This is a part of the Investing Series.

If you want to invest in index mutual funds or index ETFs, and you want to track how much you are paying as well as your own personal investing strategy or allocations in each fund, I suggest making the following chart, and updating it once or 4 times a year, each time you decide to rebalance.

Read: What does re-balancing a portfolio mean?

EXAMPLE OF A MUTUAL FUND PORTFOLIO / CHART

IN DETAIL

Name of Index Mutual Fund or ETF

Pretty self-explanatory. It can be redundant for people who have memorized the symbol or ticker, but I like having a name put to it.

Symbol/Ticker

This is helpful so that you know WHICH one you’re buying. There may be variations of the same mutual fund, held in different currencies (e.g. CAD versus USD), or have a slight twist to them (e.g. being currency neutral).

This lets you know exactly which one it is.

Portfolio %

This is your personal allocation to each index mutual fund or ETF.

I put these generic averages up there, but you might want to put less in International, and more in your own country, etc etc.

Listed MER %

You can find this on the website, of what the Listed MER % is for the fund or ETF you are buying. Just look for something that says “MER”, and that percentage is what you should enter.

Weighted MER %

This is the Listed MER % multiplied by your portfolio %, and it lets you know how much you’re really paying, no matter what the listed MER says.

Note: It is tricky to figure out MERs because they may change on a daily basis, and you need to do a rather complicated calculation of the assets of the fund each day, multiplied by the MER, and then trickling down to what you actually have to pay as an investor. This is why I like having a rough idea of what I’ll pay, but it may not necessarily be very accurate.

More details can be read here: What makes up an MER?

Effective MER %

This tells you how much you are paying in dollars (a rough amount), based on where your portfolio is allocated, and how much MER is being charged.

You can get to the same number without having to break it down by each mutual fund, but I like seeing more detail than is necessary.

I’d like to give a big thanks to Canadian Couch Potato for having made many charts similar to this one, which I have since used as my model, with a very small tweak.

THE CHART’S FORMULAS IN DETAIL

STEPS AND CALCULATIONS THAT WENT INTO THE CHART

( 1 ) CREATE YOUR PORTFOLIO PERCENTAGE

Choose your strategy of where you want your money to be, this is the most time-consuming part because you have to do your research to find ALL the index funds offered by your bank/brokerage, and then choose which ones you want to buy.

I really suggest not putting all your eggs into any one basket.

Few things to consider:

• Stick to holding either all index mutual funds at a bank, or all ETFs; to have an efficient portfolio
• Invest in your own country (mine is Canada, hence the Canadian Index fund)
• Invest in another stable trading market and/or major trading partner (U.S. is a global benchmark)
• Don’t forget the world – Europe is an international index to consider
• International indexes can also be emerging markets (BRIC*) but are considered riskier
• Allocation of bonds depends on age and how close you are to retirement.

*BRIC = Brazil, Russia, India, China; all generally considered “emerging markets”, that aren’t quite stable for various reasons, but have a strong potential for future growth.

( 2 ) FIND ALL THE LISTED MERS FOR YOUR CHOSEN FUNDS

Now that you’ve chosen your funds and what percentages you want them to be, go to their pages, read through them thoroughly and find the MER %.

It is usually on the first page of most mutual fund or ETF pages, and may be pictured in a box that looks like this:

Or sometimes on each individual fund, it looks like this:

If you are using Excel, do not make the mistake of typing in “.33″, and expecting it to be a percentage.

To be accurate, you have to format the cell as a % first with the Excel % button, and then type in “0.33″ in the cell.

( 3 ) WEIGHTED MER & ( 6 ) TOTAL WEIGHTED MER

For each mutual fund, multiply the numbers from ( 1 ) Portfolio % x ( 2 ) Listed MER %

Calculations from the above chart:

• TD Canadian Index e-: 30% x 0.33% = 0.10%
• TD U.S. Index -e: 30% x 0.35% = 0.11%
• TD International Index -e: 30% x 0.51% = 0.15%
• TD Canadian Bond Index -e: 10% x 0.05% = 0.01%

The total weighted MER is just a sum of each individual weighted MER.

( 4 ) INDIVIDUAL PORTFOLIO AMOUNT & ( 7 ) TOTAL PORTFOLIO AMOUNT

I do this backwards, going from the total up to the individual.

Instead of going from each mutual fund down to the total, I enter a ( 7 ) Total Portfolio Amount at the bottom (e.g. $10,000), and then do a formula for each mutual fund by multiplying it with the ( 4 ) Portfolio %

( 5 ) EFFECTIVE MER %

Another simple multiplication of : ( 2 ) Listed MER  x ( 4 ) Individual Portfolio Amount.

DO NOT FORGET TO ADD IN THE COST OF TRADES PER YEAR

If you have to pay for buying ETFs, or you have a no load mutual fund, it will cost you money to buy and sell each fund.

(Questrade, I might add, does not charge you commissions for buying ETFs, but they charge you for selling them.)

Add that trading cost to your total MER cost, and you will have a rough idea of how much it costs to hold your portfolio in index funds.

COPY METHOD A. COPY AND PASTE THIS CHART (NO FORMULAS ENTERED)

You can also try and copy and paste this example Excel chart, and put in the formulas listed above (might make things easier).

1. Highlight this entire table.
2. Right-Click and Copy
3. Go into Excel and open any blank sheet
4. Right-Click and Paste as Special
5. Select Text

You will see the values appear in their proper columns.

Aside from customizing it for yourself, and you will need to adjust the following columns to add in the multiplication formulas listed above:

• Weighted MER %
• Portfolio Total and Portfolio Amounts
• Effective MER

Still too much work?

