We’re going to poke a bit of fun at Royal Bank of Canada.
There’s a great 1709 quote by Alexander Pope, from his Essay on Criticism, which goes as follows:
A little learning is a dangerous thing;
drink deep, or taste not the Pierian spring:
there shallow draughts intoxicate the brain,
and drinking largely sobers us again.
The Pierian spring is a source of knowledge. Pope suggests that if we drink a small amount from the Pierian spring, we’ll become sophomoric—potentially leading us to trouble.
RBC was hoping to take advantage of shallow draughts when they offered their own brand of low cost index funds. The only trouble for keen, would-be index investors was that the funds weren’t “low cost” at all.
They were some of the most expensive index funds on the market.
When the funds were introduced, RBC probably hoped that inexperienced investors would sleep-walk into these expensive beauties, ensuring that the banks would make money from investors’ lack of knowledge.
Check out what $10,000 invested in each of the RBC indexes ten years ago would have turned into by December 19, 2011:
|
Funds |
Annual Hidden Fund Costs |
Fund values on December 19, 2011 |
Stacked up against RBC’s actively managed flagships: their Canadian equity fund, their U.S. equity fund and their International equity fund, The Royal Bank probably expected their indexes to dramatically lose.
But they didn’t.
Costs matter—a lot.
Even though these indexes had high internal costs (I certainly don’t recommend them) they were still significantly cheaper than RBC’s actively managed counterparts.
Check the tale of the tape below, assuming that $10,000 was invested in each of these funds, ten years ago:
|
Funds |
Annual Hidden Fund Costs |
Fund values on December 19, 2011 |
Total percentage of underperformance, relative to RBC’s indexed counterpart |
|
5.1 percent underperformance |
|||
|
4.5 percent underperformance |
|||
|
28.9 percent underperformance |
Who benefits from higher fund costs?
The financial service institutions
Who benefits from lower fund costs?
You
How do you give yourself the highest likelihood of long term investment success?
- Diversify your money across different asset classes
- Keep your investment costs as low as possible
Spread the word about this series of posts among your friends and relatives. And if you haven’t checked out my book, Millionaire Teacher, it explains this investment process.
We all deserve to drink deeply from our own Pierian Springs.
