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Tip Sheet
Tip Sheet Archive
Overview
High Dividend Yield
High Yield DJIA30
High Yield TSX60
Dividends at Risk
Dividend Risk DJIA30
Dividend Risk TSX60
Value Ratio Approach
Value Ratio DJIA30
Value Ratio TSX60
Graham's Approach
Graham DJIA30
Graham TSX60
Other Screens
Low P/E DJIA
Low P/E TSX60
Low P/B DJIA
Low P/B TSX60
Low P/S DJIA
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Stingy Investor Tip Sheet
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| Unwanted Partners |
You're likely to have several sneaky partners who want a slice of your
investment pie. Watch out because they might eat your profits.
When you buy funds you'll be charged an annual percentage fee based on
the amount of money you have invested. This fee is called a
management expense ratio or MER.
The taxman also wants his share. He'll take a cut of your profits
if you don't hide them in a tax-advantaged account like a RRSP or
a TFSA.
The government also eats away at your wealth by printing too much
money. Inflation is the culprit here and it's the primary reason why
ice cream cones which once cost $0.50 now cost $5.00. Inflation
reduces your purchasing power and it can be quite insidious.
I created three graphs to highlight the impact that these partners can
have on stock returns. Each has a line that matches the raw return
generated by the S&P/TSX composite. (I used annual return data to
make the graphs.) I then plot another line that tracks the index less
fund fees. Here I assume the fund manger doesn't add any value and
lags the index by the fees charged. The next line down tracks the
index less fees and less capital gains taxes. The tax is applied
annually which implies that the fund manager trades fairly frequently.
The lowest line adjusts returns for fees, taxes, and inflation. Each
graphs highlights a different fee and tax mix.
The first graph assumes a 2.5% annual fund fee (not uncommon for
active Canadian equity funds) and a 20% capital gains tax. In this
scenario you'd have only gained 23% after fees, taxes, and inflation since
starting in 1970.
The second graph assumes a 0.25% fund fee (roughly the fee charged by
Canadian exchange-traded funds) and a 20% capital gains tax. In this
scenario you'd have more than doubled your money since 1970 after your
partners' took their cut.
The third graph assumes a 0.25% fund fee and 5% capital gains taxes.
In this scenario you'd have roughly quadrupled your money after fees,
taxes, and inflation. If you hid out in a RRSP (i.e. 0% capital
gains tax) then you'd have almost quintupled your money since 1970
after fees and inflation.
The moral of the story? Try to keep your partners' sticky hands off
your cash. (But don't forget that special someone this Valentine's
day.)
(click for larger version)
 (click for larger version)
 (click for larger version)
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| | 02/05/2009 10:00 PM EST Permlink save & share | Fees |
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| Disclaimers: Consult with a
qualified investment adviser before trading. Past performance is a
poor indicator of future performance. The information on this site,
and in its related newsletters, is not intended to be, nor does it
constitute, financial advice or recommendations. The information on
this site is in no way guaranteed for completeness, accuracy or in any
other way. More...
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