Here’s the laziest way possible:

COPY METHOD B. COPY AND PASTE THIS CHART (FORMULAS ALREADY ENTERED)

Copy and paste this table with the formulas in it, into cell A1:

Note: May be a bit tricky to get your cursor right to the edge of the last bottom-right cell.

So I suggest going backwards, and trying to highlight it from the bottom-right cell (just before the X) up to the beginning of Name in the top-right corner.

INSTRUCTIONS

You can copy this table with the formulas in them by highlight the entire table above from my blog post as pictured below:

Now right-click on the highlighted section and select Copy.

Now go into Excel, and right-click in the cell A1 (the first upper-left column), and select Paste Special.

Select Text, or else the columns, spacing and formulas won’t work properly, like so:

It should look like this in your Excel when you’re done.

POST-COPYING CLEANUP REQUIRED

1. You may decide you want to format the cells with $ or % formulas (note how the weighted MER is at 0.00099 instead of 0.10%)

(When you do the above for percentages, it will look like 0% because they’re fractions of a percentage. Use the little blue arrows to the left and right to increase or decrease decimal points)

2. You will have to delete out the “.” in the bottom row one they’re in there and the “X” (if you copied it by accident), I only needed them as column/text spacers so it would be easier to copy.

3. You will also have to adjust the columns out to fit the words (just double-click on the column lines up by the A, B, C, D, E sections, and it’ll do it automatically.)

4. [Optional] Beautify it with some colours and borders (I’m a freak for pretty charts).

OTHER NOTES

If you buy ETFs, or are not buying no-load mutual funds, don’t forget to add the cost of trading to your final “Effective MER” total, to get the full picture.

Anything that is a flat or static number without any formulas in it, you can change/touch, e.g.:

• Portfolio %
• Listed MER %
• TOTAL Portfolio Amount (at the bottom, the $10,000)

Enjoy!

This is a part of the Investing Series.

You may be wondering at this point how you can even figure out what kind of investor you are, if you are just starting out in investing.

It’s like trying to figure out what you want to cook as a 3-course meal when you don’t even know how to boil water or fry an egg.

Side note: I love to trot out this story, but I knew girls who thought hardboiled eggs were whole eggs you put in a frying pan with their shells still on. *shakes head*

In actuality, figuring out what kind of investor you are really isn’t as hard as it may seem and it is something you SHOULD do before you even think about investing.

You just have to ask yourself a few questions (honestly) about your situation and what you are comfortable with in terms of how much of a risk you are willing to take with your money.

Here are a few questions you can start thinking about to get a feel for what kind of investor you are.

1. HOW OLD ARE YOU?

I’m not trying to be fresh, I promise!

I know it’s impolite to ask people their age, so I’ll just give ranges so you can keep your anonymity (you all look 25 to me, anyway!):

If you are around the age of 35 – 40 and younger, you can afford to be riskier with your holdings in your portfolio, and put it into index funds, stocks and dividend-paying stocks or funds.

This is because you have time on your side.

If the stock market tanks or takes a dip for 3-5 years and takes 10-20 years to recover and grow, you can afford to ride out the wave by continuing to save your money and invest it.

Now if you’re 40 and older, you’re about 25 years off from a generally accepted “retirement age” of 65; you might want to start weighting your portfolio closer to steadier streams of income, such as bonds, so that the money is ready and available when you do decide to call it a day.

Otherwise, consider working longer.

2. WHEN DO YOU WANT TO USE YOUR MONEY, AND WHAT FOR?

Now all this saving is great, but eventually we have to get to the point where we want to use the money.

So when do you want to use your money?

At retirement? Okay.

At what age do you plan on retiring? Do you ever foresee yourself wanting to retire earlier?

When you retire, what do you want to do with that money?

Travel?

Sit around at home and potter around a garden?

Take a cruise?

These are all things you have to think about as part of what kind of investor you want to be, because everything costs money.

For investing, you don’t necessarily have to always think of it as retirement money, maybe you want to invest your money so that you can leave your job and start a side business.

Or maybe you want to take a year off and travel, but your job doesn’t offer sabbaticals or any kind of leeway and you’d actually have to quit before you could do that.

Other things to consider would be if you wanted to put down a down payment on a house, or pay for your children’s education — all of this comes out of your savings, which are (hopefully) invested, so that when you are ready in 10 – 40 years to do what you want with the money, it’s there for you.

3. IF YOU LOST HALF OF YOUR MONEY TOMORROW, HOW OKAY WOULD YOU BE WITH THAT?

If you answered:

Yes, I still have time to build everything back up, and I am totally fine with this!

*nervous smile*…. *fidget fidget*

.. then you are a riskier investor and can afford to invest in stocks (a.k.a. “equities”) and index funds over bonds.

If you answered:

OH HELL NO.

I’m 10 years away from retiring, and I AM NOT willing to lose half of everything I worked for.

…then you aren’t a risky investor, and you should think more about bonds, but especially about INDEX funds.

Case in point: Don’t put all your retirement fund into an Apple basket… literally

I read on the investing forum comments once, about a guy who had $1.6 million saved and was in retirement already. He wanted to grow his money (STILL) even in retirement, so he bought 3200 shares of …. wait for it… APPLE.

3200 shares x $500 = $1.6 million

(Yeah I custom-made that image for this post. Cool huh!?)

Almost a month or so after, Apple started to waver and drop in share price down to about $439 because the Wall Street people were all saying that “a technical analysis of Apple shows that they’re overvalued“, which is Wall Street gobbledegook for:

“SELL NOW. APPLE IS DONE. FINITO! 

