This article from the New York Times, “The Index Funds Win Again,” talks about a study done by Mark Kritzman, president and chief executive of Windham Capital Management of Boston, which shows once again that index funds are incredibly hard, if not impossible, to beat. I found the link at the Canadian Capitalist and couldn’t resist re-posting it here.
If you had purchased shares in the S&P 500 index (through the SPY index ETF) in July 1997 (at about $91-92 per share), your investment would be worth the same amount today, but in today’s dollars. So technically you would have lost money if you consider inflation. So it has an annualized return of about 0%, neglecting inflation. All this ignores dividends which were roughly 1.5-3% during that period (very rough guess). So let’s just for sake of argument that the dividends cancel out inflation. So again, the annualized return would have been roughly 0%. If you made any more purchases of the S&P 500 index after 1997, well, you annualized return would have only gotten worse because except for a brief period in early 2003, SPY hasn’t been below $91-92 since 1997.
Just found this great interview with John Bogle, “the father of index investing.” A must-listen for any investor, especially those who own mutual funds and those who have no idea what index investing is all about. If you already use indexes in your portfolio, they is still a lot of great information here, and it will help give you even more confidence that you are on the right track!
The Million Dollar Journey brought up 4 reasons why index investing may not be for you. His 4 reasons were:
- No Downside Protection
- No Control Over your Holdings
- An Indexed Portfolio will Always be Average. Never Better, Never Worse.
- It’s Boring.
Now onto the debunking:
- No Downside Protection What index investing gives you is the average return but with far less costs than active investing (either through an non-index mutual fund or do-it-yourself trading). Period. What does downside protection mean anyways? The only way to have true downside protection is to be able to forecast when the market is going to down. No one has been able to achieve this yet (and no one every will). The other way to have downside protection is to add some other asset class to your portfolio. In the extreme case, being 100% invested in a completely negatively correlated asset class would give you perfect downside protection. This is sort of how mutual funds offer some “downside protection”, however, one could also call this “upside suckage.” Mutual funds often carry some cash. This reduces their losses during down markets but also decreases their returns during up markets. In general, there are more “up markets” than “down markets” (ie. the stock market goes up over time). Therefore you want to be 100% invested all the time to maximize your return. So the fact that index investing has “no downside protection” (at least in the way that Million Dollar Journey means) is actually a good thing because it means you are less invested in cash and more invested in the market. I would say that even if you care about “downside protection” indexes ARE for you.
- No Control Over your Holdings He says that “This can potentially lead to over priced stocks having a larger weighting on the index” and cites Nortel as an example. Overpriced stocks in an market-cap weighted index (most indexes are market-cap weighted) do not pose a problem. I only hold indexes in my portfolio. If a stock in one of my indexes increases 100-fold tomorrow, my portfolio may go up a little. If that stock eventually falls back down to its previous levels, I haven’t lost or gained anything. The investor with “more control over his portfolio” may choose to do some trading in that stock. Because he/she cannot predict the future of the stock, he/she can have no effect other than to decrease his/her net returns due to increased trading costs. As for the Nortel example, the only people that would have suffered because of the fact that the index contained a high of Nortel stock (even more than Canadian mutual funds) are those that, say, switched out of Canadian mutual funds and into indexes while Nortel was at its peak. Those that held the indexes all along, would have experienced the huge increase in Nortel’s stock price as well as its decline, whereas those who held a Canadian mutual fund during Nortel’s rise and an index during its fall, would have experienced more of the fall than the rise. (This is all hindsight, of course. Nortel could have kept rising of course and fallen back less.) If you are worried about a re-occurrence of such a scenario, switch over to indexes gradually. Having less control is better. It means less trading, less costs, and higher returns.
- An Indexed Portfolio will Always be Average. Never Better, Never Worse. This is a good thing. Any portfolio, whether it be a carefully chosen assortment of stocks, a randomly chosen assortment of stocks, or a mutual fund, will on average get the average market return. What that means is that if we sum up the returns of a bunch of portfolios and divide by the number of portfolios the average return of those portfolios will be the same as the average market return (or equivalently, plot a histogram of the portfolios returns and the center of the bell curve will be the same as the average market return). The question is, can you control whether or not your portfolio’s future return will lie above or below the center of the bell curve? This is very difficult to do (if not impossible) in an efficient market, especially after you take into account trading costs. And consider the alternative if you fail in your quest to get above average returns. You may end up getting below average returns. Investing in the index is guaranteed to give you the average market return. It usually also does so at very low cost. The fact that the cost of investing in indexes is so low means that most indexes actually end up beating the majority of mutual funds (and probably those who pick stocks on their own as well). I would provide a citation but there are too many and I wouldn’t be able to decide which one to use.
