just duration.
Without that pushy salesman doing what pushy salesmen do, I almost certainly wouldn’t have started saving for retirement until my mid-thirties at the earliest. Maybe later. Whatever fees he extracted would pale against the compounding I would have forfeited.
By the time I was forty and actually started thinking seriously about retirement, the foundation was already there. Twenty years of compounding and dollar cost averaging had already done their work. I had a substantial portfolio and I hadn’t even been paying attention.
That’s when I started educating myself properly — understanding fees, reading about how investing actually works. Vanguard was transforming the industry at that point, dramatically cutting the cost of index investing, and I moved my portfolio across. The same money started working considerably harder.
So yes, I was ripped off. I was twenty years old, I didn’t read the small print, and a commission-hungry salesman walked away with more of my money than he deserved.
But he also started a clock that I wouldn’t have started myself. And in investing, the clock is almost everything.
I sometimes wonder how many twenty-year-olds, now fully protected from pushy salesmen, are also fully protected from the conversation that changes their life. The industry cleaned itself up, and rightly so. But nobody’s starting that clock anymore.
Mark, I have also written about this before. I turned 30 in 1983. I opened my first IRA and began saving (I’m pretty sure the limit was $2,000 per year) for retirement because my employer offered neither a pension nor a 401(k) plan. An acquaintance had suggested I open the IRA with Vanguard, so I was able to skip the high pressure and high sales load scenarios that you experienced.
My experiences with limited partnerships and time shares turned out to be money losers rather than lucrative investments, so I did have some learned lessons along the way. 🙁
But you and I both benefitted from the hold ’em philosophy. I learned that from my Dad. If I bought something, it was because I thought it was worthwhile and that it would pay off in either the short term or the long term. Overall this has worked very well for me. However, some things I’ve held for a very long term will punish me if/when I sell them due to capital gains taxes.
Jeff, thanks for the link to your article — what a rollercoaster! Your resilience and determination to keep your retirement on track is really impressive, hats off to you. Time in the market is undoubtedly the greatest engine we have, and I suppose a capital gains problem is better than the alternative! That said, I’m grateful my UK equivalent of an IRA is fully exempt from capital gains tax, so at least I only need to focus on managing income tax when I start making withdrawals.
Mark, I have two separate accounts. Here’s my over-simplified response: My IRA proceeds, when withdrawn, are counted as regular income. My investment account proceeds, when withdrawn, will have gains computed between the original purchase price and the sold price. I don’t really plan to withdraw from this account. My best-laid plans are for the kids to inherit this account and benefit from the basis step-up that would happen when I croak.
Mark, I think many of us got our start like you, I know I did. I understood the loads, after all, the salesman had to get paid somehow, and they were transparent (if you read the prospectus). What wasn’t transparent was that the salesmen were often using 4th quartile proprietary funds. I guess those were the days before strict fiduciary regulations.
One thing is for sure, I do not want to know how much more money I could have had sans loads and lousy managed mutual funds.
Dan, understanding what you’re signing up for is absolutely the sensible approach — though I’ll admit I didn’t, which says a lot about how naive I was back then! It’s probably a good argument for having a more experienced adult in your corner when younger generations are making financial decisions.