You know that you need to be saving for retirement – but if you hope to meet those $1 Million+ retirement nest eggs that the experts talk about needing to see you through your golden years, you’ll likely need to do more than just save. If you’re like most Canadians, you’ll want to see your money grow while you work and plan for that delightful day when you’ll walk out of the office for the last time.
A lot of first-time investors are intimidated by talks of picking one stock over another, or how to choose the best “5-star mutual fund”. They run the risk of reading news headlines about bull and bear markets, or interest rate decisions that are going to sink or buoy the overall economy, and end up experiencing paralysis by analysis. The truth is that very, very few investors can predict what stocks or bond markets will do in the short term, and none of them can actively control what the overall market will return.
Money Saved = Money Compounded
The one thing that all investors CAN control is how much they pay in investment fees. Trimming how much you pay in order to invest your money isn’t flashy and won’t win you your own show on the business TV channels – but it will supercharge your retirement investments!
It’s basic math: The more of your hard-earned money that you can keep working for you inside your investment portfolio, the more compounding and growing it can do on your behalf. Reducing fees by a couple of percentage points might not seem like the stuff millionaires are made of, but it can make a massive difference over the course of several decades of nest egg building. Fees and commissions are often charged on your overall portfolio no matter how it performed that year. That means that if your investments made 7% that year – you might only see 4.5% growth in your investment account due to other entities taking their cut. When you think about those raw numbers, it’s technically true to say “the investor paid 2.5% in fees”, but it’s equally correct to say, “the investor lost nearly 36% of their returns in fees”. When you consider how compound returns work, losing 36% of your returns when you’re just starting your investment journey can mean hundreds of thousands of dollars difference decades later.
Oh, and by the way, when the stock market has a bad year and you lose 15% – you still have to pay that 2.5%. Talk about adding insult to injury!
By investing online you can cut your investment costs to the bone. Discount brokerages have competed against each other over the last couple of decades and the result has been a massive win for investors who are willing to open online trading accounts and handle their own portfolio decisions. Gone are the days of $30+ fees on every trade. In their place are $5-$10 per-trade costs, with very few account fees for most Canadians with $5,000+ to invest. Now, that being said, those $5-$10 per-trade costs can add up in a hurry – especially when you think about them as a percentage of a relatively small account. Comparing the MERs and other fees on ETFs and traditional funds that you purchase through a discount brokerage account, then adding in the per-transaction costs, gives you close to an “apples-to-apples” look at investment costs. This is especially important when comparing to leading low-cost mutual funds like Steadyhand or one of Canada’s robo advisors.
Two Strategies that Keep Costs Low
For many years, if you wanted to quickly diversify your investments and didn’t want to go through the trouble of buying and selling individual stocks and bonds, mutual funds were your only option. With the rise of online investing, you can efficiently diversify your portfolio by purchasing 2-4 Exchange Traded Funds (ETFs). If you do a little reading on “passive investing” (aka “couch potato investing” or “index investing”) you can get all the benefits of the formerly expensive diversification, by buying or selling ETFs.
If you want to skip mutual funds and ETFs altogether, you’ll want to looking into buying and selling shares of individual companies. You will still have to pay transaction costs every time you buy or sell a stock, but there will be absolutely no management fees to pay. Of course, the trade off here is that to properly diversify your money across different sectors of the world economy, you will likely need to purchase several stocks. This is known as “active management” and requires a substantial amount of research in order to be efficient and confident in your investing plan.
Personally, I’m willing to sacrifice .25% or so of my portfolio in MER fees in order to stick to basic ETFs that allow me to easily practice “passive management”. Essentially, I’m cool with accepting the overall market average attached to a very low fee, compared to trying to pick which stocks I think will be winners. Whether you decide to go with active or passive management, online investing will make sure that much more of your money stays working for you in your portfolio (and not working for someone else instead).
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chThe opinions and views expressed in this presentation are those of the presenter and not necessarily BMO InvestorLine Inc. This presentation is prepared as a general source of information and is not intended to provide legal, investment, accounting or tax advice, and should not be relied upon in that regard. If legal or investment advice or other professional assistance is needed, the services of a competent professional should be obtained. Any information contained in this presentation does not constitute and shall not be deemed to constitute advice, an offer to sell/ purchase or as an invitation or solicitation to do so for any entity. The content of this presentation is based on sources believed to be reliable, but its accuracy cannot be guaranteed. BMO InvestorLine Inc. and its affiliates, sponsors and employees do not accept responsibility for the content and makes no representation as to the accuracy, completeness or reliability of the content and hereby disclaims any liability with regards to the same.