They ordered less screens from Foxconn for their iPads, iPhones and iPods. GET OUT!!!!

*plays doomsday music*“

Some investors, like a bunch of wildebeest following a crowd, starting selling their shares, and it went from $500 a share down to $439 or so, and the shares of Apple are still dropping ever so slightly as I’m writing this post.

Other investors were saying that Wall Street was screwing around and trying to turn a quick profit by scaring people off the stock, buying it when it goes below $400, and catching the upswing when they then turn 180 and say: NOPE! Guess we were wrong! Apple is on the rise again…

Anyway, as all of this is happening, that guy in retirement, lost on paper about $195,200 in a span of a month or so.

He started asking around if he should get out now with his money somewhat bruised but still intact, or wait for the upswing that other investors were sure was going to happen because Apple makes a serious profit margin on all their products.

It became a whole discussion topic about people being quite alarmed he had done that with his retirement savings, and telling him he should talk to a financial advisor, STAT, and/or switch out his money into bonds to preserve his wealth.

I don’t know how the story ends because after reading that, I was already in the corner breathing into a paper bag, but if it made your heart jump the way mine did, you would be wise to remember to STRONGLY consider switching your portfolio to bonds as you age.

Above all, and even if you forget everything I’ve ever told you — please don’t put your retirement money into one single company.

If that is not the epitome of all your eggs in one basket, I don’t know what is.

Hindsight is 20/20.

The story could end very well, the guy could end up making $320,000 if the stock price goes up to $600/share, but it could end very badly if it drops down to $300/share or starts in on a low, slow, decline.

4. HOW DO YOU PLAN GETTING YOUR RETIREMENT INCOME?

Are you sharing the retirement fund with someone else?

Do you want to have a steady income coming in from all your investments so that you don’t have to sell anything? 

Or do you want to slowly deplete your assets at a rate of about 4% a year, and whatever is left goes to your family?

If you like the idea of making an income from your investments, aside from buying real estate and collecting rent money (assuming the mortgage is cleared), you might want to think about a dividend-paying stock portfolio, where you get money every quarter (or whenever the company pays them out) for holding stocks.

Still, I would never in a million years ever recommend that you put 100% of your money into dividend-paying stocks ONLY, because that’s just as risky as it is still invested 100% in stocks.

The only time it would make sense, is if you’re an heir or heiress and you inherited those shares and you are dancing footloose and fancy-free on capital and “free” dividends that has been earned by someone else.

If you earned that income, and THEN put down capital to buy those stocks, it’s another story for me, because you (may) only really get a few pennies of dividends per stock, which may not be your thing if you don’t want to wait for this strategy to pay off.

A lot of the wealth on the stock market (if you look at the Total Return of the S&P 500) has been from buying dividend-paying stocks, and re-investing them.

In fact, S&P says about ~40% of the return has been from dividends!

The hardest question then becomes: Which ones should I buy, and which ones are sustainably going to pay me dividends over the long-term?

If you can’t answer those questions, then consider this:

$0.04 in dividends / $50 for the stock price = 0.08% return on your money every quarter

Sure you can find high-yield dividend-paying stocks that you can buy forever that pay out a 6% yield or higher, that’s great, but you have to search for them AND you have to keep on top of them to make sure the company wasn’t lying (read: desperately giving dividends as bait) and is about to go bankrupt.

You also want them to increase their dividends over time, otherwise other companies look better.

Until you get to the point where you have enough money that you have a solid strategy for your retirement fund going forward, and you have the time (and interest) to hunt down good dividend-paying stocks, you should stick to something simple until you can master it.

Like index fund investing.

It’s a good strategy to have dividend-paying stocks IN ADDITION to your other investments that are diversified throughout index funds, bonds and stocks, but it shouldn’t be your be-all and end-all.

Otherwise, if you just want to deplete your assets, you need to know how much will be left, growing at least to combat inflation each year (average of 3%), so that there’s enough to last by the time you kick the bucket.

This brings me to my last question..

5. HOW MUCH DO YOU NEED FOR YOUR RETIREMENT SAVINGS?

This might seem kind of stupid in a list of questions on what kind of investor you are, but you need to be well aware of what kind of GROWTH you need to reach your goals.

Read: How much you need to have saved for retirement

Let’s take an example.

If I have about $10,000 saved at the age of 25, and I save about $10,000 a year until I retire at 65 (40 years), here are the growth rates I need:

• At 1% growth rate = I will have about $506,490.01 (but you’ve lost money to inflation)
• At 3% growth rate = I will have $804,864.65 (but you really have a real return of 0%)*
• At 5% growth rate = I will have $1,345,262.55
• At 8% growth rate = I will have $3,151,895.41

* 3% is just on par with combating average inflation rates of 3%, which makes your money growth equal to a big fat 0

As you can see, how risky your investments need to be, factor into how much you will have at the end.

If you figured out that you need to have at least $1 million saved by the time you retire, then your money needs to return about 5% on average over the 40 years, or a real rate of return of 2%.

This means you can’t just stick your money in bonds or high-interest savings accounts that return 1% – 2%.

That barely even covers inflation at 3%, but more importantly, you will miss your retirement target of $1 million by about 50%!

Of course, you can also help this number along by saving MORE than $10,000 each year for 40 years so that even if it returns 1% it’s doable, but this is just an example.

WHAT IS A ‘REAL’ RETURN VERSUS A ‘NOMINAL’ RETURN?

A real rate of return or “real return” means it takes into account inflation eating away at your money each year.

