| |
 |
  |
|
| News Articles Stocks DRPs Brokers Links Free Newsletters |
| Rothery Report: Login Learn More Performance Sample Subscribe Contact Us |
Active at Passive Prices
Unbundling ETFs 2008
5 Stingy Stocks for 2008
5 Graham Stocks for 2008
Is your index too active?
Graham's Simple Way
Canadian Graham Stocks
5 Stingy Stocks for 2007
8 Graham Stocks for 2007
Top SPPs
The Simple Way
A hole in your IPO?
Monkey Business
8 Stingy Stocks for 2006
Graham Stock Gainers
Blue-Chip Blues
Are Dividends Safe?
SPPs for 2005
Graham's Simplest Way
Selling Graham Stocks
RRSP Money Market Funds
Stingy Stocks for 2005
High Performance Graham
Intelligent Indexing
Unbundling Canadian ETFs
A history of yield
A Dynamic Duo
Canadian Graham Stock
Dividends at Risk
Thrifty Value Stocks
Stocks in Short Supply
The New Dividend
Hunting Goodwill
SPPs for 2003
RRSP: don't panic
Desirable Dividends
Stingy Selections 2003
10 Graham Picks
Growth Eh?
Timing Disaster
Dangerous Diversification
The Coffee Can Portfolio
Down with the dogs
Stingy Selections
Frugal Funds
Graham Revisited
Just Spend It
Ticker Temptation
Stock Mortality
Focus on Fees
SPPs for the Long Term
Seeking Solid Stocks
Relative Strength
The VR Approach
The Irrational Investor
Value Investing
Eye on PI
MoneySense Articles
Income 2008
Small stocks, big profits
Cdn Top 200 2008
US Top 500 2008
Value that sizzles
So simple it works
Income 100
No assembly required
Investing by the book
Cdn Top 200 2007
US Top 500 2007
Invest like the masters
A simple way to get rich
Top Trusts 2006
Stocks for cannibals
Car bites dogs
Cdn Top 200 2006
US Top 1000 2006
So easy, so profitable
Top Trusts 2005
Dogs of the Dow
Top 200 2005
Money for nothing
Yield of dreams
Return of the master
Advisor's Edge Articles
Passive Rebundling
Doing the math
Norm Speaks
Investors track performance with an intensity that can cause them to overlook high fees. Most can save thousands of dollars a year by simply buying low-fee funds and trading infrequently.
Although it may seem strange, some investors don't realize that they pay an annual fee for their mutual funds. This fee is called the Management Expense Ratio (MER) and is detailed in a fund's prospectus. The MER is a percentage that is automatically removed from a fund's performance. So, if your fund's investments gained 10% last year and it charged a 2.5% MER then its reported return would have been 7.5%. In this way the fee is hidden in the fund's performance numbers.
The fees vary depending on fund type and may appear modest (See Table 1). However, due to the magic of compounding, these fees can take a big chunk out of your portfolio. Figure 1 shows the percentage of a portfolio that is consumed by fund fees assuming that the fund grows at 10% a year. In this case, after 25 years with a fund that charges 3% you would get half the profits and the fund the other half. Moving from percentage to dollar terms, Table 2 shows how much the investor pays for different MERs depending on the amount invested. A MER reduction of one percent can amount to thousands of dollars in annual savings for larger portfolios. For instance, if you have a portfolio worth $200,000 and reduce its MER from 3% to 2% you will save $2,000 in fees each year. Not only that, but after 25 years you will have kept about 65% of the gains instead of only 50%. As a result, it's prudent to weight both performance and fees equally when selecting funds.
| Table 1: Average MER for various fund types | |
| Fund Type | Average MER |
| Canadian Equity | 2.42% |
| U.S. Equity | 2.54% |
| International Equity | 2.54% |
| Specialty Equity | 1.85% |
| Resource Equity | 2.82% |
| Balanced / Asset Allocation | 2.42% |
| Dividend | 2.17% |
| Mortgage | 1.86% |
| Real Estate | 2.63% |
| Canadian Bond | 1.77% |
| Foreign Bond | 2.01% |
| Canadian Money Market | 1.12% |
| Foreign Money Market | 1.51% |
| Source: www.fundmonitor.com | |
| Table 2: Annual Fund Cost | ||||||
| Management Expense Ratio (MER) | ||||||
| Investment | 0.5% | 1.0% | 1.5% | 2.0% | 2.5% | 3.0% |
| $10,000 | $50 | $100 | $150 | $200 | $250 | $300 |
| $20,000 | $100 | $200 | $300 | $400 | $500 | $600 |
| $50,000 | $250 | $500 | $750 | $1,000 | $1,250 | $1,500 |
| $100,000 | $500 | $1,000 | $1,500 | $2,000 | $2,500 | $3,000 |
| $200,000 | $1,000 | $2,000 | $3,000 | $4,000 | $5,000 | $6,000 |
| $500,000 | $2,500 | $5,000 | $7,500 | $10,000 | $12,500 | $15,000 |
| $1,000,000 | $5,000 | $10,000 | $15,000 | $20,000 | $25,000 | $30,000 |
Another common investment mistake is trading too frequently. Each trade may incur a commission but more importantly causes gains to be taxed. Figure 2 shows the performance of three investors who pay 20% of any gains to the taxman. The "Buy-and-Hold" investor gains 10% annually and is taxed only in the last year. The "Yearly Trader" also gains 10% annually but pays taxes each year due to frequent trading. The difference between the two is noticeable. Over 25 years compounding helps the buy-and-hold investor to the tune of about 1% annually.
It also turns out that most investors are poor market timers. In the 1995 edition of The Journal of Portfolio Management, Stephen Nesbitt showed that fund investors lost about 1% a year by switching funds at the wrong time. I suspect that similar results hold for many stock pickers as well. The "Average Trader" in Figure 2 suffers from a 1% return reduction and only gains 9% annually. Of the three, the long-term buy-and-hold approach appears to be the most desirable on many fronts.
Combining a low fee approach with a buy-and-hold strategy can pay big dividends for most investors. Your should look for savings in your portfolio.
First published in April 2001.
|
|
| About Legal | Contact Us |