How and why to ditch your expensive mutual funds
When it comes to investing, you often get what you don’t pay for.
That means you should own expensive mutual fund products at your peril.
Let me explain….
My financial awakening
I write about personal finance and investing often – heck I have this site you’re reading (!) – and I’ve been blogging for almost 10 years now.
But I wasn’t always informed about how high fees can kill portfolio values over time. Until I dug deeper.
For those that have not been following my journey on this site, throughout my 20s and into my early 30s, I invested my hard-earned money using primarily a couple of big bank mutual funds – inside my tax-deferred Registered Retirement Savings Plan (RRSP).
I didn’t really monitor the performance of these big bank mutual funds until the 2008-2009 financial crisis. When the sky seems to be falling, everyone starts to take notice….
It was during this 2008-2009 financial crisis, that I started asking some serious questions about the performance of my portfolio and what “advice” I was getting from owning these fund products in my portfolio:
- What is this 2% management fee or MER (management expense ratio) for? Who gets paid and why are they getting paid this money? Is this fee per fund?
- Why is my portfolio going down so much when I own a balanced fund? Aren’t bonds supposed to protect me from equity calamity?
- Why do I not get any advice for my fund or this portfolio? I thought this was included in my fund fee anyhow?
- And the list goes on….
Needless to say years ago I was confused, frustrated and downright concerned about my financial well-being.
Should investing really be this hard?
Not all mutual funds are bad funds
No doubt some of my financial immaturity caused me to sabotage my portfolio early on, but all was not lost. My portfolio was growing over the years thanks to a disciplined saving and investing plan. I happened to own modest products that avoided huge risk. I also learned that all mutual funds weren’t evil.
In fact, many mutual funds provide many benefits to investors:
- Mutual funds can provide instant diversification. Many people don’t have the cash to invest individually in a large number of companies/stocks – so a mutual fund allows investors to own positions in a bunch of companies. If a few of these companies don’t do well, no problem, the rest in the fund should offset poor performers.
- Mutual funds can provide built-in professional money management services. Many people don’t have the time, energy or desire to research good stocks, when to buy them, where to hold them, etc. so professionally managed money helps people in this regard. Time has always been precious in our busy world.
- Mutual funds can provide liquidity. Many people, probably everyone at some point, invariably find themselves in some financial emergency and need money for something. Shares of mutual funds can be easily sold and you can get access to the cash; especially if you kept your mutual funds outside an RRSP where tax-deferred RRSP issues don’t exist.
- Some mutual funds can be rather inexpensive to buy. No-load mutual funds exist. These funds don’t charge any fees to buy or sell fund units but they do have operating expenses.
…Just the high fee funds are BAD mutual funds!
Is any 2% fee considered high? Doesn’t sound like much does it?
It’s not really high to answer my own questions, relative to a one-time expense or relative to a small value or purchase.
- 2% of $100 is $2.
- 2% of $1,000 is $20.
- 2% of $10,000 is $200.
But let’s consider the damage of 2% fees with larger values and time involved. Consider this the destruction of value, a very evil and annoying cousin to the magic of compounding.
Example 1 – you invested $10,000 in your 20s but you got busy with kids. Left alone, over 20 years, your 2% fee cost you thousands more in fees versus better alternatives.
Example 2 – you invested $50,000 throughout your 20s but you got busy travelling abroad. Left alone, over 20 years, your 2% fee cost you tens of thousands in fees.
Example 3 – you invested $200,000 throughout your 20s and 30s (awesome work by the way) but you got busy buying a house, with kids, and changing jobs for the next few decades. Left alone, over 20 years, your 2% fee cost you a whopping $125,000+ in fees.
Images courtesy of InvestRight.org (BC Securities Commission) – free calculators are on my Helpful Sites page.
I hope I’ve made my case with these simple examples.
I would think you’d much rather have thousands, tens of thousands or hundreds of thousands of dollars in your back pocket than giving it unknowingly to someone else!?
My own switch – from expensive to lower cost fund products (and wealthier for it!)
Most people know what they know.
Some people know what they don’t know.
But we’re all flawed because we don’t know, what we don’t know.
For years, this was me when it came to understanding financial costs. I was invested in expensive mutual fund products – but I saw the light eventually.
I’ve never looked back…
Years ago, I moved out of high-priced mutual funds by doing the following things:
- I sold all my mutual funds and decided to buy initially broad market Canadian ETF XIU from iShares.
- At the time, because I believed I still needed some bonds in my portfolio, I bought a Canadian bond ETF XBB. You can see an early post on this subject here.
- I researched U.S. stocks since I know I needed to diversify and eventually bought low-cost U.S. ETF VYM. I still own that fund today.
- At the same time I also started buying individual stocks. I figured I would own the same companies that top mutual funds own. Enbridge was one of my very first stocks to own. I still hold that company today…
Thanks to this blog, as a financial diary, fans of this site can now read what I own and have learned over the years on these subjects:
ETFs – While learning about indexing, I’ve also learned some ETFs ride the coattails of stock market returns.
Retirement – I’ve learned that other people, including retirees, have struggled with the same concepts I have. Yet over time, they’ve also dug themselves out of accepting higher cost products as a way to invest – and built some wealthy portfolios in the process. Experiences can be a great teacher, including those from others!
What you can do about your high-cost funds?
Ultimately how you invest and what fees you wish to pay for as you invest is totally up to you.
But if you’re stuck and looking for some help – these are some options that can help you beyond my site.
Option 1 – Build your own indexed fund portfolio
Consider learning about and opening a self-directing investing account! This way, you can buy your own index funds!
(An index fund can track a stock or bond market – striving to deliver market returns less a minuscule money management fees. You can easily get some of the best, most diversified, stock market index products for less than the 0.25% in fees I highlighted above.)
Another popular set of funds are TD’s e-Series funds – do a quick Google to find out what they are. All those TD efunds charge less than 0.50%.
Option 2 – Invest with a robo-advisor
Don’t what to run your own direct investing account, consider use of a robo-advisor. I actually have a partnership with one of Canada’s best in this area – although no obligation! Do what’s best for you!
While a traditional financial advisor might change you 1% or more in money management fees per year, these automated solutions have driven down those costs dramatically! The best thing with these solutions, while the software does all the re-balancing for you, you can still talk to a real person about your financial goals at any time.
Once your portfolio of low-cost funds is established with the robo-advisor, all you really need to do is to make your regular contributions and the robo-advisor will automatically/robotically allocate the right amount of cash to your investments.
Option 3 – Own an all-in-one fund
Thanks to the dawn of these awesome all-in-one funds, you can invest easier and better than ever before!
Life anything in life, you don’t know what you don’t know – but via this blog when it comes to personal finance and investing – at least you have some help.
I’m not a perfect investor.
I’ve made financial mistakes and I will probably make more.
But over time, my poor investing decisions are getting smaller and less frequent. That means more of the money I have invested is working harder for me every year – so I don’t have to work someday.
I hope you will have the same financial options in your future too. Thanks for being a fan.