Preet over at Where Does All My Money Go recently discussed the importance of paying attention to investment fees. In a lighter moment, he had some fun with a fund screener and listed funds with yearly MERs above 8%! To appreciate how ridiculously high this is, you need to see the effect over a long period of time.
As I have discussed before, MERs are paid every year, and investors have to be cautious about comparing them to one-time costs. After one year in a fund charging an 8% MER you would still have 92% of your money. The next year, though, the fund would take 8% of your remaining 92% leaving you with 84.64% of your money.
Over 25 years, an 8% MER would chew up 87.5% of your money. Suppose that your initial investment grows to $250,000 after 25 years. If you didn’t have to pay the 8% MER, you would have finished with $2 million!
Things get even sillier with the worst fund Preet listed: “Dynamic Power Hedge Fund-F” with an MER of 13.94%. I’m not sure what this name means, but it does a better job of distracting us from its high fees than something like “Stodgy Limp Noodle Fund-Z.” After 25 years in this fund, 97.6% of your money is gone. If the fund’s managers were to re-invest the MER they collect from you back into the fund for 25 years, for every dollar of your money left in the fund, the fund’s managers would have over $40.
Don’t let these high MERs desensitize you, though. Anything over 2% looks outrageous to me. Even a 1% MER takes away 22% of your money after 25 years.
I would like to see funds have to report their MER25, which is 25 years worth of expenses rather than just the one-year MER. When comparing a 2% MER actively-managed mutual fund to a 0.2% MER index fund, both percentages seem trivially low. But their MER25s are 40% and 4.9%. This gives a better picture of the damaging effect of fees.