Wednesday, August 17, 2011

Mesmerized by the Market

With the high stock market volatility lately, I haven’t been able to keep myself from checking the big swings in my portfolio value from day to day. I know I should focus on other things, but it’s hard not to check how many weeks of pay I’ve gained or lost each day.

Of course, these swings tend to balance out somewhat over time. A week of volatility is less than 5 times a day’s volatility, and things balance out more over longer periods of time. But still, with these big daily swings, it’s hard to believe that tiny little MERs could make any difference. Consider the following example.

Suppose that at the start of the day yesterday you owned $250,000 worth of large cap Canadian stocks in the form of the exchange-traded fund XIU. By the end of the day you would have lost $2477. The portion of this loss that is due to XIU’s MER is $1.70 (based on 250 trading days per year and XIU’s MER of 0.17%). If the MER had been 2.5%, the day’s MER cost would have been $25.

It’s hard to imagine that a $25 cost matters much when you’re making or losing $2477. But as I said, the market swings tend to partially balance out over time. The difference with MERs is that they always point in the same direction: down. It’s like a runner bolting back and forth on a train that is moving at one-tenth of walking speed. At any given time the train’s movement seems irrelevant, but over time the train manages to make a difference and the runner has just gone back and forth.

I’ll probably keep checking my portfolio daily even though I’d be better off reading a novel. Hopefully, I won’t get any bright ideas about how to juice my returns with some sort of trading. Maybe you can guess what’s going to happen tomorrow based on whether the market was up or down on that last two trading days ...


  1.'s mind-boggling that a smart guy like you is still paying MERs. It's cheaper to be in stocks directly and you don't pay anyone for your own inactivity. In fact, you get to decide when to take on transaction costs in your purchases and sales of securities. I've held some of the same stocks for over 15 years, bought more in market panics, and have a comfortable portfolio of growing businesses that sell products every day to people regardless of what the macro economy is doing. There are no MERs while I collect dividends and watch the value of the securities grow.

    Patient accumulation of cash is hard to do since many people have a sense that action is required all the time. People pay MERs to active managers when patient inactivity is often more profitable. Outsized investments when companies are cheaply valued (i.e. when others are panicing) can be done directly in the stock market at a fraction of the cost of the daily MER skimming by mutual funds and ETFs.

    Yes, I have been buying 1 stock heavily during this period. It's nice to see something on sale and heavily discounted from its real value.

  2. I like the train analogy. :)

    I think the problem that the general public has (or doesn't have) with investing fees is that the annual percentage figure just doesn't convey the real cost. 1%, 2%, 3% are all small numbers and don't seem all that significant.

    There are regulatory changes coming in the next year or two which will make financial companies disclose the annual MER in terms of dollars, not just percent. That should help a bit (assuming that some investors read their statements).

    The way I like to think about investment costs is cumulative. After 20 years, how much more would I have if I cut my costs by 1% or 2%? That ends up being a large number I can appreciate.

    @Anon - Every investment has an MER. In your case it's trading fees and the time spent analyzing stocks.

  3. @Anonymous: To be clear, I pay MERs of a small fraction of one percent, not the typical Canadian stock fund MER of over 2%. If I tried to mimic a stock index by buying individual stocks I would pay more in either trading costs from having too many stocks or a drag on long-term compounded return from increased volatility caused by inadequate diversification (for the case of owning a small number of stocks).

    I used to think that I had a better idea of value than the market. I don't think that any more. Good luck.

    @Mike: Glad you liked the analogy -- I put some effort into them. I agree that MER percentages look small and people have a hard time understanding why they are a problem. I would like prospective investors in funds to be told how many dollars they can expect to pay in fees per year for the first 5 years BEFORE they invest their money.