A nominal rate of return or “nominal return” doesn’t take inflation into account, and that isn’t realistic because as we all know, things that used to cost pennies in the 1950s, now cost dollars to purchase.

HOW WOULD I ANSWER THE ABOVE QUESTIONS?

If you want a real-live example of how I’d answer the above questions so you can follow along, here it is:

1. How old are you?

I’m just shy of 30, as of this post date.

2. When do you want to use your money and what do you want to use it for?

I want to use it when I’m around 55 – 60 years old, and I want to use it for retirement.

I am not actually sure that I want to retire so early at 55, but it’s nice to save money and work towards that option in case I change my mind.

I also want to retire overseas, I’m not keen on staying in Canada at all, so I’d need to also make sure I have some money set aside so I can pay for accommodations overseas.

I’m also thinking it’d be nice to travel a bit, but as I’m older, I wouldn’t want to travel too often or walk too much, and therefore I’d more than likely need more than just a week to see a city.

3. If you lost half your money tomorrow, how okay would you be with it?

NOT. OKAY.

I can stand losing 10% – 25%, but 50% is just bonkers.

This means I am a moderate investor, but not a risky one, and I want growth, but some kind of stability as well that my wealth won’t vanish over night.

I’d rather have lower gains and returns on my investment, than risk my pot of money.

4. How do you plan on getting your retirement money?

I plan on withdrawing about 4% of my retirement cash each year, and using that to live.

If I need more, I also need the option of being able to pay for my nursing home so I’m not a burden on my future kids.

I am also not relying on anyone else (including the government) providing the money for me (it’s never good to be dependent on anyone or any institution), so whatever I save alone, is what I can afford for my retirement.

I’m also a freelancer, so I’m totally on my own for retirement savings. I can’t count on company pensions nor Canadian government aid in retirement either.

This image is just for fun. It has nothing to do with this post except that it’s Canada-shaped.

The average Canadian can expect to get about $33,500 if they earn about $100,000 as a household income when they retire due to:

1. Company pensions
2. Canadian Pension Plan (CPP)
3. Old Age Security (OAS)

Let’s say they live to about 82 years of age (average life span of a female Canadian), and retire at 65; that’s about 17 years of living expenses paid for.

17 years x $33,500 = $569,500

If you need about $50,000 a year to live “comfortably”, then you need to have saved an additional $16,500 alone, above and beyond what you can expect to get, for each of those 17 years.

17 years x $16,500 = $280,500

$569,500 + $280,500 = $850,000 saved for retirement

(for an average 6-figure income Canadian couple)

But again, since I’m not counting on any of that money to help boost my retirement savings, I know I need to save AT LEAST $850,000 all by my lonesome to have a shot at retirement by the age of 65.

5. How much do you need for your retirement savings?

I’ve always had about $1 million in my mind as the target goal, but I’m thinking that $1.5 million is probably a better bet because I do want to move overseas and perhaps buy (or rent) a small place to live out the rest of my years.

Also, $1 million was based on retiring at 65 I think, and if I want to retire earlier as a conservative estimate, I’ll need more money, and $1.5 million sounds better.

Currently, I’ve saved about $50,000 a year on average, and if I am able to keep up this rate of savings for the next 26 years, these are my growth numbers if I want to retire at 55 (conservative age):

• 1% = $1,743,303.91 saved
• 3% = $2,401,450 saved
• 5% = $3,391,275.59 saved
• 8% = $5,933,253.78 saved

As you can see, if I want to meet my goals I HAVE to save $50,000 on average after taxes, and it has to grow at least 1% for about 26 years to retire at 55.

The good news is that I’m young, so if I assume my nominal rate of return will be around 5%, and I should be on track to have ~$3.4 million by the time I retire at 55.

This is retirement savings overkill, but I’d rather kill it than miss it.

SUMMARY

• Knowing what kind of investor you are, is like learning how to crawl before walking
• Understand what you need that money for, when you need it, and how you’ll get it
• Risk has everything to do with how much growth you want; riskier investing = growth potential
• Know your retirement numbers of how much you need to have saved for retirement

This is a part of the Investing Series.

This is by no means a comprehensive list of shady tactics that financial advisors will pull on you, but it’s the ones I’ve come across, and are fairly common and easy things to check.

If you have any more tips you’d like to pass on to new investors, please make note of them in the comments and I shall update the post accordingly.

BE SUSPICIOUS OF ANYONE WHO SAYS THEY CAN MAKE IT RAIN

Every banker or advisor I’ve ever come across has tried to get their paws on my money by making commissions off selling me overpriced mutual funds.

Another trick is to sell you life insurance.

As long-time reader tomatoketchup pointed out in the comments in this post: What is investing, exactly?, there are a lot of crooks out there who make their fortunes by screwing you:

One important thing to mention is to be very cautious around anyone that calls themselves a Financial Advisor or Financial Planner (including companies like Edward Jones and Ameriprise for people living in the US).

These people are almost always scavengers out to take a cut of your money while providing absolutely nothing useful to your finances.

I had a “financial planner” who in hindsight was really just an insurance salesman, and fortunately I discovered sooner rather than later that he was managing my money with his interests in mind; not mine.

He got too greedy which set off a red flag and inspired me to learn about this topic. After I fired his ass, I manage all my investments on my own which consist of only 3 index funds.

A very easy litmus test to identify these jackals: anyone who tries to sell you any type of permanent life insurance (e.g. whole life, variable universal life) is trying to take your cash.

All I can say is to be suspicious because lot of people want a bit (or a lot) of your money for themselves.

