IFA
Index Porfolio 90
IFA
Index Porfolio 70
IFA
Index Porfolio 50
IFA
Index Porfolio 30
IFA
Index Porfolio 10
Step 7 - Silent Partners
RECOGNIZE THE PARTNERS IN YOUR RETURNS
There are partners that subtly take a large slice of your investment return. In taxable accounts, over a 15-year period, active investors kept only about 50% of the total return earned by their initial investment. Meanwhile, investors in index funds keep about 85% of the total return by maintaining tight controls over the silent and often invisible partners of high fees, expenses, cash drag, taxes, transaction costs and more. By minimizing the cost of these silent partners, investors will increase their expected returns.
There are many silent partners
that quietly, but determinably eat away at an active investor’s
returns pie. The list of silent partners that erode investors’
returns includes: sales commissions, expense ratios, transaction
costs and taxes (in taxable accounts). Just how much do silent
partners consume of the average investor’s returns pie? The
figure below illustrates a 15-year study conducted by Vanguard
founder John Bogle. It shows that from 1984 to 1998, the
average equity fund investor gave up 33% of cumulative returns
to fees and expenses to silent partners! |
Meanwhile, the passively
managed index fund gave up just 2% to fees and expenses and
11% to taxes. The end result? Bogle determined that passively
managed index investors kept 87% of their returns, while
the actively managed fund investor kept just 47% — a 40%
difference! For non-taxable accounts, silent partners ate
away one-third of the average investor’s returns pie, while
index investors gave up just 2%. A passively managed index
portfolio is the best way to mitigate the devastating impact
of silent partners, allowing returns to grow as undisturbed
as possible. |
Additional Charts and Graph from Step 7
 Sad Uncle Sam |
 The Feast |
| < Step 6 - Style Drifters | Step 8: Riskese> |
