When it comes to reporting returns, actively managed mutual funds are engaged in an elaborate shell game. They report their returns pre-tax.
If they were required to report their returns after-tax, and those returns were compared to the after-tax returns of index funds of comparable risk, investors in actively managed funds would understand that more than 17% of their returns are lost to taxes.
John Bogle did a study that demonstrated that investors in actively managed funds kept only 47% of the cumulative returns of the average fund. Index investors kept 87%.
Why the big difference?
Actively managed funds have much higher costs. These costs include sales commissions, taxes, cash drag, higher expense ratios and transaction costs.
In this week's video, I discuss the effect of taxes on the amount of returns investors get to keep in actively managed and index funds.
It is the big secret your broker hopes you will never find out.
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