If it was as easy to make money as they say it is, bankers wouldn’t be feasting like kings off all those the fees they charge us to manage funds, because they’d be millionaires and wouldn’t really need to work.

Be suspicious of financial advisors like Charles in this hilarious video:

Via Vanessa

THINGS YOU MIGHT COME ACROSS AS PRESSURE TACTICS

It usually starts like this (with my experience):

Are you actually happy with those returns? 

Because we have a great line of actively managed funds that I could show you…

Or how about this oldie but a goodie?

Do you even know anything about the stock market and investing?

I mean, what’s your education and credentials in being able to manage your money on your own? Do you have any knowledge or FINANCE-related accreditation?

At this point, I stop them, and can respond in three ways:

1. Very Nicely
2. Snarkily
3. Outright Rude

#1 Very Nicely: Yes, I’m happy with those returns. Thank you.

#2 Snarkily: Oh really? Tell me, do you invest all of your money in those funds?

#3 Outright Rude: You don’t say! Listen, I’d love to give you all my money to help me invest it, but first — can you tell me what your personal net worth is right now and how much you have personally made with these funds you’re trying to get me to buy?

I tend to choose Response #1 most of the time, unless they annoy me, in which I move on to Response #2.

I’ve never had to use Response #3, thankfully, but I’ve come close, especially when they try to put me down and make me feel stupid because they think that women don’t know anything about investing and don’t have the brains to learn it on their own.

I’m sure they get a lot of money intimidating people that way, by flashing their “financial credentials” around to bully people into indirectly paying for their year-end bonus.

Now I know this might seem unorthodox and rude to toy with financial advisors especially since it’s their job to make money off you, but it frustrates me to no end that investors are basically letting their hard-earned cash that they’ve saved, just slip through their fingers because they think someone else who calls themselves a “financial advisor” knows better than they do.

Do some research, and become a “sophisticated” investor so that you don’t fall for their tricks, and you are able to evaluate what they’re saying to you to see if it holds any water.

You don’t have to be mean the way I am, but you’ll notice just how fast they back off if they reach Response #2, because NO ONE wants to talk about their finances or lack thereof.

MANAGEMENT EXPENSE RATIOS (MERs)

Management Expense Ratios are a fancy way of saying that investors need to pay for the guy that they’ve hired to manage the mutual fund that you’re investing in, plus other fees (keep reading).

This hired financially-sound person will watch the portfolio and make sure that it follows what it says it was supposed to do as its strategy among other things.

WHAT MAKES UP AN MER?

• Management expenses: Investment research, marketing, the bank’s profit
• Dealer/Advisor Compensation or Trailer Fees
• Administrative Costs: Regulatory expenses, service costs, legal and audit fees
• GST (Canada): Goods and Services Tax

If you want to know exactly HOW much they take out of your account, it’s a bit tricker because it is taken out as a percentage of the entire portfolio of assets held at the bank in that mutual fund, not based on your money specifically.

This is what it looks like as a pie chart:

You can read a lot more about MERs here.

WHERE DO I FIND AN MER?

To find this “MER”, look around on the page that deals with that fund, and look for the part where it talks about fees; here’s an example:

HOW DO THEY TAKE OUT THE MER?

0.35% means that they take 0.35% of the entire assets of the portfolio, or out of the $422.78 million as of December 31st 2012, which obviously can change as assets will increase or decrease as the year goes on.

These calculations below are just a demonstration of how it works in general:

0.35% x $422.78 million = $1,479,730 a year, or $4054.05 a day

You only pay a portion of that $1.479 million a year, based on how many units you own.

With TD Canada Trust in particular, they take the MER out on a daily basis.

This amount will change as the funds assets grow and shrink, so I am fairly sure it isn’t based on just a single December 31 2012 number in this case.

If there’s more in assets by January 1st 2013, they will take the same amount of MER (that is the same percentage) out, just out of a bigger pot of money, which will end up as more than the $4054.05 a day.

This is calculated on a daily basis, which means the fee that you pay will also change on a daily basis.

Now do you see why everyone harps on MERs and making sure you don’t over pay?

Read: How and when is TD Canada Trust charging for their MERs?

In this particular example, let’s say you own $10,000 in this particular fund that charges 0.35% as an MER because it’s passively managed.

As I understood it, it works like this (Investors, please correct me if I’m wrong):

$10,000 / $422.78 million = 0.0024% is what you own of the entire fund’s assets.

0.0024% x $4054.05 = ~$0.10 a day

In contrast, if your actively-managed fund charged a 2.3% MER with the same assets of $422.78 million, this is what it looks like:

0.0024% x $27,220.08* = ~$0.65 a day

Yep. $0.54 extra in fees being eaten every single day you invest with them.

*Got this number of $27,220.08 by taking 2.3% x $422.78 million, and then dividing it by 365 days of the year.

BUT DON’T I MAKE MORE MONEY WITH HIGHER MANAGEMENT FEES?

You’d like to think so.

A question I asked myself at the start of all this investing was: Do these actively-managed funds actually return MORE versus passively-managed funds over the course of your investments?

The answer I got was: No. Studies have shown the contrary, which I will go more in-depth about in my Investing Series.

Over a life time, it really adds up, especially if you continue adding more and more money, and taking into account that inflation that also eats away at your future purchasing power each year.

The difference becomes even greater if you think about having $100,000 in the pot:

$100,000 = 0.024% of the fund’s total assets

0.024% @ 0.35% MER = $0.96 cents a day

0.024% @ 2.3% MER = $6.44 a day

We’re dealing in the DOLLARS now, not just in pennies of a difference in cost.

