A $3627 lesson in investing

Now that I'm a middle-aged man, I have a new problem. I've paid off my student loans, along with all my credit card debt, and contented myself with driving a ten year-old used car. I've saved up for my kids' future college expenses, and just locked in a 2% fixed interest rate for my mortgage refinance.

The problem is this: now that that I'm in a position to save money, what should I do with my it?

I've tried managing my own investments in the past. I got a subscription to Barron's Weekly, but their advice was no panacea. Given the way the Rio Tinto stock I'd bought took more than four years just to break even, I got the impression their writers were using a worthless crystal ball.

Then, last year, I moved my traditional and Roth IRAs to Edward Jones. Despite all the COVID19 craziness, they've done well, but I wanted to see how well. After going through all my statements from the past year, here's what I've learned.

First, Edward Jones is not bad. If you have no idea at all what to do with your money, Edward Jones is a step up.

With that said, it's not the best option, either.

To explain, let's consider their business model. Investment managers make money by helping people manage their money better than what they could do themselves. They charge fees to pay their staff, which is legitimate, but those fees come in the form of bumped up stock prices when you buy.

For example, in my Roth IRA my portfolio manager bought for me (among other things) 123.938 shares of MRGAX for $38.48 each on February 20th. According to MarketWatch, the price for that mutual fund on that day was $36.70. That's a 4.85% markup, totaling $220.61, just for the service of picking that particular fund and buying the shares for me. [Source]

With all the other funds I bought for my Roth IRA, the amount of fees I paid that day totalled $2,011.

Considering that those funds would go on to return $3660 by the end of the year, it wasn't a bad deal, but it's worth noting that Edward Jones would have gotten their fees regardless of what the return on investment was, or even if I'd lost money.

Compared with other active fund managers, Edward Jones has no *consistently* better ideas on what to do with other people's money. They're not evil, but they are self-interested, and that's hardly encouraging. After all, if someone else's advice isn't consistently any better than anyone else's, there's not much point in paying a premium for it.

I recently finished reading a book called "Millionaire Teacher." It's a financial advice book from a former public school teacher whose frugality and investment allowed him to become a millionaire by the time he was 45. (And a pointed rebutal to "Delia" in this Vox article.) In it, he offered some key financial advice.

One of the best is to buy into funds that minimize the types of fees I just described. Quoting Warren Buffett, as found in the 2014 Berkshire Hathaway annual report, "My advice to the trustee could not be more simple: put 10 percent of the cash in short-term government bonds and 90 percent in a very low cost S&P 500 index fund."

Had I opened a Schwab account on February 20th instead of using Edward Jones, I could have applied those $2,011 in fees toward more buying shares of their S&P 500 fund (SWPPX). AND It would have returned 10.48% instead of 8.27%.

In other words, I could have done a better job with my own money if I'd followed Warren Buffet's advice from the beginning – to the tune of an extra $2255.

Going forward, I'm not going to close my Edward Jones account. Doing so would only incur even more transaction fees, which is exactly what I'm trying to avoid.

Rather, I'm going to channel future savings toward those low-administrative-cost index funds, and not worry about "beating the market." Between my two IRAs, this past year taught me a $3,627 lesson. There's no need to spend any more.