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Mutual fund MER calculation - this can't be correct?

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  • Apr 25th, 2015 10:48 pm
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Penalty Box
Oct 26, 2007
897 posts
97 upvotes
Toronto

Mutual fund MER calculation - this can't be correct?

Ok so someone told me about mutual fund MERs. Long story short, after alot of research, it dawn on me why banks love selling mutual funds.

If you have a portfolio of mutual funds that you've saved for 25 years from age 20 to 45 with those encouraged monthly withdrawals that the banks make it seems is a gods blessing and it's about say $500,000 and an average MER of 2.20% a year, you pay $11,000 whisked away.

In ten years, you pay $55,000 in fees if you don't contribute anymore?

$55,000 of my hard earned money? That's alot of money?

Can someone confirm this calculation? This is a ball park calculation but it seems wayyyyyy too high?

Anyone?
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A guide for the everymans guide to investments
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Deal Addict
Dec 28, 2008
1382 posts
169 upvotes
Toronto
rammingman wrote: Ok so someone told me about mutual fund MERs. Long story short, after alot of research, it dawn on me why banks love selling mutual funds.

If you have a portfolio of mutual funds that you've saved for 25 years from age 20 to 45 with those encouraged monthly withdrawals that the banks make it seems is a gods blessing and it's about say $500,000 and an average MER of 2.20% a year, you pay $11,000 whisked away.

In ten years, you pay $55,000 in fees if you don't contribute anymore?

$55,000 of my hard earned money? That's alot of money?

Can someone confirm this calculation? This is a ball park calculation but it seems wayyyyyy too high?

Anyone?
Your calculation is correct.

The goal of active management is to earn more than 2.2% than their benchmark to account for their cost.

E.g., if the benchmark is to earn 5% and your fund earns 8% gross (5.8% after fees) than you are still further ahead by 80 basis points.
However, very few money managers can pull off this alpha generation net of fees.
Deal Addict
Aug 4, 2006
3428 posts
2377 upvotes
Toronto
You should be buying TD e-series, or a Series D (discount). Those fees seem high if you are a DIYer
Deal Addict
Jul 15, 2009
3648 posts
3043 upvotes
Yes, this is pretty much correct.

See also:
http://www.michaeljamesonmoney.com/2011 ... costs.html
http://www.michaeljamesonmoney.com/2012 ... ts_16.html

Here's another thing to think about. You've saved up your $500k and retire, and you decide you can safely withdraw 4% a year without running out of money. That means you have $20k a year to live on. Along comes a banker and charges you 2.2% MER. The banker gets $11k, and you now have to live on $9k a year.
Deal Addict
User avatar
Aug 3, 2009
2294 posts
719 upvotes
Nova Scotia
This is why self directed passive investing is so heavily advocated for here and on PFC reddit.
Deal Addict
Apr 21, 2012
1770 posts
1140 upvotes
Markham
Well, if your $500k doesn't grow, it would be $55,000; however, if your $500k does grow, it will be more.
you forgot the opportunity cost, it is more than $55,000, way more.

The best way to demonstrate this is via an example.
Your $500k for 25 years growing at 10% a year WITHOUT fees, versus with 2.2% fees.
The net worth at the end of 25 years WITHOUT fees is around $5,417,352
The net worth at the end of 25 years WITH fees is around $3,269,181.
The actual fee paid is around $2,148,171. Yes, more than 2 millions, and most of it is from opportunity cost. The fee they took away from you can not help you compound your return.

$55,000 is miniscule in comparison.

With the new rule in regards to mutual fund transparency, we will now see fees as high as 5% due to some performance/bonus fees. if the fund is a new one, the start-up cost will be significantly higher during the first year.

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