While I was in a line up at the grocery store checkout this past week, a lady in front of me was buying a dozen cans of cat food. The gentlemen behind her made a joke and said, “No retirement plan?” Everyone found it funny and I was a little jealous I didn’t come up with the joke.
But it got me thinking, why would anybody want to eat cat food in retirement when cans of people food are cheaper? For example, 1 can of 85g cat food is $0.60 whereas a 200g can of salmon is $1.35 ($0.05 cheaper if you go by weight), a 284ml can of soup is $1.05, and a 398ml can of Chef Boyardee pasta is $1.29. All are cheaper by weight.
You get the point. Cat food must taste better?
Mutual fund MER
So what does this have to do with personal finance? Last week’s post Management-Expense-Ratio-MER I wrote about how much MER can affect your portfolio.
There are many ways to skin a cat and a lot of people are still in high cost mutual funds; $1,467,000,000,000 worth in Canada. I did not find the statistics but some of the almost 1.5 trillion would be in group or employer-sponsored plans in which you have little choice but invest in mutual funds (cat food). The vast majority would be through the banks or independent financial advisers.
In 2016, the number of Canadian mutual funds that focused on US stocks that outperformed the index was zero. Investors in these funds are still paying the full MER. Remember, the average management expense ratio in Canada is 2.53%.
On “Interesting Stuff on the Web” I posted an article from Bob Brown Six Themes That Will Drive the Next Five Years where he gave his forecast for equity returns of about 6% over the next 5 years.
One reader of my blog commented “If you take into account the 6% return on stocks after the 2% inflation forecast gives us a real return of 4%. Let’s say the tax man takes 20% then we are down to an after tax real rate of return of 3.2% much of which will come from dividends. If you give up another 2%+ in expense ratio, an investor might as well put their money in long term certificates of deposit and eliminate risk.” I couldn’t say it better myself.
Mutual Funds Fees
It is important to note that all rates of return are published net of fees. For example, if the fund shows a 10% return, it actually earned 12.50% but the MER was removed already. You will never see this fee as it is taken off the fund usually on a monthly basis.
Front end load
This fee comes right off your investment. For example, if you are investing $10,000 and you pay a front-end fee of 2%, you will pay $200 for the purchase and $9800 will get invested. Paying a front-end fee means you have less money at work.
Back end load
A back end load is different in that you do not have to pay anything up front. You still pay the MER usually monthly. However, the mutual fund company has locked you into a 6, 7 or 8 year time frame where, if you leave their company before a certain time, you will have to pay a penalty for leaving early. The longer you stay with the fund company, the smaller the fee. Typically, you can still move your funds around within the same company without triggering fees.
Some would argue, that for the 2.5% fee you are getting financial/tax advice from professionals, and that is fine as long as you understand what fees you are paying.
It’s like buying cat food instead of people food in retirement. Active vs passive (what tastes better). As long as you understand the fees you are paying and the services you are receiving for that 2+% MER. If you use the cheaper options out there, you might have a enough left over to buy the really nice organic cat food.
Disclaimer: No cats were harmed in this post!!