Update: Hat tip to Jared for catching my wonky late-night calculation and typos. You miss ONE space or a dot at 9 p.m. in a post and it screws everything O_o

WHAT IS A GENERAL RULE FOR THE COST OF A MUTUAL FUND?

There’s no rule, it depends on what the bank wants to charge.

If you want a benchmark for index-tracking mutual funds (a.k.a. Index Funds), I’d say around 0.50% and lower is “normal”, but you can find them as low as 0.15%, even in Canada.

Other actively managed funds start at 1% and go up to 2.5% or even 3% at times as an MER.

WHAT ARE ‘NO LOAD’ MUTUAL FUNDS?

Everyone talks about buying “no load” funds, but WTF does that mean?

No load means they don’t charge you to buy the funds.

I know, at this point you’re thinking:

But .. I’m GIVING my money to them.

They’re taking MY money to invest, and they still want to charge me money on top of that!?

Sadly, yes.

This is where banks ALSO make their money in addition to MERs, by charging you a friendly 5% sales commission on selling you a fund that you so desperately need to buy.

ACCOUNT FEES THAT ARE BELOW MINIMUMS

This is not a huge deal, but generally if you have less than $10,000, they will charge you an account fee because you don’t have enough invested with them.

Much like not having $1000 or $2000 as a minimum balance in your chequing account, you can get slapped with a small fee each year for having an account that doesn’t meet the minimum balance required.

This should in NO WAY deter you from starting to invest, because the fee isn’t a massive amount of money, and you should just get started and work towards waiving those account fees.

This is why it’s a great idea to stick to one bank or brokerage, and do all your buying with them.

MOVING RETIREMENT ACCOUNTS FROM ONE AREA TO ANOTHER

You can move your retirement accounts from one bank or brokerage to another, but BE CAREFUL and call ahead of time to make sure you aren’t making a mistake.

For instance, if you take out the money from your retirement account (RRSP, 401K, IRA, TFSA) with the good intention of putting it back into the same retirement account but with a DIFFERENT bank, call both banks ahead of time for the procedure.

You don’t necessarily have to even lift a finger and get the money in a cheque made out to you, you can just ask for a direct transfer and let the banks deal with it.

CANADIAN RRSP FROM ONE BANK TO ANOTHER

A good real-life example is when I left my company. I had a retirement plan with them that I was NOT planning on keeping because their mutual fund selection had no index funds, and they were charging me a fixed account service fee to boot.

I called my bank and told them I wanted to move my RRSPs and they set everything up without my having to receive a cheque or have any money pass through my hands.

This is especially important that come tax time, you don’t LOOK like you’re trying to raid your retirement accounts on the sly, because the government will penalize and tax you on such withdrawals.

THERE’S ONLY ONE TRICK I KNOW OF, FOR TFSAs IN CANADA

Let’s say you put all your TFSA money into one bank or one area. As TFSAs are tax-sheltered and not tax-deferred, you have already paid tax on that money, and it’s allowed to grow without any additional taxation.

If you want to move it all to another bank, you could wait until December, and simply withdraw all the money before the end of December 31st, and then re-deposit it in the new bank in the new year let’s say January 1st when the TFSA contribution room resets itself.

I still don’t like this for anything except straight-up savings accounts, because a lot of things can go wrong, but it’s something you can consider if you are thinking of moving TFSA savings accounts from one area to another.

AMERICAN 401K FROM ONE BANK TO ANOTHER

Another example I have is for Americans this time, is let’s say you want to move your 401K or IRA from one bank to another.

You have to ask and specifically get the details for a trustee-to-trustee transfer so that come tax time, your 1099-R doesn’t have any sort of code (other than Code: G) that says you withdrew the money completely and now owe federal and state income taxes on, and an additional 10% penalty on the cash (for anyone under 59 1/2 years old).

Let’s not even mention the fact that if you shift your accounts in the U.S., the original bank could very well do a friendly 20% withholding tax on your accounts to “prepay” the taxes you may owe, in case you decide to keep the money rather than put it in another retirement account.

You’d lose 20% right off the bat, plus other fees I am sure I haven’t heard of yet, and you can recoup that 20% when tax time comes around, but you’ve basically handed over 20% of your retirement account to the government for them to use for free, no interest being earned or accumulated.

It’s just as silly as getting a tax refund.

ALWAYS CHECK WITH YOUR BANK BEFORE MOVING RETIREMENT ACCOUNTS

I’d give an Australian or U.K. example at this point, but I haven’t lived or worked there, so I’d be useless. Please call your bank before you move your Superannuations or Pensions (if you’re even allowed to..)

IN GENERAL, MOVING ACCOUNTS IS A BAD IDEA

I really, strongly suggest you do your research and stick to ONE bank, ONE brokerage and ONE area to do your investing in.

You can get the most amount of gains out of sticking in one place and not shifting all the time, even if you can chase down higher interest rates.

Even if you can avoid being flagged by the Canada Revenue Agency (CRA) or the Internal Revenue Service (IRS) for dipping your paws in your retirement cookie jar, you may also incur costs to do these transfers.

Some banks don’t want you to leave them (rightly so), and they could very well impose an administrative charge to move one account from one bank to another to deter you from leaving their bank.

