A recent article from Russell Investment only confirms what some of us already know;
"Your mutual funds taxes are impeding your progress"
The article is a good one and kudos to Russell Investments on writing it. It confirms for us however, factors we've known for a long time. Your investments are incredibly expensive and those costs make the chances of your meeting your long term investment goals or any financial goal for that matter, daunting at best.
If the math is correct in the article (we have a lot of faith in the Russell organization, so let's assume it is ok?) a taxable capital gain of nearly $8,969 is bad enough, but with having 15% of that being a short term distribution, the tax impact is considerable.
Look we're not saying that all or even a majority of your investment decisions should be driven by tax factors, but if they aren't driven by them, clearly they should at least be a consideration in the grand scheme of things shouldn't they? We think that they should especially when they can be avoided without too much effort.
As we've written before, how may layers of costs can the mutual fund industry heap on investors before they wake up and stop the insanity?
If we have expense ratios (the cost of operating the fund) of about 1.3% to 1.5% of assets (Source: Investopedia) and if the Wall Street Journal was right a few years back that "undisclosed trading costs to mutual fund investors was annually about equal to the funds expense ratio, then we've got just the cost before commissions or fees of owning the damn things at about 2.6% to 3.0% per year.
Add to that, either commissions or advisor fees and you've got costs of about 3.0% to 4.0% per year. Now let's factor in taxes because if we take the hypothetical investor from the Investopedia article, taxes in his case were ANOTHER 2.4% getting the total costs to about 5.4% to 6.4%.
Ever wonder why actively managed mutual funds can't beat an index fund or passive ETF with any consistency? If you did, just go back and re-read the last paragraph again.
So, let's take and example for a minute. Let's say we're trying to pay for a child's college education in ten years. Here's what we can reasonably count on for our math.
1. The average cost of a college education will come in at roughly 2x the inflation rate. For the sake of this post, let's consider the inflation rate to be 3.1%. That means that the average college tuition will increase year-over-year by about 6.2% so we have at least earn that
2. We then have to earn enough to cover the expense ratio, another let's say 1.3%, so now our investment has to earn 7.5% just to keep pace
3. Then we have to cover the trading costs of another 1.3% so our "required earnings" are not up to 8.8% and then;
We have to earn enough to cover any tax bill and any fees or commissions.
If you believe that's going to happen I've got an actively managed mutual fund I can sell you. (That bridge reference just wasn't appropriate here, even though based on recent infrastructure analysis "it" has about as much of a chance as falling down on the job as your actively managed mutual fund will.)
If you're saving for college and you can clear that probably about 9% a year hurdle, you're on your way to making some real money.....just one problem. If you make 11% you're not keeping much of any of it now are you?
Nuveen investments some 20 years ago used to run an add campaign that said, "it's not what you earn, it's what you keep."
I wish I'd have though of it, because it may be the only thing about investing that still rings true today.
I know what your saying, that since Barry Capital doesn't use active management (we'd prefer that you keep them money that otherwise gets wasted) we've got a bias. Well, you'd be right on both counts, we don't use active management and we have a bias. Our bias just happens to be spreading around the world. If you've got 81 mintues to spare you can check it out here.
As I wrap this up, I just took a look at the four largest portfolios that we manage in each of our core investment strategies. The grand total on this years (2014) capital gain distributions were: $0. (Unless we rebalanced your portfolio at some point and realized a gain as a result of that effort, an effort we can assure you at some point you'll be glad we undertook on your behalf.)
If you can't change your investment program, you'll have a tough time. If you can change it please do so for your own benefit.
We'd be happy to help.