- It’s Boring. The original poster admits that “this is probably the weaker of all the arguments.” He says that if you like “digging in research, watching the markets, and investing when you think the time is right” then index investing is not for you. I would argue that the main reason people do “research,” “watch the market,” and “invest when they think the time is right,” and find those activities non-boring is because they believe they can “beat the market.” Once you realize that you can’t beat the market and give in to that fact, you may find that index investing is not so boring after all. When you invest with indexes you will get the average return (sounds boring), but due to your decreased costs you will beat everyone else who is invested in mutual funds or buying individual stocks on their own, and that is exciting! I agree, however, that index investing is simpler, but that’s what makes it outperform everything else. Simpler means lower costs, and lower costs means greater returns.
As I was writing this, the Canadian Capitalist published a great reply to Million Dollar Journey’s post as well.
Rob Carrick recently did some analysis of mutual funds’ and ETFs’ MERs relative to their performance, which he calls FFI (Fund Fee Index) (see “How to get the skinny on your fund’s fat fees“). The FFI is supposed to be used as “a new way to measure the value you get from the fees you pay to your own mutual funds and exchange-traded funds.” It is calculated as follows:
Cute idea, but unfortunately it is a fairly meaningless measure since paying more expenses to a mutual fund company will not get you more gross returns (because returns are random). The big thing you will notice from the chart is that all the iShares ETFs scored far lower. In fact, as Carrick points out:
The best index score for a mutual fund was the 8.7 earned by the Phillips Hager & North Dividend Income. The worst score on the ETF side was the iShares Cdn Short Bond Index Fund at 4.8. Here, we have a vivid example of how the low fees of ETFs work to the advantage of investors. The ETF scoring worst on the Fund Fee Index beat the mutual fund with the best score.
That’s right, each of the 12 ETFs he chose beat the top 50 mutual funds of all types according to his FFI measure. He praises ETFs’ low fees, which is why the ETFs’ FFI scores are consistently lower than those of mutual funds, but stops short of making any grander conclusions. He says “it’s pointless to generalize about the value that investors get for the mutual fund fees they pay – some funds are outstanding, many are middling and some are pretty bad.” Maybe so, but we can definitely generalize and say that investors get much more “value” (I’m using Carrick’s definition of value here… a low FFI) out of ETFs than they do from mutual funds.
In general the FFI is a useless measure. Here’s an example. If a mutual fund or ETF had a 5 yr. annualized return of 1% and an MER of 0.1%, we get an FFI of 11 . Let’s say another fund or ETF had a 5 yr. annualized return of 20% with an MER of 2%. That gives the same FFI of 11 . So what does that tell us? That these two investments are equally “good”? The FFI hides the returns and in the end doesn’t tell us anything.
The only way in which the FFI is moderately useful is for comparing funds in the same sector or market. Then we can truly understand why the ETFs have lower FFIs than the mutual funds and what that actually means. The FFIs for the ETFs range from 0.9 to 4.8. These are ETFs such as iShares CDN Composite (XIC) with an FFI of 1.3 and the iShares CDN Short Bond Index (XSB) with an FFI of 4.8. The gross returns of the mutual funds should, on average, be equal to the gross return of the iShares ETF in the same category (because the gross return of the iShares ETF is the market average’s return). So when comparing ETFs and mutual funds in the same sector, the only variable affecting the FFI score is the MER. The higher the MER, the higher the FFI. So for this specific case, the FFI basically just becomes another measure for the net return, and as Rob Carrick says “The ETF scoring worst on the Fund Fee Index beat the mutual fund with the best score.” But what he is really saying here is that in any given sector, the iShares ETF for that sector had a higher net return than all the mutual funds in that sector that he looked at.
