Reader B.C. sent the following question about the Management Expense Ratio per Quarter century (MERQ): I have been reading through some of the old posts on your blog, and came across your idea of the MERQ as a more valuable indicator of management expenses than the MER, and I wholeheartedly agree. What is not obvious to me though is what equation you are using to calculate the MERQ. Would you be able to provide me with the equation? I'm sure that I am just forgetting some basic math :-) A fund’s Management Expense Ratio (MER) is the management expenses and certain other fund costs for the year divided by the average assets under management during the year. This is then expressed as a percentage. The problem with this measure is that it gives a low-looking percentage (usually between 0.1% and 3%) that seems harmless. But, this bite out of your savings gets taken out of the same money year after year. Suppose that Fund A’s expenses lead to year-end assets being 2% lower...

Savvy investors know they pay fees to invest in mutual funds and Exchange-Traded Funds (ETFs).  Most of these costs are captured by the Management Expense Ratio (MER).  MERs are calculated by taking the fees charged in a year and dividing by the total fund assets.  By focusing on annual fees, the MER percentage is misleadingly low.  What really matters is how much of your money goes to fees over a lifetime of investing. For someone who begins investing at age 30 and lives to 85, the total investing period is 55 years.  However, the portfolio is small initially and may be small late in life.  When it comes to the cumulative effect of fees over a lifetime, what matters is how long the average saved dollar is in your portfolio from the day you save it until the day you spend that dollar and all the returns it has produced.  For a nice round figure, I use 25 years as the average holding period for saved retirement dollars. This gives rise to the Management...

All investment portfolios have leaks. As you drive that metaphorical portfolio, money leaks like air from a punctured tire. You lose money to trading commissions, trading spreads, ETF and mutual fund MERs, income taxes, lack of diversification, and other costs. We can’t eliminate these costs entirely, but we can shrink the size of the hole. One way to control costs is to trade infrequently. This reduces trading costs and triggers less capital gains tax. For those who embrace the benefits of diversification, Management Expense Ratios (MERs) on exchange-traded funds (ETFs) and mutual funds are a concern. Seemingly low MERs like 2% are actually applied every year, and they add up to big money over many years. To make this clearer, a while back I coined a new 25-year measure called the Management Expense Ratio per Quarter century (MERQ) . To illustrate what the MERQ means, let’s compare the largest Canadian equity fund in Canada to one of the least expensive Canadian equity inde...

Regular readers of this blog are very familiar with the arguments that seemingly small costs can cause big damage to your portfolio over an investing lifetime. To make this more clear, I’ve proposed the MERQ (Management Expense Ratio per Quarter century) as a better measure than a single-year MER. One thing I’ve discovered about the MERQ in casual discussions is that many people simply don’t believe it. For example, the Investors Group Beutel Goodman Canadian Balanced Fund Series A has an MER of 2.89% (as of 2012 Feb. 9) which translates into an MERQ of 51.4%! This means that after 25 years, more than half of your portfolio would be consumed by fees. In contrast, a balanced portfolio of index ETFs from iShares (XIU and XBB) has an MER of 0.235% for an MERQ of 5.7%. So, a portfolio that would have come in at a million dollars without fees would end up with $486,000 with the Investors Group fund and $943,000 with the iShares ETFs. This difference is so large that people are sk...

The typical person will invest for many years, but we express investment costs with yearly percentages that are misleadingly low. I propose that for recurrent costs that accumulate, we use an investing horizon of 25 years to express these figures. For example, instead of talking about a fund's MER, we would talk about its MERQ (Management Expense Ratio per Quarter century). This would give investors a better feel for the effect of recurring costs. In another example, if an investor's portfolio concentration creates a drag on returns, we should look at the effect over 25 years rather than just one year. In a recent article, Jonathan Chevreau observed that Investors Dividend A Fund has an MER over 2% higher than that of iShares Dow Jones Canada Select Dividend Index Fund (XDV/TSX) despite the fact that they have substantially the same holdings. Even if we add 1% to the MER of the iShares ETF to account for the cost of advice, the percentages are 2.69% vs. 1.53%. The di...