SUMMARY

• Be suspicious of financial advisors; everyone is out for some of your money
• You can learn enough to be a “sophisticated” investor and cut out the middlemen
• Follow your instinct and stay stubborn to the investing strategy you’ve chosen
• Watch out for Management Expense Ratios (MERs) that eat a chunk a day
• No Load mutual funds are mutual funds that don’t charge a sales commission
• Be aware of how much you need as an account minimum to waive their fees
• Stick to one bank and/or brokerage for investing; don’t spread your money around
• Don’t move around too much if you can help it, it may cost you a lot in fees & taxes

What I’ve noticed is that we PF bloggers fall into 4 camps:

• Investing/Stock Technical Bloggers: They talk about stocks, dividends, mutual funds
• Lifestyle Bloggers: They tend to talk about their life and their money; either in debt or not
• Informative How-To Bloggers: They give FAQs, How-To posts and other Money-To-Do Lists
• Frugal Bloggers: They wax poetic on the wonders of white vinegar and saving toilet paper

I am probably a Lifestyle Blogger more than any of the other categories (well, maybe Informative too), but I’d like to see if I can find a balance between all 4, because I do read all those kinds of blogs and they all fall within my interests.

(Also, this blog is going to get stale if I keep repeating and harping on you to budget and track your expenses to get out of debt and onto the path of wealth.)

So this is the first of many posts in the Investing Series that will appear over the year on this blog, which will run on Saturdays as they’re completed.

Now a lot of you may think you are not at this point and want to run away, but to that, I say….

YOU DON’T NEED A LOT OF MONEY TO START INVESTING!

All you need to invest is $25 to get started (minimum purchase amount for an index fund).

$25.

Before you roll your eyes at me, I KNOW you have at least $25 lying around somewhere.

I KNOW IT.

I’m the girl who once found a $20 bill on the ground, and regularly finds dimes and quarters at least once a day.

I am just like those fancy French pigs that dig for truffles except I sniff for money and bank it instead of trying to eat it.

So trust me. I can smell that extra $25 on you.

I know you’re thinking of using that $25 to buy something frivolous and enjoyable, but you should really think twice before you do it, or else you are never allowed to write, say or think the words: I don’t have any money to invest.

…… and I especially don’t want to see this face:

You can start now, start TODAY and start small.

You have money. Budget and track your expenses and you will just have to choose what you want to do with it.

Now that we’ve established that you have money to invest, let’s talk about what investing means:

WHAT IS INVESTING?

It’s putting your saved money into something (other than in savings accounts, which are considered ‘cash’ or “like cash”) knowing it may bring you a Return on Investment (ROI) in the future, after taking inflation into account (more on that later).

THE DIFFERENCE IS ALL ABOUT THE LEVEL OF RISK!

You may be wondering why saving your money in a chequing account is not the same as investing.

Well, investing is more than just saving your money, because that is pretty much guaranteed as a return on investment. You know you’ll get 1.8% or 2% on your money in a high-interest savings account and it has nothing to do with the markets going up or down.

Investing has an element of risk involved and it is not guaranteed, which is why you can earn more investing your money than you can (think 18% or 20%), rather just stuffing it in some savings account.

It’s also basically betting that you’ll be buying something that will increase in value, and be worth more than what you paid for it.

In general, investing your money means:

• Buying stocks
• Buying mutual funds
• Buying index funds (you can think of them as a type of mutual fund)
• Buying collectibles (that will increase in value, but it’s a risky business )
• Buying real estate (tricky, as not all houses in all countries have good returns over the long-term)
• Buying private stocks in start-up companies in exchange for capital*

*This is kind of like lending your uncle $$$$ to help him start his small business.

And investing your money does NOT mean:

• Putting your cash under your bed (you’re actually losing money every day due to inflation)
• Putting it in a savings account for the interest (it just basically evens out to $0 because of inflation)
• Buying a lottery ticket of any kind in hopes of winning the jackpot
• Buying jewellery & clothes (I loathe the term “investment shopping”!!)
• Buying collectibles that are marketed as “limited edition” when it isn’t
• Buying cars (unless they’re collectibles or rare with a lot of history)

There are plenty more examples I am sure you can all come up with but the idea is buying things that you can hold and sell for a lot more money than if you had kept it in a bank account for the same amount of time.

WAIT, YOU PUT “COLLECTIBLES” UNDER INVESTMENTS!?

Yes!

Collectibles can also be investments of a kind, although they are riskier (in my eyes) than straight-up stocks, or mutual funds.

Collectibles refers to anything that can be kept and resold at a higher price later.

Booze is a big one — for example, people buy wine by the cases from the best years, leave it in a wine cave, and the value just increases as the wine ages.

Art is another, and my best example is to let’s say you were that guy (Irving Blum) the art dealer who bought the 32-piece set of Andy Warhol’s famous Campbell Soup painting practically for just a song ($1000 in 1962), before he became the Andy Warhol with his famous Marilyn Monroe paintings.

Via

He bought the entire set of 32 paintings for about $1000 in 1962.

After Warhol was hailed as a great pop artist of the 60s whom nobody understood at the time, the same set of 32 Campbell Soup paintings were sold for about $15 million in 1996.

Not a bad investment! 34 years, $1000 in the pot, and he came out $15 million richer.

Other “collectibles” include comic books (first edition of Superman for instance), rare books (first, signed edition of classics), and basically anything you can think of, including cars.

Some cars are worth a heck of a lot of money due to their history (who drove it for instance), or just because they’re rare.

YOU CAN ALSO MAKE SHORT INVESTMENTS BASED ON HUNCHES

We consumers are a funny bunch. We’ll pretty much pay anything when we want something badly enough.

Anyone remember Tickle-Me-Elmo or any of those other toy crazes that made parents lose all rationality during Christmas season?

