I Want To Talk About Fees
Almost everything in this blog, related to investing, will come down to one of three things:
- Your brain (God love it!)
I am going to tell you the stories of two women.
So turn off your iPhone (unless you are reading this on your iPhone, lol), grab a glass of juice or wine, and for sure pull up a chair – you are going to want to be sitting down for this.
CAROLINE, a 25 year old Marketing Director at a furniture warehouse company, created and managed a phenomenal campaign highlighting the dangers of sitting (sitting is the new smoking, you heard it hear first!), and the benefits of standing desks. The effort resulted in a 76% annual sales. Caroline’s COO was so impressed with her work, Caroline received an unexpected, additional $10,000 bonus for 2013.
Shortly after the $10,000 was deposited into Caroline’s bank account, a mutual fund representative from her bank, the Bank of Nova Scotia, called to say that he noticed the significant cash balance in her account, and would she like to consider investing in a mutual fund? After a short conversation confirming her long-term time horizon and her moderate risk tolerance, Caroline agreed to invest the entire $10,000 in the Scotia Global Growth Fund.
She was super happy to hear that there were no fees to purchase the mutual fund and so she readily agreed to a $500 a month auto-payment to the same fund. Less than a week later, Caroline received a slip in the mail confirming her $10,000 investment in BNS974. Ten days after that, she received another slip for her first $500 monthly investment in the same fund, BNS974. Caroline felt huge gratitude toward her bank for taking the time to reach out to her, assisting her in (finally) setting up an investment account.
BEATRICE was a highly-sought after computer programmer, having taught herself HTML5 and CSS3 from CodeAcademy. A new start-up in Montreal was so interested in having Beatrice join their team that they offered her a $10,000 signing bonus. Beatrice was ecstatic and jumped at the opportunity. Her first day on the job, Beatrice sat in a huge industrial loft, in an open-concept layout with six other developers – all working on a new iPhone App to track portfolio returns for Canadian investors.
The subject of the App had several of the developers, all men, comparing their personal investment returns and current holdings. One of the men, the oldest of the group at 35, pulled down his head-phones and said, “Because of Ebola and ISIS, global funds have had a serious pull-back.” Scratching his long, hipster beard, he continued, “But, with the recent announcement of Japan stimulus, it could be good to look at the Vanguard FTSE Developed ex-North America Index ETF (VDU), which also just reduced its MER from 0.28% to 0.20%.” He could have been speaking Greek for all Beatrice knew, but she could not believe how several of the team quickly logged in to their online trading accounts, making quick market purchases of VDU on the TSX.
“Because of Ebola and ISIS, global funds have had a serious pull-back.” Scratching his long, hipster beard, he continued, “But, with the recent announcement of Japan stimulus, it could be good to look at the Vanguard FTSE Developed ex-North America Index ETF (VDU), which also just reduced its MER from 0.28% to 0.20%.”
Beatrice, no stranger to online learning, waited until she got home that evening to do research on both Vanguard ETFs, and discount brokers in Canada. Choosing Questrade for their no-fee ETF option on purchases, Over the next few weeks, Beatrice was easily able to transfer her $10,000 to her new Questrade account, ultimately purchasing $10,000 of VDU. Beatrice was so excited that she also set up a monthly transfer of $500 per month to Questrade, for additional purchases of VDU.
…40 years later:
Both women enjoyed tremendous personal and professional success, and neither contributed (or withdrew) more-or-less than their original $10,000 and $500/month for forty years.
Both the Scotia Global Growth Fund and the Vanguard FTSE Developed ex-North America Index ETF (VDU) returned 9.3% annualized returns, before fees, for the forty-year period.
- Caroline: $1,388,305.84
- Beatrice: $2,597,717.18
Yes, you read that correct.
Both women contributed the exact same amount, at the exact same time periods, and both funds returned exactly 9.3% before fees over the forty-year period.
And yet, Beatrice has $1,209,411.34 – or almost twice as much as Caroline.
How could this happen? Tune in next week to find out.
A bit of fine-print on the above post:
Both of these women and their stories are fictitious ( and that was hard to spell!), Both investments – the mutual fund and the ETF – are real, as is the formula used to calculate the assumed 9.3% rate-of-return on the forty year time period. For the sake of simplicity, the additional $6,000 annual contributions were calculated as one single contribution made at the beginning of a single, annual compounded period. Don’t worry about this last point, final returns are not significantly affected.