This picture makes use of Robert Schiller’s monthly historical data on the U.S. S&P 500 index. Although, I’d prefer to use Canadian stock market figures, U.S. figures are easier to get, and the results would look much the same for Canadian stocks. I traced the path of a $10,000 investment 50 years ago under three different conditions:
1. The money follows the S&P 500 with dividends. We track real returns, meaning that the effect of inflation is factored out.
2. The money follows the S&P 500 with dividends less MER fees of 0.17% per year. This is the MER level of the widely-popular iShares large capitalization index of Canadian stocks (XIU).
3. The money follows the S&P 500 with dividends less MER fees of 2.5% per year. This is the MER level of a typical Canadian stock mutual fund.
Here are the results:
As the chart shows, a 0.17% MER ETF tracks its index fairly closely, even over 50 years. However, the 2.5% MER has decimated returns. The final portfolio value is less than one-third of the value for the lower MER.
Although a percentage like 2.5% sounds like a small figure, it gets deducted from the same portfolio year are year and eventually adds up. Like the flow of water slowly carving a groove in rock, MER costs slowly carve away a big chunk of your savings.
Update: A reader, Thicken My Wallet, asked what the chart would look like if the MER were set at 1%, which is the fee level set by many newly-issued ETFs. Ask and ye shall receive:
As we can see, the 1% MER took quite a bite. The final portfolio value is more than 1/3 less than in the 0.17% MER case. Even fractions of a percentage point matter over an investing lifetime.
Michael, I just don't see a future for you in mutual fund marketing. That chart is scary.
ReplyDeleteGene: Maybe mutual funds could pay me to not talk to their customers :-)
ReplyDeleteGreat post Michael!
ReplyDeleteWhat is a 'small' 2% fees after all? Every serious investor should be able to answer the following question: how much does it cost to manage my money and how will that affect my returns?
Anonymous: I'd like to see MER fees reported as fees charged per decade or even better, 25 years. The percentages would look bigger and would better reflect the real cost to long-term investors.
ReplyDelete2 per cent cost vs. seventy-five per cent cost. This should be above the fold on every fee-for-service advisor's site. Thanks for this.
ReplyDeleteI started out with Investors Group years ago. Apparently I had signed a piece of paper acknowledging that the MER was [at the time] 3.2%. I didn't know what an MER was.
ReplyDeleteA decade or two later, I read a blog article that declared, "Canadians will lose approx 50% of investment profits, over their lifetime, to MERs.
What is this MER you might ask ?
As you have precisely explained, it is not [with an MER of 3%] 3 dollars on every 100 you have made......it is the FIRST 3% of the 6% gross you made;
6% minus a 3% MER equals 3% OR in effect, 50% of your profits right down the drain to the 'actively managed' RRSP manager !
This is what I did not understand; I have since made it a point to bring this up with family, friends and acquaintances over the past few years, and with one(1) single exception, all were unaware of this little fact. They all believed a 2% 'Commission (MER) means paying 2 dollars for every 100 you make.
Hogwash.
Actively managed fund MERs are the greatest scam ever perpetrated on mankind, next to Realty industry commissions.
@T Reashore: I wish you the best of luck spreading the message. I'm trying to do the same.
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