Investment Fees Matter!
I was recently on a baby shower discussing investing strategies (I’m such a geek, I know) and one thing caught my attention, most of the party goers are investing in the stock market (yay!) BUT they don’t do it by themselves, most of them have a Financial Advisor or invest with a Robo-Advisor, that way they leave all the “tough choices” in the hands of experts, or so they think.
My next question was very evident to me: “Do you know what you own?” and “How much are you paying in fees?” and the most common answer was: “No I don’t know what I own” and “Fees? The bank/Robo-advisor/Financial Advisor do it for free!”
What?!?!? FOR FREE?!?!?! Yeah right, you WISH it was for free.
So dear reader, if you own a mutual fund, do robo-investing or have financial advisor taking care of your portfolio, Do you know what you own? and Do you know how much you are paying in fees? But more importantly:
Do you know how much money you are potentially losing by those fees?
Investment Fees Matter! And they matter a lot, let’s do a comparison of how much you are paying (and potentially losing) when you chose a Mutual Fund, a Robo Advisor or decide to DIY Invest with an ETF Strategy.
Mutual Fund vs Robo-Advisor vs DIY Investing (ETF)
For this comparison, I will use the most popular investing funds available that are (up to a point) holding equivalent assets in order to be the least biased possible
Mutual Fund: TD Managed Index Aggressive Growth
Robo Advisor: Wealthsimple Growth Portfolio
DIY Investing: Vanguard Growth ETF Portfolio
Before presenting the first results, I have to let you know about an assumption that I had to use for the model. I gave the same average return of 7% to each fund in order to just show the lost in earnings by fees. Keep in mind that these funds doesn’t have the same performance.
Earnings lost caused by fees assuming same average return year-to-year
(Please remember that these numbers assume the same return for every fund which is not true)
Ok! Putting that table together took me quite some time, now, let’s discuss the findings. For the first important result, I have a baseline of an investment that cost 0% in fees, this type of investment doesn’t exist, but I needed to have a reference line.
As you can see, an initial investment of $10,000 with monthly contributions of $100 for 30 years would have a performance of $189,475 which is incredible! Again, this type of investment doesn’t exist!
Well, no surprises there, that 1.34% in fee doesn’t look bad right? Who cares (I do!) about paying 1.34% year to year for having the peace of mind that a professional is taking care of your investments. How much are you paying for that privilege? $47,937 in 30 years! That’s 35% lost, quite an expensive privilege!
But honestly, if you took the DIY approach of buying the Vanguard Growth ETF Portfolio you would have saved $38,990 in fees! You lost 28% when you compare it with the DIY Vanguard Growth ETF Portfolio.
Wealthsimple – Growth Portfolio
I got to say that I’m impressed with Wealthsimple, is definitely a really great upgrade from the mutual funds. Just by ditching your Mutual Fund and move to the Wealthsimple Growth Portfolio can net you an increase of $28,255 in your final balance (Mutual Fund $141,538, Wealthsimple $169,793). That’s 20% more in the bank just by going from 1.34% to 0.5% in fees!
The Wealthsimple growth portfolio is really nice and easy to build portfolio. If you check their portfolio assets on their website, it gives you the exact asset allocation, so you could technically build the portfolio by yourself and reduce the fees from 0.5% to 0.1%.
DIY Investment – Vanguard Growth ETF Portfolio
This is a fairly new ETF, and it holds Canadian and International Stocks and Bonds, the beauty of this approach is that it automatically provides you a well diversified portfolio by just buying in ETF that can be compared to the TD Mutual fund and the Wealthsimple Portfolio.
If you decide that you want to take control of your investing portfolio, and you want to stop paying fees for having someone else building your portfolio, you could move from Wealthsimple to a DIY Investment Portfolio, buy the Vanguard ETF fund (VGRO) and have 7% more in your final balance just by cutting the fees from 0.5% to 0.22%. That represents $10,735 more in the bank! Not bad eh?
So, this far we have settle on one thing, investment fees matter, and they matter a lot! But I still have one mistake on my analysis, and is the following:
Not all funds have the same returns
This is a big one OK, I did the previous analysis using just the fees of 3 common known funds BUT giving the same performance to all of them of 7%, which is very generous from me, why? Because they are NOT making that in average. The funds used for the analysis doesn’t have the same performance.
So, what is the real performance of this funds and how much money is being lost due to fees?
(2018 returns are from January 1st to June 15th)
There’s a couple things that you have to noticed from these charts, the first is, a 4-year analysis is a very limited one and the reason I had to limit myself to 4 years was because funds like Wealthsimple and Vanguard Growth are fairly new to the scene and don’t have records prior 4 years ago. The second thing is that Wealthsimple and Vanguard Grow have almost an identical performance, but Vanguard provides the performance without charging too much on fees.
Just by giving a quick look to the charts you might say, “Derek, come on, even if I’m paying more in fees for the TD Fund, I’m making more money than on Vanguard and Wealthsimple” Yeah… that’s true up to a point. Yes, you are potentially losing $900 on fees and beating both Vanguard Growth and Wealthsimple (for now), but, you are not beating the most simple and basic investing strategy, Index Investing!
Index Investing – SP500 Index, the benchmark for stock market returns
The S&P500 Index Fund (SPY) is currently beating all of the previous funds, all of them! Not only its beating them all, but you are only losing $58.37 on fees. Now that my friends, that’s how you make money in the Stock Market! By having a simple strategy and paying the lowest fees!
This is the reason why I invest by myself in the stock market. I also recommend that every investor should be a DIY Investor and hold at least 20% of their portfolio on an SP500 Index ETF.
Warren Buffet and John Bogle have said it many times, Index Investing is the best strategy for every stock market investor, and it should be core of every portfolio. Warren Buffet also put his money where his mouth is and won a 10-year bet saying that the Index Fund (SP500) would beat the return of any Fund Manager Portfolio.
Why not a 100% Index Fund Portfolio
Although a 100% Index Fund portfolio is perfectly viable, I love and enjoy researching stocks and the reward that comes with when I pick big winners. In 2018 (by June 15th) I’m beating the performance of the SP500 (3.11%) and Warren Buffet (-2.77%) with my DIY Portfolio (16.22%). How am I doing it? By having a balanced portfolio that contains Index Funds ETF, Growth Stocks and Dividend Stocks.
But not bonds… I can talk all day about why I personally dislike bonds so much for young investors (under 45 years old) but that would be material for another post. All I have to say on this post about bonds is, if you have 20 or more years before retiring, I wouldn’t allocate any part of the portfolio for bonds, because you have plenty of time in the market to recover from any crash. Keep in mind that I’m not a CFP or CFA, so please, before making any decisions, do your own research! (And don’t sue me lovely reader 🙂 )
You have to take control of your investments and financial future
I have shown 2 very important things on this post:
1- Investment fees matter, and they matter a lot, it can take up to 35% of your return on a 30-year investment, and that is simply too much for the privilege of having someone else taking care of your finances
2- DIY Investing can be very simple and rewarding! Plus, it gives you bragging rights every time you beat the performance of Warren Buffet! 😀
If you are ready to invest but don’t feel ready to do it all alone by yourself, you can give Wealthsimple a try, like I mentioned before, Wealthsimple have a really nice Portfolio allocation and will do all the buying and selling for you for a really low fee that no one else can beat (well, you can beat it by going DIY 😉 )
If you liked this post and would like to learn how to invest, make sure to get my free investing course!
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