Keeping What You Earn
The painful math of taxable accounts.
The Big Picture
The paper's title caught me by surprise. "The 50% Rule: Keep More Profit in Your Wallet," by Stuart Lucas, chairman of the financial advisory firm Wealth Strategist Partners, advocates that investors retain at least half the profits generated in their taxable accounts, thereby giving less than half to government bodies and investment professionals. At first thought, the goal seemed very unambitious. With mutual fund expense ratios less than 1% for most large funds, investors surely need not leak anything like 50% of their profits.
It made sense on second thought. Percentage of investor profits, after all, is quite different from percentage of assets. A 1% annual expense ratio is a tiny fraction of overall assets, but in a year when market returns are 5%, that same expense ratio gobbles up 20% of gross profits. Also, Lucas incorporates tax effects. As he points out, performance is typically reported on a pretax basis. Pretax figures appear on fund advertisements, are shown in Morningstar performance tables, and are incorporated into the Morningstar Rating for funds.
John Rekenthaler does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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