Flex your money muscles: Step 5

Reduce the fat!

Hidden costs are the silent killers of your investment portfolio.

Illustration by Jason Ford

Illustration by Jason Ford

Heart disease is called the silent killer because it can sneak up on you with little warning. You can spend years eating a high-fat diet, sitting on the couch without any symptoms, but all the while your arteries are hardening and you’re at risk for a heart attack.

Hidden costs are the silent killers of your investment portfolio: they don’t show up on your quarterly statements, but high fees steadily erode your returns over the years and decades. Mutual fund investors, in particular, often unknowingly pay management expense ratios (MERs) between 2% and 3% every year. These fees must be disclosed, but many investors are oblivious to them because they’ve siphoned off the funds’ returns rather than charged explicitly.

Even a 1.5% difference in fees—which may appear benign—can have a devastating effect on your portfolio’s health. Consider two investors: Diane pays 1% in fees and Jack pays 2.5%. Assume both start with $100,000 and the markets return 6% annually before costs. After 20 years, Diane will have over $265,000, while Jack will have less than $199,000. At the 30-year mark, Diane’s portfolio would be 35% larger. That extra 1.5% in fees reduced Jack’s retirement nest egg by a third.

All of that is pretty grim, but thankfully is also preventable. Just as anyone who is overweight or in poor shape can make positive lifestyle changes, investors can wake up to the true cost of high MERs—and many are doing just that. Perhaps the easiest ways to substantially reduce fund costs is to go with a low-fee, no-load provider such as Steadyhand, Mawer, or Phillips, Hager & North. While these companies don’t provide financial planning services, they will help you build a portfolio that meets your long-term investment needs. Conveniently, they also offer all-in-one balanced funds with a target mix of 60% equities and 40% fixed income. Fledgling investors can open an account at Steadyhand with as little as $10,000 and pay 1.34% for the company’s Founders Fund. A minimum investment of $25,000 gives you access to the PH&N Balanced Fund and its 0.89% MER.

Do-it-yourself investors can reduce their fund costs further by opening a discount brokerage account where a wider array of funds is available (usually with a minimum investment required). If you’re a Couch Potato investor, the cost of a balanced portfolio using TD’s e-Series index funds—available only through TD Direct Investing—can be as low as 0.44%. Once your portfolio grows larger—at least $50,000 or so—exchange-traded funds (ETFs) are the best option, especially if you add new money annually rather than monthly to keep trading costs low. You can build a diversified ETF portfolio for less than 0.30%.

If the process of picking funds seems daunting, there are many free online resource services that can help: Morningstar (www.morningstar.ca) and Globe Investor (www.theglobeandmail.com/globe-investor) are good places to start. Another option is to get the assistance of a fee-based fee-for-service adviser.

Complete all 10 steps for optimal fitness!

Step 1: It all starts with a plan

Step 2: Exercise regularly

Step 3: Eat a balanced diet

Step 4: Avoid unnecessary risk

Step 5: Reduce the fat!

Step 6: The wrong kind of supplements are dangerous

Step 7: Weigh yourself regularly

Step 8: The wrong kind of prepackaged food is dangerous

Step 9: Avoid the fads!

Step 10: Get the right help