Lately I have had heard of a number of conversations that have had a similar theme. Unfortunately, the common sense that sparked the conversation has been, in many cases, obliterated by a dogmatic pursuit of something that seems like a good idea - seeking low fees on your investments.
I'm in no way advocating for high fees, but the whole idea of fees on your investments really is getting too much attention relative to more important matters.
And often it's undeservedly so. If your mutual funds happened to go down by ten percent, it wasn't merely the fees that caused that. It was the markets.
If the market is off by ten percent, then similar mutual funds went down too. It's just a question of whether they went down by 9.8% or 10.2%. Fees cause incremental changes to your results, they don't drive your results.
Sure, incremental results are worth paying attention to, but the more important issue by far is owning the right investments in the first place, combined with your own behaviour as an investor. Get that right and you now have the luxury of trying to seek incremental improvements. Botch that one, however, and the effect of fees on your portfolio is drowned out by far more impactful forces.
Still, all things being equal cheap fees are better than expensive ones. At the end of the day the less that you pay in fees the more that is left for you.
But the problem with blindly accepting the dogma that cheap equals better is that you stop thinking about stuff. The question of fees on your investments is a legitimate question, but it's a question that can put you in a treacherous situation.
Here's the deal. All things being equal, it is wise and good to seek to reduce your fees. But the absolutely critical part is the part about all things being equal.
For instance, let's say that you are looking for a Canadian Dividend fund and you are comparing Dividend Fund A to Dividend Fund B. The top holdings of the respective funds are highly correlated, but fund A comes with a Management Expense Ratio (the annual fee for owning mutual funds) of 1.56%, while Fund B has a Management Expense Ratio of 2.87%. In that case, the less expensive investment, all things being equal, is quite likely to be the preferred option.
You'll want to compare the all-in costs of your various options though. Mutual fund management fees are one cost, but they aren't the only cost that investors can be exposed to. If your mutual fund cost $80 per year to own, and an exchange traded fund with a similar mandate costs $8 per year to own, but the administration fee on the brokerage account needed to hold the ETF is $100 annually, how much money have you saved?
So it's fine to compare the total cost of similar products, but the problem is that if you start favouring bonds or GICs over equity funds based purely on price. That is not a logical comparison. You are comparing the price of two different things. It would be like saying a box of crayons is less expensive than a choice cut of steak.
For decisions like this the primary deciding factor is what it is that you are trying to do. Are you needing supplies for art class or for a backyard BBQ? Having first determined what you need, now is the appropriate time to look at price. But first you have to determine your needs.
Back in July I happened to be in Salmon Arm. I saw a sign that said "Zellers Closing Out Sale, Everything 60% Off". As it turned out I had just blown out my pair of sandals and the thought of cruising the hot Okanagan beaches wearing black motorcycle boots was not appealing, so off I went to seek out some new sandals.
I was a little late to the party, however. I'm a size ten, but there was not a single pair of men's footwear larger than a size nine. No sandals, no sneakers, no golf shoes, no hip waders. Nothing.
So what did I do? Did I buy a pair of shoes that didn't fit just because they were cheap? Of course not.
They did, however, have some kid's bikes on sale, and my kids needed bikes.
The bikes were cheap, I wanted them for my kids, so I bought them on the spot, even though that meant packing them around for the rest of my vacation before hauling them home.
Here's one more thing for consideration, though. While the bikes were of good quality and available at a great price, I wouldn't buy one for myself. I couldn't ride them - I wouldn't even want to try - they are kid's bikes; far too small for a grown man. What is a good fit for one person is not necessarily a good fit for all people, and that has nothing to do with price.
There isn't a week that goes by when someone asks me a question in which I reply "It depends on your objectives." Should I top up my RRSP? Should I buy or should I rent? Should I get a term insurance policy or a permanent insurance policy? It all depends on your objectives.
Always keep your objectives in mind. Having first determined what products will meet your objectives, you can then look for the best price. But looking at price first means you might be trying to cram your feet into size nine shoes, and you would look pretty funny pedaling down the street riding a Spiderman bike with training wheels.
In fact, your objective is not even going to be simply to have the lowest cost portfolio. Your objective is going to be something along the lines of being able to retire when you want, with the lifestyle you want and to be able to maintain that lifestyle for the duration of your lifetime. Alternatively, it could be seeing your kids through post-secondary education without hanging the albatross of a six-digit student loan around their neck. Or it might even be to be able to be there for your aged parents when their health starts to fade. Those are real objectives. Keeping costs down is one component of reaching your objectives, but it isn't an objective in itself.
First things first. Figure out what your objectives are, determine what types of products are consistent with your objectives, and then - and only then - is it appropriate to look for ways to bring your costs down.
