A Quick and Easy Way to Increase Your Returns by 17%

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.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

Comments

[therealredstateblues]

Quick and easy way to get returns on investments

1. set up a ponzi scheme

2. come up with a fancy confusing title and acronym and call it "innovation"

3. lobby congress and pay off the financial media to promote your "innovation"

4. squirrel it all away in an offshore account

5. if you get caught, get a slap on the wrist and repeat steps 1 thru 4

[nomorefed]

As the growth of the financial bubble coincided with the repeal of the Glass-Steagall Act of 1933, maybe it would be wise act to reinstate it as it kept the Banks under control for 66 years.

hat tip to http://www.makeitbrief.com/avupq for the good articles

*****
Glass-Steagall Act
A 1933 act that prohibited commercial banks from undertaking investment banking activities such as underwriting the securities of private corporations. The legislation was passed to keep banks from entering into nonfinancial businesses (for example, owning corporate stock) and more risky activities. The Glass-Steagall Act was repealed in 1999. Also called Banking Act of 1933.

[joebaggadonuts]

Hmmm. There are many secrets the brokers and other financial handlers of our money don't want us to find out. Thanks for sharing this one.

[Boiler20]

Dan-

Good advice. I am not a fan of actively managed mutual funds specifically, and mutual funds in general. The fact of the matter from my desk is that the mutual fund industry as a whole is dying a slow and maybe not-so-slow death at the hands of ETF's.

It would also be helpful if you would complete this discussion with some discussion of :

1.) the actual investor returns of mutual funds, both active and managed. I seem to recall a couple years ago a study that was publicized that stated that the actual returns of fund investors that invested thru an advisor was somewhat higher than those who did not invest through an advisor. It stated something along the lines that the advisor-purchased fund investors had a better overall investment experience because the traded in and out of the funds much less frequently­....i.e.,.­...their natural pre-dispostion of a retail investor to chase returns was somewhat muted when going through an advisor.

2.) How does your video lesson / axiom apply to those that are invested in a tax protected account, such as an IRA or 401K? The reason I bring this up is that I don't think it's a stretch to say that the very vast majority of individual investors' assets are invested in mutual funds thru these tax protected accounts.

Thanks for your efforts.

[petef59]

what study?

[Dan Solin - Huffpost Blogger]

You are correct. I discussed these studies in this blog:

http://www.huffingtonpost.com/dan-solin/the-new-rules-for-smart-i_b_122840.html?show_comment_id=15259080.

Investors in tax deferred accounts are less impacted by the difference in after tax returns. However, their returns are significantly reduced by the other costs listed in my blog.

[bmora]

Good advise as always.