You probably also knew someone (or at least I did) who used to do their research on the next hottest toy craze, and he’d go and buy up ALL THE TOYS, then re-sell them on eBay to desperate parents who absolutely needed to buy little Mikey that Tickle-Me-Elmo he had been screaming about.

Or how about a more recent example, like Hostess Twinkies? People thought they were disappearing, and instead of $4.50 for a box of 10, people were raking in the Twinkies cash and selling 12 boxes they bought at retail for $54 for a jacked up $300.

WHY ARE CARS AND JEWELLERY NOT GENERALLY CONSIDERED INVESTMENTS?

Depreciation.

(Plus once the price tag gets snipped off, it doesn’t look as shiny.)

Depreciation is when something goes down in value due to “wear and tear” (read: it was sold, and you cut off the tag, so to speak and are unable to return it any longer).

For jewellery, unless it’s a famous diamond that was worn by some famous actress back in the day, diamonds for instance, are not all that rare.

An example of a rare item with a lot of fame is Elizabeth Taylor’s “Taylor-Burton Diamond Ring” (kind of an ugly name), which is 33.19 carats and has a lot of cachet attached to it:

(That ring is bigger than her head!… Okay, not really, but it looks like costume jewellery. Via)

Another example is the Hope Diamond which is rare because it’s BLUE:

Via

You can read all about it on the Smithsonian website here.

Otherwise…. chances are that plain ol’ H20 (water) is considered to be more scarce and rarer than a diamond. Hey that’s an idea… buy some fresh water and give that to your fiancee instead.

For cars, unless it has some similar history (famous, legendary, blabeddy bla bla), it is not likely to be worth anything.

In fact, buying a brand new car and then driving it off the lot, instantly decreases its value.

Note: The optimal point for buying a car at the lowest point of its depreciation while still being considered a fairly new car, is 3 years.

Buy cars that are about 3 years old, and you won’t lose your shirt in depreciation.

In short, unless something has a famous history, it is not wise for us ordinary folk to “invest” in jewellery other said pieces for reasons other than sentimental ones.

WHAT IS INFLATION AND WHY IS IT RAINING ON MY PARADE?

I know it must seem weird — how can you put $1 under your pillow and in a year, imagine that the same $1 could be worth less?

It’s because it all hinges on the fact that your money is simply not making you any money (yes, the power of compounding interest comes into play here).

Inflation just means that a dollar today is worth more than a dollar in 10 years, because you have to take into account what else the dollar could have been doing other than snoozing under your pillow.

From my tiny little chart above, you can see that if you just left your $1 under your pillow, you would have missed out on $0.20 – $0.63, because it was lying there, doing jack squat for you …. that lazy #*$&$ dollar…

Another way to look at it, is to understand that the price of everything goes up eventually, and if your money stagnates and earns 0%, it won’t go far in terms of purchasing power.

For example, people used to pay $0.05 for a bottle of Coca-Cola in the past. Now it’s about $1.00 for a can.

Listen, just talk to any grandparent and ask them how much things used to cost ‘back in the day’.

You’ll get a nice lesson in the eroding power of inflation on your money as well as some interesting stories to boot.

HOW DO YOU CALCULATE A RETURN ON INVESTMENT (ROI)?

You can calculate the return on investment on anything, the same way you would calculate how much money you earned in interest, dividends or in the value of the stock!

The Quick & Dirty Simple Calculation for Return on Investment:

Amount of your Financial Gain (Profit) / Total Cost of your Investment

Then if you want to make it a %, just multiply it by 100.

Finally, you can also figure out the simple ROI per year, by dividing it by however many years you’ve held said investment.

Note: There’s also another one that is more complicated, taking into account that the present value (PV) of your dollar will not be the same in 10 years, but for simplicity’s sake, let’s stick to just a straight-up ROI.

HOW DO WE USE THIS ROI CALCULATION?

Well let’s take for instance a very good year for a particular wine (real-life example):

It used to cost only $90 to buy that bottle of wine in 2009 (which you actually end up buying in 2010 because they had to harvest and bottle it).

In 2013, that same 2009 bottle of wine is now selling for $366.

Let’s say you invested $90 in a bottle of wine, and kept it (properly) in your wine cave for 4 years:

Find the Amount of your Financial Gain (Profit):

$366 – $90 = $276

What was the Total Cost of your Investment?

$90

Now divide your Profit by your Total Cost of your Investment:

$276 / $90 = 3.06

And multiply that number by 100 to get a Percentage (%)

3.06 x 100 = 306%

In 4 years, the price or the value of the wine has tripled, and is now worth 3 times what you paid.

Finally, figure out the ROI by year:

306% / 4 years = 76.50%

Imagine if you bought a whole case of that wine?!

Even better is if you could leave the wine alone and don’t sell the bottles until 10 years later — who knows how much it might cost to buy a bottle!?

At the very worst, you could drink your stash.

BENCHMARKS

Updated: As PK from DQYDJ pointed out correctly, you need to also know what other investments are selling for and have targets in mind.

For instance, if you invested a ton of money into wine, but you could have done better with just buying stocks of a winery, you should also be doing those kinds of calculations to know whether your money is doing better than if it were in something else.

A benchmark I like to use, is the overall stock market, which incidentally is how I like to invest my most of my money by way of index funds.

SUMMARY

• Investments are things you buy that return a value or an ROI over a period of time (short or long)
• Investments can include riskier things like collectibles (art, dolls, furniture, wine)
• Investments are generally not things like clothes, cars, or jewellery (again, unless they’re rare)
• Investments are affected by inflation and depreciation, among other things
• You can calculate an ROI by taking your profit and dividing it by your total cost of investment