I enjoy talking about investing and have had discussions with a great many people with widely-varying investment knowledge. Over the next three days, I will be going over some of the common costly mistakes that people make in the course of investing with their financial advisors. The first mistake is repeatedly getting hit with back-end loads on their mutual funds. What is a back-end load? A back-end load is a percentage of your investment that you pay when selling out of a mutual fund. Other names for this are “contingent deferred sales charge”, “redemption fee”, and “exit fee”. A common arrangement is for the mutual fund to charge 5% if you sell within the first year, 4% if you sell in the second year, and so on until the back-end load drops to zero after 5 years. In such cases, the fund typically does not charge a front-end load. You may wonder how the fund could afford to eliminate the back-end load after 5 years if they had to pay the financial advisor at the beginning wit...

Many people have investments in the form of retirement savings. For Americans, this might be a 401(K) or IRA, and for Canadians, an RRSP. Often these investments have been set up by a financial advisor. I have dealt with many financial advisors over the years and have learned a few things. 1. Competence. Most financial advisors seem to be well-meaning people who don’t know as much as you might hope about investing. I’m sure that there are exceptions to both the well-meaning part and the competence part. 2. Main focus of the job. Their job is more of a mutual fund salesperson than what most people would think of as a financial advisor. 3. Individual Customer Attention. The comprehensive personal financial assessment that they perform with each client seems mostly geared toward figuring out how much they can get you to invest in mutual funds. 4. Conflict of Interest. The amount that financial advisors get paid varies from one mutual fund to the next. The funds they choose should be b...

So what if the Management Expense Ratio that I pay on my mutual funds is 1% or 2% or 3%? If I’m planning to at least triple my money before I retire, why should such tiny percentages concern me? The short answer is that the MER is collected on the same money year after year, which makes it really add up. The government may take one-third of your income every year, but at least they don’t tax the same money as income again. Imagine if instead of taking one-third of your income the government added up the value of everything you have and demanded one-third of that every year. “Let’s see ... your house plus the rest of your stuff is worth about $450,000. That makes your taxes $150,000 this year. Pay up.” The MER is more like property taxes; you are taxed on what you have instead of what you make in a year. However, property tax rates are much lower than income tax rates. In my area, property taxes amount to between 1% and 2% of the value of a property each year. And at least the city ...

The people who run mutual funds have to eat. They also have to pay commissions to the people who sell units in mutual funds to the public. Other expenses include the cost of buying and selling stocks and paying for those slick commercials on TV scaring you into believing that you can’t do this investing stuff alone. Where does the money to pay for all this stuff come from? Well, mutual fund managers could look for nickels on the sidewalk, but it’s easier to take some of the giant pot of investor money invested in the mutual fund. The percentage of investor money taken for these expenses each year is called the Management Expense Ratio, or MER for short. A quick look through the Morningstar data on mutual funds shows that for U.S. funds holding at least $100M of investors’ money, the MERs tend to be around 1%. There is some variability, though. For example, the Vanguard 500 Index only charges an MER of 0.18% per year, while the Alpha Hedged Strategies Fund charges 3.99% per year. ...

One day at work I saw a sign advertising a free seminar hosted by my employer about investing and retirement savings plans. It just so happened that I was starting to think about putting some money away for retirement, and so I went to the seminar. An energetic guy named Mike gave a slick presentation with lots of graphs that I couldn’t completely follow, but I was left with the impression that Mike and his firm knew what they were doing, and that people could do very well financially by investing. Another plus was that my company’s employees would not be charged the usual yearly fees for Mike’s services. I approached Mike, and we set a time for my wife and me to meet with him at his office. After some discussion, we agreed that we would invest in a couple of different mutual funds, but as we were getting ready to sign papers and hand over most of our savings, I had a strange feeling that something wasn’t right: we didn’t seem to be paying for Mike and his company’s services. The new...

I thought I’d jot down what I have learned about personal finance and investing over the course of several years of reading books and asking questions. It turns out that most of what is written on this subject is not useful and often seems designed to confuse and scare people. The truth is actually not very complicated. A good example is the mutual fund. Many people own units of mutual funds in retirement savings without knowing much about them. Here’s a little story that is hopefully more useful than the usual dry definition. What is a mutual fund? We are bombarded with ads telling us to buy mutual funds. But, what are mutual funds? It’s a good idea to have a basic understanding of what mutual funds are before ploughing years worth of hard-earned income into them. To start with, let’s go back to a time years ago when there weren’t any mutual funds. An average guy we’ll call Jim heard some good things about the stock market, got curious, and spoke to a stock broker about buying...

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