Hey there, time traveller!
This article was published 23/12/2011 (2042 days ago), so information in it may no longer be current.
The problem is inertia. The consequences are catastrophic. I'm talking about your finances. Some people are good at math. Others not. But they all tend to have one thing in common: They find numbers boring, eye-glazing, sleep-conducive.
So they don't bother to think about what they're being charged for financial or other services.
Take mutual funds, especially equity funds. Many of them are simply a ripoff, pure and simple. You are being fooled into thinking your money is safe and well attended to when it's not. And you are being looted for thousands or even tens of thousands of dollars by mutual fund companies and their agents in the financial community.
Let me give you a really simple equation. Some funds charge as much as 2.5 per cent to manage your money. You may think, "Well, that's not much, is it?" And you will be wrong.
What they are really charging you is roughly a third of the money you'd otherwise earn, probably more. How? Simple. Stocks return over the long term about 7.5 per cent. So when the fund company and the brokers it has to pay to sell their products take 2.5 points, they're taking a third because one third of 7.5 is 2.5, right?
Let's put that in real dollar terms. Let's say, simplistically, that you put $100,000 away the day you start your career at 22 years of age. I know that's not likely, but it serves to illustrate the point.
Assuming you put all of your money into an equity fund whose performance before fees matches the market's, which goes up 7.5 per cent every year. When you retire 40 years later, the market will have gone up 18-fold. Your money? It's now worth seven times as much.
In other words, those little fees cost you a million bucks in our example. And while it might be an extreme way to look at it, rest assured that regardless of what numbers you use, you are getting burned. The effect is magnified by time and the effect of compounding.
The financial industry sucks billions from the savings of Canadians every year. What do fund companies do with the money they take? They pay brokers fees to sell their funds (and you thought you were getting unbiased advice). They advertise their mutual funds. They pay their people. The rest is profit.
But to add insult to injury, many fund managers, especially the ones running big funds, don't even keep pace with the index. They can't. So you're giving up a third of your return for substandard performance.
I'm not advocating that you take matters fully into your own hands. The financial markets are dangerous places for people who can't commit the time and resources to learning and staying on top of things, which describes the vast majority of people.
I'm saying educate yourself on choices. Most fund companies now offer lower-fee funds. There are also index funds, and specialized exchange-traded funds.
The important thing is that you stop being lazy and start doing a little homework. Most people spend more time researching a new TV set than their finances, which they find too daunting, or they naively trust a broker will take the best care of them (there are some terrific value-adding brokers out there, but there are too many who put themselves first, which is human nature, after all).
Ask questions. Stay on top of things. Set aside three hours a month to manage your affairs. Given the thousands or tens of thousands or maybe even more it could save you, on an hourly basis it will likely be the most money you'll ever make.
Fabrice Taylor is an award-winning financial journalist and analyst and author of the President's Club Investment Letter. Email him at: