Aliso Viejo, Ca. (PressExposure) December 17, 2007 -- James Burns, Esq. a tax attorney whose new book "The 3 Secret Pillars of Wealth" is timely in describing the costs involved when investing in mutual funds as we await the bonus announcement for Wall Street elite, no matter how much jeopardy they placed our economy in with the risky subprime mortgage investing.
In a year where Wall Street should be getting coal rather than sweet meats they are poised to award themselves 10% more in 2007 regardless of the mortgage mess they invested in. Most U.S. businesses - 66 percent - give no bonuses at all. Those employees lucky enough to receive a cash gift will get an average of $837. Compare that to the bonuses Goldman Sachs gives out, a jackpot so big they could give every employee more than $600,000."
Burns asks in his book, "did you ever wonder where all this money comes from?" When you invest in the typical mutual fund (assuming outside of a qualified retirement plan), you face costs that erode your benefit. Chances are you're not aware of them, they're not in your prospectus and your broker isn't going to sit down and tell you about them. The five costs of mutual fund investing are:
1. Tax costs - excessive capital gains from active trading.
2. Transaction costs - the cost of the trades themselves.
3. Opportunity costs - dollars taken out of portfolios for a fund's safekeeping.
4. Sales charges - both seen and hidden.
5. Expense ratio, or "management fees" - no end to increases in site. This is a calculation based on the operating costs of the fund divided by the average amount of assets under management.
You could be losing almost a third of your return before it's even taxed. You're losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return.