I totally understand that not everybody could be or wants to be a DIY investor. As a matter of fact, I think that financial advisors and brokers (I mean the honest ones amongst this group, hahaha!) have a real utility for most investors. They will provide solid financial advice, will take care of retirement planning for you and will also manage your funds. These services obviously have to be charged, nothing is free. However, have you ever took a second to consider how much you pay in fees and transaction costs and how it will affect your portfolio in 10, 20, 30 years? Yeah I know, it takes too long to build the excel chart, right? Let me do it for you!
One Situation – Four Scenarios A young investor at the age of 30.
Investing $5,000 per year on January 1st.
He plans on retiring at the age of 60 (so 30 years worth of savings).
At the age of 60, he wants to withdraw money for the next 20 years (so until he is 80).
Average investment return before fees at 5%.
I’m not considering the rate of inflation since I’m not doing a retirement plan, I just want to highlight the difference of management fees and transactions costs in one’s account over the next 30 years.
Scenario #1 & 2 Investing in Mutual Funds The classic response for most young investors is to start with mutual funds. This is not a bad idea, especially if you don’t know much about the stock market. It will give you a better picture of how it works and how money is managed. For scenario #1 and #2, I’ve taken the hypothesis of an investor using mutual funds to grow his nest egg.
In scenario #1, our young fellow is taking the first mutual fund available and invests with a management fee of 2%. In scenario #2, the investor manages to find a cheaper mutual fund at 1% MER.
Scenario #3 & 4 DIY Investor with an Online Broker For the other two scenarios, I’m considering that our investor likes to read about the stock market and prefers to invest by himself. Scenario #3 shows the results if he picks the first online broker he sees and pays $15 per transaction. Assuming he makes 10 transactions (buys or sells) per year, this total to $150 in transaction fees. In scenario #4, our young investor does his research and finds a quality online broker at $4.95 per trade. He does the same 10 transactions to either buy more stocks or to manage his asset allocation.
The Results in 1 Graph You can probably tell by now that scenario #1 and #2 will affect our investor’s retirement plan greatly since the fees grow according to the value of the portfolio. But the graph will definitely show you how a 1% MER fund represents so much money over 30 years of savings and 20 years of retirement.
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The Shocker in 1 Chart The chart shows clearly that investing with MERs as a percentage of your assets is a killer. The following chart will show you that even if you pick an online broker, even the small difference of paying $4.95 per trade instead of $15 makes a huge difference. We are talking about $12,000 more in your pocket over the long haul. I don’t know about you, but $12,000 is a lot of money!
|Scenario||Investment Value Peak||Total Fees Paid||Amt Available at Retirement||Total Withdrawals|
|2% MER||$240 848.41||$120 287.57||$15 000.00||$300 000.00|
|1% MER||$289 078.69||$70 373.30||$19 700.00||$394 000.00|
|$150 Trades||$338 838.12||$7 650.00||$25 000.00||$500 000.00|
|$49.50 Trades||$345 515.23||$2 524.50||$25 600.00||$512 000.00|
About the author:----------------------------
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"