As long as I can remember, my kids have both wanted a golden retriever. Unfortunately, Daniel and I have to choose between breathing and having a large hair shedding animal in the house. We, therefore, settled on a pair of “junior retrievers”, two adorable gerbils who quickly became a part of the family. Fast forward to this past summer and our last of the two “retriever gerbils” died, leaving us with a big hole in our hearts (and a lot of gerbil gear).

After a suitable period of mourning my wife announced one recent Saturday morning “It’s time. Let’s get on over to Al’s Pet Shop and adopt a new pair”. With some reservations (If your kids have ever asked you for a pet you know what I mean) we made the trek across the city ... a couple of hours later Lewis and Clark (Kayla’s idea - after having spent a recent family holiday in the Dakota’s) were nicely settled in their new home. Reacquainting myself with handling these two little rodents, it struck me how strange it was that these two small creatures could capture such a big piece of our hearts.

Which, of course, brings me to the main point of this story (I bet you were wondering). Paying attention to the small things often leads to big results. Take your investments as an example...often hidden and seemingly insignificant costs can have a serious impact on your investment nest egg! What costs, you may ask? “I know I’m paying you – what other costs do I need to know about?”

John and I came to the conclusion some three or four years ago that the costs faced by actively managed mutual funds were just too high to reasonably expect them to outperform a passive index. An average management expense of 2.39%1 is, sadly, only the beginning. In an effort to “beat the market”, managers incur other costs over and above their disclosed management expenses. A manager chasing stocks every day can’t always afford to wait for the best stock price when selling or buying. As my aunt used to say, “If the seller knows you need it today, you’ll overpay ...better to wait until he’s motivated to sell”. Transactional and similar costs can boost the cost of your actively managed funds by almost 1%2.

“Surely, there can’t be more costs I don’t know about” you say. If you are investing outside of RRSP accounts I have a five-letter word for you T-A-X-E-S. A couple of landmark studies on both sides of the border have concluded that taxes have a huge negative impact on investor returns and that lower turnover index-based strategies3 (like those we employ using Dimensional funds) are vastly preferable to the active trading strategies of many mutual funds and investment counsellors.

Bottom line, actively managed funds and stock portfolios must outperform their index-based cousins by as much as 2% per year just to keep up!4 We are keeping an eye on the little things (can you find Lewis and Clark in this newsletter?) so we can deliver big results to you.

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Mark Orr
CPA, CA, CFP, CIM

Senior Financial Advisor
Aldershot Financial Group

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_{1 Source: RBC Asset Management.
2 William Bernstein, The Intelligent Asset Allocator, 2001, page 92
3 Robert H. Jeffrey, Robert D. Arnott Is Your Alpha Big Enough to Cover Its Taxes?, Journal of Portfolio Management 1993. Michael Thorfinnson and Jason Kiss The Overlooked Piranha, Canadian Investment Review 1996.4Keith Matthews, The Empowered Investor, page 80.}

_{This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above please make sure to see me for individual financial advice based on your personal circumstances. The opinions expressed are those of the author and not necessarily those of Aligned Capital Partners Inc. Aligned Capital Partners Inc. is a member of the Canadian Investor Protection Fund and is registered with the Canadian Investment Regulatory Organization (“CIRO”). Mark Orr is registered to provide investment advice and transact in securities products in the provinces of British Columbia, Nova Scotia, Manitoba, the Yukon and Ontario.}