7.1
The term "silent
partners" refers to the numerous parties who silently share in the
realized and unrealized gains on an investment. Fees, expenses, taxes, and
inflation are silent partners that can set an investor back before returns
even begin. The investment costs alone of the average active fund can consume
nearly fifty-five percent of its gross wealth. By investing in index funds,
however, high costs and high taxes can be avoided. In this case, the only
uncontrollable partner is inflation.
One illustration over a fifteen-year period demonstrates that 40% of total
return is allocated to silent partners. On a $10,000 investment, this translates
to $41,000 of compounded return. An index fund limits the partners' take
to only 13%. In tax-managed index funds, the percentage is even lower. This
step discusses the unnecessary partners involved in your returns and how
to keep them from eating slices of your "returns pie."
 |
"
None of my clients are taxable... Once you introduce taxes,
active management probably has an insurmountable hurdle. We've
been asked to manage taxable money -- and declined " |
 |
Theodore
Aronson of Aronson+Partners, Institutional Money Manager (as
seen in previous steps, active management doesn't work in
tax deferred accounts either) |
|
 |
"If you can eliminate the government as a 39.6%
partner, then you will be much better off." |
|
Warren
E. Buffett, Chairman, Berkshire Hathaway |
|
 |
"The
art of taxation consists in so plucking the goose as to get
the most feathers with the least hissing." |
|
Jean
Baptiste Colbert |
|
|
