You should be lowering your MERs, i.e. management expense ratios whenever it makes sense to do so. In short, the MER is the price that you pay for the investment product that you’re buying. It’s a percentage of your investment that is paid to the company that put the product on the market. MERs can range from as low as 0.04% to 2.75%.
As I’ve said before, success with money is within everyone’s grasp because the secret sauce isn’t being bright. Take it from me. I’m not the smartest lobster but I’ve managed to set myself up quite nicely by reading a little bit and following a few simple steps. I’ll share them with you right up front so you can start doing these things for yourself too. I promise that Future You will be very happy if you start and continue doing the following 3 things:
- Live below your means so that you always have money leftover to invest. Track your expenses. Cut down on the things that aren’t essential to your survival. Use that money to invest for the future and to build your emergency fund.
- Invest 20% of your net income for long-term growth in a well-diversified equity exchange-traded fund (ETF)***. You’ll find the 20% by completing step one. If you can’t find 20% right away, then start with whatever you can and work your way up to 20%.
- Re-invest all the dividends and capital gains that your portfolio generates. Do not spend this money! Your dividends and capital gains will bolster the money that you invest from your paycheque. They will exponentially increase the compound growth of your investments. The result of re-investing dividends and capital gains is having your portfolio growing bigger and faster without any extra work from you.
Consistently investing a portion of your paycheque every time you’re paid will vastly improve the odds that you won’t be homeless, hungry, and cold when you’re a senior citizen. If you follows these 3 steps faithfully, you’ll do very for yourself.
My favourite sibling and I were talking about investments and my sibling stated that I hadn’t optimized my investments over the years. I couldn’t disagree. The truth is that I have made mistakes over the years, and I could’ve made smarter choices sooner. However, I don’t flagellate myself too, too much over the choices I’ve made because no one is perfect. For all of the reading I’ve done and people I’ve talked to, here’s the truth. No one has an ideal investment track record. Every single person could’ve made atleast one better choice at some point. Everyone has made mistakes when it comes to their investment journey.
The only mistake that is fatal to building wealth is never starting. Working paycheque-to-paycheque for a lifetime is pretty much guaranteed to ensure that there is no retirement money waiting for you when employment ends.
Thankfully, that is one mistake that I didn’t make. I’ve been investing since the age of 21. Have I done it in the best way possible? Absolutely not! If I could go back and make different investment choices, you’d better believe that I would do so.
The one area where I didn’t screw myself too badly was in relation to MERs. As soon as I understood what they were, I made sure to lower them as quickly as I could.
Again, if you follow the first 3 steps that I’ve set out, Future You will be very happy.
Optimizing your MERs is simply delving into the minutiae.
Check out this expense ration impact calculator to see the difference that MERs make on your returns. Just for fun, plug in a starting investment of $0, an annual investment of $5200, expected return of 7%, and an investment duration of 30 years. Now, change the expense ratio from 0.04% to 2.75%. Carefully review the difference in the future value of total investment and the total cost of the fund.
Keep playing with this calculator, and use your own numbers. Maybe you’re not starting at $0, or you can’t invest $100/week, or the lowest MER you can find for the ETF you want is 0.35%. The point is that higher MERs mean that you keep less of your money over time. If you lower your MERs, then you will keep more of your money. Your time horizon is decades long and you’ll eventually have a 7-figure portfolio size.
Invest in ETFs with low MERs. When you pay lower MERs, more of your money will remain invested over a long period of time. Money that isn’t paid out as fees will benefit from compound growth. That means it stays in your pocket instead of going to the ETF-provider. Look for ETFs that have MERs of 0.5% or less and try to only buy those. You’ll be doing yourself a huge favour.
MERs shouldn’t be the first thing that you consider when you’re looking for the right ETFs to add to your portfolio. But if you want to optimize the returns on your investments, MERs shouldn’t be ignored either. If you have to choose between two ETFs that will allow you to meet your financial goals, pick the one that has the lower MER.
*** In the interests of transparency, I invest my money in VXC. This ETF is from Vanguard Canada. I like Vanguard because their ETFs have low MERs and they give me the diversification that I need to grow my portfolio over the long-term. I am not recommending that you invest in this ETF. I don’t know your circumstances and I’m not qualified to recommend financial investments to anyone. Do your own research and pick an ETF that will best help you meet your goals. If you do decide to get advice, go to a qualified financial advisor.