When Low Fee Investment’s Don’t Pass the Stress Test



Over the last number of years, the prevailing narrative in the investment media has been centered around low fee investment products.  The wisdom is, why pay a 2% management fee for a mutual fund when you can get an ETF for 0.5% fee or less.  In a perfect world this makes perfect sense.  If a mutual fund with a 2% fee earns a 5% return net of fees each year, a similar ETF with a 0.5% fee should return 6.5% net of fees.  In a perfect world this makes logical sense, but we don’t live in a perfect world.

Benjamin Franklin said, “The bitterness of poor quality remains long after the sweetness of low price is forgotten.”  In Bull markets where all investments are rising, low cost investments win out 100% of the time.  It is not until we experience bear markets and extreme corrections that we start to taste the bitterness.  According to Fidelity Investments, since 1920 the S & P 500 has a 5% pullback on average three times a year, 10% correction once a year and plunge of 20% or more ever 7 years.  If the 20+% plunge occurs as we approach retirement, or worse when it does hit during our retirement years, the effects can be devastating… from not being able to sleep at night, having to delay retirement, or worst of all, running out of money in your later years when you not only need it the most, but are least able to earn an income.

A well advertised, low cost investment management company’s tagline is “Retire 30% wealthier”.  Based on a Balanced Portfolio and an average return of 6.21%, their portfolios will perform 30% better over a 20-year time frame.  Where their reasoning fails the stress test is when the market corrects when you are or are about to start using your investments as income to support your retirement.  Considering that our life expectancy has increased to the point that retirement could last 25 years or longer, it is likely that you will experience 3, and possibly 4 or more plunges in retirement.

What if the investment management fees included provisions that would either ensure the upside of the bull markets were locked in, or guaranteed that your retirement paycheck would not be affected by the corrections or plunges in the market?  Would it be worth paying a little extra in fees in exchange for peace of mind and the ability to sleep soundly at night?

If you are interested in learning more about these investment options, you can set up a complimentary, 30- minute phone consultation at calendly.com/mjhfinancial OR email me at michael@mjhfinancial.ca.