John Chevreau looks at the latest “the SPIVA (Standard & Poor’s Indices Versus Active Funds) scorecard for 2007” and it doesn’t look good. When will the average Canadian realize that investing in mutual funds is a loser’s game? Check out Andrew Teasdale’s interesting comments below the article. Here’s a snippet:
Mutual funds in general are products whose main objective is to earn returns for financial intermediaries and financial institutions and in many respects pander to the short term whims of the general investing public and the financial community at large. Sadly the mutual fund industry (as a whole) could be considered more of a game with the odds stacked against the investor than a serious attempt to deliver value and discipline. . . Canada however is one of the worst offenders when it comes to the value for money mutual funds offer the investor. When will Canadian investors as a whole start to realize that the odds, based on the current status quo, are more often than not stacked against them?
Rob Carrick recently “gathered 10 of our favourite bits of investing advice, on topics ranging from stock-market risk to which mutual funds to buy” and called it the 10 Commandments. A commandment is “a command or order,” so something like “thou shalt not use the word commandment incorrectly” is a commandment. “Commandment” #10 is “Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and almost invariably, abandon it at precisely the wrong time.” C’mon that’s not even a commandment! So what is the order here, that we should not jump ship on a good strategy that goes bad? or should we not use strategies? or should we abandon them at precisely the right time instead of the wrong time? The longer explanation does not leave things any more clearer, offering such advice as “ignore the slumps or use them as a buy-low opportunity,” or ” judge whether your fund manager has what Dreman calls a good strategy.” For what’s it’s worth, the only words of advice in there I thought were useful were Buffett’s (use low-cost indexes) and Malkiel’s (less fees are better).
A while ago a guy named Alan Haft (he wrote a book called “You can never be too rich”) made up his own 10 Commandments of Investing and it’s been in my drafts folder ever since I saw it. I think he sums up the most important things that people should do with regards to investing, they are well written, and they make sense. Here they are:
- Stick with the indexes
- Watch those fees
- Create a bond ladder
- Watch your money
- Don’t rush in
- Don’t take the risk if you don’t need the return
- Get out if something isn’t working
- Understand tax consequences
- Keep it simple
Here are some highlights:
1. Stick with the indexes
Leave the individual stock picking to gamblers and speculators. Very few people really understand how to successfully pick individual stocks, and if they do, the news that drives markets today is totally unpredictable, making individual stock picking a highly risky venture. Reams and reams of statistics prove index investing almost always outperforms the financial advisors, money managers, and stockbrokers. Stick with the indicies and you’ll likely wind up far ahead of the game. Care to speculate a bit on some individual stocks? Do it with a small portion of your money, but certainly not the bulk of it.
2. Watch those fees
Wall Street loves investors that don’t watch their fees. For those investing in funds, check out www.personalfund.com. You might be shocked to find out the total cost your funds are charging you to own them year after year. Especially over the long haul, fees can destroy your returns. Minimize fees as much as possible by investing in low-fee, highly diversified investments such as one of my personal favorites, Exchange-traded funds such as those offered by www.ishares.com
7. Don’t take the risk if you don’t need the return
Many people would do perfectly fine getting 7-10% returns on their money, yet their portfolios are invested in things that strive for well beyond that. Especially if you’re a retiree, if you doubled or tripled your money overnight, would you go out and buy a fancy new sports car? A mansion on the hill? Few of us would. And for that reason, always ebb towards the safer side of investing as much as you possibly can
Check out the original article for the rest!
There was yet another Rob Carrick disaster in the Globe & Mail this week, a newspaper that I am losing respect for all the time. After reading the headline,
ETF advantage fades in down market, I knew it was going to be a beauty. He starts off by explaining that index funds and ETFs “clean up” in a bull market.
One of the top no-brainer investing moves is to put money in an exchange-traded fund or index fund if you want to clean up in a bull market.
But why just in a bull market? It is unfortunate that he doesn’t give any reason why indexes might perform better in a bull market (or bear market). The most obvious reason is that index funds or exchange-traded funds represent “the average” but have lower MERs. This same logic should apply to bear markets right? His whole argument that ETFs and index funds “beat” actively managed mutual funds in bull markets but perform poorly in bear market is weak. It rests completely on being selective about what past periods to look at and a belief that mutual fund managers are “market pros [that] are using their training and experience to pick the best stocks.” Couple that with reporters’ tendencies to write about both sides of the story, in this case searching for advantages and disadvantages to both index ETFs and mutual funds even if it means leaving readers with an unfair and inaccurate picture.
