Thursday, December 07, 2006

I hate fees -- and you should too

Yet another worthwhile issue of MoneySense magazine plunked into my mailbox this week. I highly recommend getting yourself a subscription -- it's easily the best $20 I ever spent for my personal finance education.

A highlight for me was Duncan Hood's column on page 16, entitled Do fees really matter?

It's not available online yet, I don't think, and while I highly recommend buying yourself a copy, I'm going to excerpt a particularly enlightening passage here because it provides mathematical ammunition for why investing fees are the surest, quickest way of eating into your investment returns.

If you invest $100,000 in a standard portfolio of stocks and bonds for 25 years, history suggests you might get an average return of 7%. At that rate, your money would grow to more than $540,000.

But taxes takes the first bite out of that.. If you keep you portfolio outside an RRSP and you earn $75,000 a year or more, you will end up paying taxes on your investment returns of at least 20%, reducing your rate of return to 5.5% a year and leaving you with a portfolio worth just under $400,000.

Once we factor in inflation, which has been running at about 2.5% a year, your return drops to 3%, leaving you with a portfolio worth $200,000 in today's dollars.

The average Canadian mutual fund charges 2.5% per year in fees. That won't take a full 2.5% off yoru returns as fees are deducted before taxes and inflation, but it will do some serious damage, Fees reduce your return to 1%, leaving a portfolio worth $130,000 in today's dollars

At the end of our experiment, the sample portfolio has been knocked down from 7% growth a year to 1% a year. That bleeds the hypothetical $540,000 portfolio into an actual $130,000 one.

$30,000 profit to show for a quarter-century of diligent, diversified investing?

Fees matter. Anything you can do to reduce the amount that is trickled out of your portfolio every year, do it. It all adds up.


If you're paying a financial advisor 2% of your money each and every year to buy you a Canadian index fund, stop. And say it with me: ETFs! ETFs ETFs!

1 comment:

Alex Givant said...

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