Over a lifetime, investment costs take a huge bite out of people’s savings, but many investors don’t understand how they work.  It’s not that they’re complicated, it’s that the final answer seems unbelievable.  How could it be that these fees nearly cut my retirement nest egg in half? Let’s go through some of the misunderstandings. I don’t pay investment fees Some people think that because they never swiped a credit card or wrote a cheque to pay investment fees, they didn’t have to pay them.  This isn’t true.  If you own mutual funds or exchange traded-funds (ETFs), then fees are quietly deducted from your savings.  The total of these fees for the year is called the Management Expense Ratio (MER). The investment returns you see on your statements are net of fees in most cases.  An exception is that some group RRSPs report before-fee returns.  The fact that you see net returns is good in the sense that you see represent what you actually got.  On t...

I’ve resisted discussing my asset allocation for some time, but now is finally the time to describe it and the reasons behind it. I’m not holding it out as a model portfolio; I believe it’s suitable for me and not necessarily anyone else. With that warning, enjoy the discussion and feel free to ask questions or take some pot-shots. The main reason why I haven’t discussed my asset allocation in detail before now is that I don’t want readers to treat it like a model portfolio and follow it blindly. Everyone’s situation is different. The need for variation in asset allocation from one investor to the next usually isn’t huge, but there is no one-size-fits-all portfolio. A secondary reason for keeping my asset allocation to myself is that I can’t be sure I’ll never change it. For example, I recently made the minor change of switching from an ETF of small-cap stocks to an ETF of small-cap value stocks . I don’t have any plans to change my current allocation, but I may think differe...

Just about every other blogger has written a “7 links” post where they choose posts in 7 categories, including most beautiful, most popular, etc. I have resisted this for some time because I knew I would agonize over which of my posts to choose in each category. Thanks to Tripbase and The Blunt Bean Counter for being the most recent to push me to stop procrastinating. On with the 7 links. My most beautiful post Market Timing in Pictures takes you from fantasy to reality. My most popular post My most popular post as judged by the number of comments was where I observed that preferred shares offer a 2% higher return than the interest rate on 3-year closed mortgages . But how large is the hidden risk in this potential arbitrage? My most controversial post In Understanding Ontario’s Switch to the HST , I explained that the HST is not all bad compared to GST plus PST. Some unhappy readers weren’t in the mood for hearing anything positive about the HST. My most helpful ...

In my never-ending quest to clearly explain the devastating effect of investment fees on your savings, I’ve found another way to look at it. Instead of looking at how much of your money gets consumed by mutual fund fees, let’s look at how they affect your retirement age. Suppose that Katie is 30 years old and is just starting out saving in her RRSP. She has set up automatic contributions of $1000 per month. She plans to increase this amount each year to keep pace with inflation. Katie wants to know, “if I plan to draw $3000 per month (in today’s dollars) in retirement until I’m 95, when can I retire?” The answer depends on how her RRSP investments perform. For illustration purposes, let’s assume that her investments beat inflation by 4% per year, before investing fees . Of course, she can’t count on this, and returns vary considerably from one year to the next. But the goal here is to see how fees affect retirement, so we’ll do calculations based on a steady 4% real return. ...

It was my pleasure to be a guest on Preet Banerjee’s Mostly Money Mostly Canadian podcast this week. If you’re looking for entertainment value, at one point I managed to connect investing to Charles Barkley. Many thanks to Preet for taking the time to talk to me. A big welcome to those who’ve landed here for the first time after listening to the podcast. (I’m in a good mood; welcome to everyone else too.) Every week I write somewhere between one and five articles on any subject to do with money. I tend to focus on personal finance rather than macroeconomic issues, and I use mathematical analysis to (ironically) simplify things as much as possible. My biggest benefit from writing this blog is interaction with readers. I’m always happy to learn something new about how the financial world works. The best ways to ask a question or speak your mind are to leave a comment on one of my posts (scroll to the bottom of the relevant post) or use Twitter where I’m @MJonMoney . Down t...

I thought I was going to have to replace the locks on my house doors.  At first I just had to jiggle the key a little to get it in the lock.  But then it was getting bad enough that as I fought with it, I wasn’t sure the key could go in all the way any more.  Fortunately, before I called a locksmith, I did an online search.  The locks just needed a little grease.  I can’t believe how well it worked.  The locks had seemed like they were broken, not just a little stuck. There might be better lubricants for the job [a reader suggested graphite spray as a better solution], but I just used WD-40 in the keyholes.  A few seconds later, the locks were like new.  Don’t forget to hold a tissue or rag under the lock to catch the excess; it can make a mess dripping down your door. Here are my posts for the past two weeks: CPP Timing: A Case Study The Capitalist Code Management Expense Ratio per Quarter Century (MERQ) The Ultimate Retirement Guide for 50+ The ...