In the second paragraph, he mentions that ETFs did not perform that well between Sep. 1, 2000 and Oct. 31, 2007 but from 2002 onward they performed much better than actively managed mutual funds. He thinks he has it all figured out; index ETFs perform poorly in a period that includes a bear market.
. . . the advantage of ETFs isn’t so clear over a longer period that includes a down market. The past seven years are a good example. If you bought ETFs at the peak of the last bull market on Sept. 1, 2000, and held until this past Oct. 31, your returns would look puny compared with many popular Canadian equity mutual funds.
He even suggests that investors consider “investing in the Canadian market, but through mutual funds rather than ETFs” because “the S&P/TSX composite is looking shaky right now after a five-year bull run.”
He describes accurately how the S&P TSX Large Cap index did poorly after Sep. 2000 and explains one of the reasons for this: the fact that Nortel made up close to one third of the index whereas mutual funds were limited to about 10% exposure for each stock. So when Nortel lost almost all of its value after 2000, the index, with more Nortel exposure, would have faired much worse than actively managed mutual funds (in fact, the index performed so badly that the “capped” S&P/TSX 60 index was created after the Nortel debacle). The index would have also faired much better than the actively managed funds between 1997 and 2000 because of Nortel’s gains thus compensating for the loss from 2000-2002; however, he conveniently leaves out the 10-year figures (1997-2997) and only uses a “seven-year comparison prepared especially for this Portfolio Strategy column.” His reason for not using 10-year data is that “a 10-year slice is of little use because many funds and ETFs haven’t been around that long.” I find that rather odd because the TSE/S&P TSX Composite has been around since 1977 and the TD Canadian Index mutual fund have been around for 10 years! Of course I agree that “many funds and ETFs haven’t been around that long,” but since we’re only looking at Canadian equities here, isn’t one Canadian index enough? After all, he only looked at one index for the 7-year period.
I decided to get my own figures from Morningstar’s Fund Selector:
|Number of funds that beat the TD Canadian Index Fund||Total number of Canadian Equity funds||% of funds that performed worse than the TD Canadian Index Fund|
My Method: Using Morningstar’s Fund Selector I searched for funds in the “Canadian Equity” category that have a 10-year return greater than -50%. This allowed to me to find out how many funds have been around for the past 10 years. Then I searched for funds that had performed better than the TD Canadian Index fund over that same 10 year period to determine how many funds beat this index fund. I then repeated the same procedure for 5 yr. and 3 yr. periods. The TD Canadian Index fund’s performance over the 3, 5, and 10 years periods was 19.8%, 20%, and 9.2% annualized, respectively.
As you can see from the table, the indexes beat a large percentage of actively managed mutual funds over the past 3, 5, and 10 year periods. Note also that there is some survivorship bias in these figures. Presumably, in 1997 there were more than 68 mutual funds in the “Canadian Equity” category but only 68 “survived” until 2007. One can assume that the ones that did not survive were more likely to have performed worse than the index, hence their reason for being discontinued, retired, or merged with other funds. So the percentage of funds that performed worse than the TD Canadian Index Fund is likely to be higher than 66% if we could somehow include funds that existed in 1997 but no longer exist in 2007.
Indexes can do even better than this if only the MER was lower. The TD Canadian Index fund has an MER of 0.85% but the iShares CDN S&P/TSX Cap Composite Index (XIC) has an MER of 0.25%. XIC does go back 5 years; however, it wasn’t always tracking the TSX Composite; it used to track the TSX/S&P LargeCap 60 index so I will not look at its performance values. Let’s assume that if XIC (in it’s present form) had existed 10 years ago, it would have performed 0.6% better than the TD Canadian Index Fund over that same period due to its lower MER, or 20.4%, 20.6%, and 9.8% annualized over the past 3, 5, and 10 year periods, respectively. This approximation is consistent with the fact that in 2006 the TD index returned 16.4% but XIC returned 17.0%, a difference of exactly 0.6%. I re-ran my fund searches on Morningstar and here is what the performance would be if XIC existed 10 years ago in its present form with an MER of 0.25%:
|Number of funds that beat the hypothetical iShares CDN S&P/TSX Cap Composite Index (XIC)||Total number of Canadian Equity funds||% of funds that performed worse than the hypothetical iShares CDN S&P/TSX Cap Composite Index (XIC)|
As we see once again, the S&P/TSX Composite Index with a 0.25% MER has outperformed over 71% of all actively managed mutual funds in the “Canadian Equity” category in the last 10 year, 5 year, and 3 year periods ending in Oct. 31, 2007. I have not cherry-picked any period and I have shown three different periods, not just one. I have not thrown out any periods based on whether or not they include or don’t include either bull markets or bear markets. The original article only looks at one bear market and concludes that indexes perform worse than active management in bear markets. I am not at all convinced that this is a consistent truth or “rule.” There is lots of data from the US for example that shows that over long periods of time (which include more than just one bear market) indexes handily beat actively managed mutual funds. In A Random Walk Down Wall Street, Burton Malkiel quotes a Lipper study (2007 edition, pages 267-268) that found that from Dec. 31, 1985 to Dec. 31, 2005, the S&P 500 index beat 82% of mutual funds and on average performed 1.5% better than the average fund per year. I would find it very hard to believe that one could increase performance even more by switching from indexes to mutual funds at certain times, or even holding some balance of mutual funds and indexes. Even if we looked at more than one bear market and it turned out that indexes did perform worse in every bear market, without being able to predict when future bear markets start and end, would this information be helpful? How would you know when to switch to mutual funds and then back into index ETFs for the next bull market? You would be guessing and in the end you would lose out due to commissions spent on buying and selling the ETFs and the higher MERs on mutual funds.
