Mikestrathdee’s Blog


Higher fees the price paid for not learning about investing
January 21, 2011, 10:17 pm
Filed under: Investing

published in the January 2011 issue of Christian Week Ontario, Your Money column

 

How can I avoid paying such high fees on my investments?

This question is increasingly common at financial literacy seminars.

Canadians are not that financially literate. We also pay some of the highest mutual fund fees in the world.

Getting a better understanding of your investments, and whether you are getting good value for money invested, would be a great New Years’ resolution. It will have lasting impact on your financial future.

Excessive mutual fund fees are the price we pay for  not educating ourselves about investing. We pay too much because we naively expect someone else to look out for our best interests.

Ratings agency Standard & Poor’s regularly studies how actively managed mutual funds perform compared to the index for various fund categories. (An index is a measurement of the ups and downs of a particular market by monitoring a group of securities over time).

S&P gives failing grades to the mutual fund industry.

In the first three months of 2010, six out of every 10 Canadian equity funds did worse than their index. The same results were found for funds made up of smaller and medium sized companies (Canadian Small/Mid Cap equity, in industry jargon).

Some types of mutual funds did better than their index during the period studied. But over a longer period of time, the poor record of most mutual funds looks even worse.

In the three and five year periods ending March 31, 2010, only 10.9 per cent and 3.3 per cent of actively managed Canadian equity funds  did better than the S&P/TSX Composite Index.

The picture isn’t much different for actively managed foreign mutual funds. Less than one in 10 International equity or U.S. equity funds did better than their respective indexes, S&P found.

Author John Lawrence Reynolds’ “The Skeptical Investor – How to Grow and Protect Your Retirement Savings” is a good start for people who haven’t thought much about the fees they are paying, and what possible alternatives might be.

For people who have a bit more understanding how the markets work, there are lots of places to go for ideas.

Two of my favourites are the Money Smarts blog, www.moneysmartsblog.com/, and Money Sense magazine.

Mike Holman, a Toronto-based writer who pens the MoneySmart blog, worked in financial services for several decades. His blog combines articles written from his own experience and links to insightful pieces on various topics related to investing and personal finance from a number of other blogs and websites.

Money Sense magazine, and its www.moneysense.ca website, provide lots of ideas of cost-effective ways to invest.  For people who want to deal with a stock broker or set up their own self-directed account, their “couch potato” approach is worth considering.

For people with smaller portfolios, at least one major bank offers e-series index funds that are much less expensive than regular mutual funds. But you won’t find it prominently advertised, as other products make them bigger profits.

Another alternative is to hire a fee-only financial planner to evaluate where you are at and what a suitable investment mix would be for your age and stage of life. More on that in my next column.

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