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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."
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