I while ago I bought Vanguard Europe Pacific ETF (VEA) for the international portion of my portfolio and one reader had the following comment:
Just a quick question. With regards to balancing one’s portfolio, would ETFs like VEA (and I see there is now one that encompasses the whole world excluding the US), not pose a problem? If for example the European markets did well one year but the Pacific markets performed poorly, then one would be unable to rebalance by selling a European based ETF’s (like VGK for example) and buying more Pacific based ETF’s (VPL for example). With everything in one basket one could not take advantage of the gains to be made by selling high and buying low. Is this assumption correct? Or is it true that because VEA comprises 75% VGK and 25% VPL, that it would reflect any net changes made by owning a combination of both VGK and VPL?
Your assumption is correct, one could not take advantage of the gains to be made by selling high and buying low the stocks in one region vs. another. These rebalancing “bonuses” are small, but more importantly, they may completely disappear after trading costs are taken into account. VEA does not contain a fixed percentage of VGK and VPL underneath. It contains the market cap weighting of all its components. Market cap-weighted indexes have several advantages as investments:
Market value-weighted indexes have lower trading costs. If you made your own index, and the index never added or removed stocks the stocks would be bought once and never sold. As one stock goes up in value, it maintains the desired allocation in the index. This keeps trading costs low as one essentially rarely needs to make trades, except for when stocks are dropped or added from the index. Market value-weighted indexes have the lowest MERs, and other indexes like fundamental-weighted indexes, or fixed-weight indexes have higher MERs due to increased trading within the index.
With market value-weighted indexes, one never ends up holding on to dogs. Imagine it is the early 1900s and you own shares in a fixed sector-weighted index (did such a thing exist back then?). The index contains 25% financials, 25% railways, 25% consumer goods, and 25% manufacturing (or a fixed percentage of each individual stock, it’s the same thing). Every year the index is rebalanced. Pretty soon railways start to go out of style as air travel is invented and highways are built. The 1960s arrive and “tech” stocks are all the rage. The index rebalances religiously, which leads it to purchase a lot of railway stock which continues to do badly, meanwhile it has missed out on the rise in tech stocks. The worse railways do, the more you have to buy in order to keep your portfolio balanced (in addition to paying more commissions). You now wish the index had altered their weightings to contain less railways. One way to do it might have been to not fix the amount allocated to each sector and just use market cap-weighting instead. Or use market cap-weighting while taking into account large changes in what is going on in the market. For example, one could have envisioned a “smarter” version of the S&P 500 index that underweighted tech/IT stocks in around 2000 (selling high) and went back to their appropriate market cap-weight in 2002. Of course we only wish we had a crystal ball back in 2000 that could have warned us that tech stocks were about to fall. It seemed inevitable, just as it did in 1997. Unfortunately there is no foresight in the market and there was no telling if tech stocks would not have kept climbing after 2000. Furthermore, if you believe that markets are largely efficient, there is no such thing as “buying low” or “buying high” and it is not possible to “take advantage of the gains to be made by selling high and buying low” as there are essentially no “gains” to be made. There are only “losses” to be incurred through increased costs of trading and higher turnover.
In the scenario you described you said “If for example the European markets did well one year but the Pacific markets performed poorly, then one would be unable to rebalance by selling a European based ETF’s (like VGK for example) and buying more Pacific based ETF’s (VPL for example).” Personally I would get a bit nervous in buying more VPL. How do you know it is at a “low”. What if it actually at a “high” of even greater future “lows.” I was in an investment club from around 1999-2005 (the club ended in 2005). We consistently thought we were buying stocks at “lows.” We bought stocks like Nortel, Nokia, 360 Networks, Global Crossing, Lucent, etc… after sharp declines only to watch them decline even further (often with another purchase on the way down for good measure). So this is the problem I have with fixed allocations and rebalancing. If you bought 75% VPL and 25% VGK and held them in your portfolio. How do you know if 25% VGK is “just right”, “over-valued”, or “under-valued.” If it falls to 15% now how would you classify it? If it was over-valued before, now it might be just right. If it was just right before it might be considered under-valued now. But if it were truly under-valued (in the sense that the equities in VGK are worth far more than what the market is valuing them at) most likely other smart investors would have already taken advantage of it (as if you’d be the first to realize it!) and so it’s most likely that those equities are “just right.”
I blogged a lot about Equal Weight Indexes in the past:
- In Non-Market Cap Weighted Indexes: The Next Big Thing I ballyhooed equal-weighted indexes and lamented the lack of equal-weighted indexes in Canada. My opinion of equal-weighted indexes would soon change.
- In Equal-Weight S&P 500 Index I came to the full realization that RSP, the S&P 500 Equal Weighted index only performed better because of its higher concentration of mid-cap stocks.
- In Too Many Choices (or why I am ready to give up) I mentioned that “I have now come to the realization that RSP is very similar to the S&P 400 Midcap Index which is also available as an ETF (MDY). It is very highly correlated . . .”
Regrettably, I don’t think equal weight indexes are all that I initially hyped them to be. I did some searching on the web for more information on the advantages of market cap-based indexes over fixed weight indexes but had trouble finding any information at all, however, I think my reasoning above makes sense. As in many arguments over financial instruments and investing strategies, cost is again a huge factor.
According to Fidelity, we need 80% of our current income to retire (see Canadian Capitalist’s “Fidelity’s ‘Scary’ Retirement Findings“, where I found this story). Canadians on average have 50% of their pre-retirement income in retirement, but this is no different from other countries; United States: 58%, Britain: 50%, Germany; 56%, Japan: 47% (see “Want to play in retirement? Test your future income“). If those numbers are not adequate, it implies that the average senior in the United States, Britain, Germany, and Japan are all in dire need. I doubt that is the case. (My opinion is that people should save as much as they want. You might need only 50% but if you want to spend a lot in retirement and travel instead of just tinkering in your garden then maybe you need 80% of your pre-retirement income, or maybe 150%, just in case.)
The funny part is that even if you wanted to get to 80%, the hardest way to get there would be to use Fidelity’s products. All their MERs are above 2% (click on Facts & codes). It’s too bad their retirement calculator doesn’t have a slider bar for the MER or rate of return, then you would be able to see just how badly these management expense fees can affect the final value of your portfolio, and in turn, your annual income in retirement.
I just did a calculation and if you invest $8,500 annually starting from the age of 30 you end up with $2 million at the age of 65 if the contributions are indexed to inflation and the rate of return is 8% (the return you might get if you buy a low-MER (0.25%) investment, like an index ETF). Decrease that return to 5.75% (the return you’ll get if you pay a 2.5% MER on Fidelity mutual funds or their managed portfolios) and you’ll have only $1.32 million at age 65. Assuming $2.64 million is what one would need to keep the same income one enjoyed pre-retirement:
In the 2.5% MER case: $1.32 million is 50% of $2.64 million
In the 0.25% MER case: $2 million is 76% of $2.64 million.
So by simply not using a company like Fidelity and going with a competitor like Vanguard or iShares and buying index ETFs (with far lower MERs) instead, you can easily get closer to that 80% figure and increase your nest egg from to $2 million from $1.32 million without even having to save any more money. By the same token, it could probably be argued that one of the main reasons that Canadians do not have 70-80% of their pre-retirement income in retirement (and only have 50% instead) is because of the amount of MERs, fees, and commissions they pay every year to the financial industry.