This post is part of a series where personal finance expert Dan Solin looks at money secrets that help the rich stay rich. See more.Most investors don't realize that the biggest factor in reducing their returns are the costs associated with their investments.
These costs include commissions, loads, taxes, advisory fees, market-makers, transfer agents and related costs. When you add them up, they can be very significant, reducing overall returns by as much as 40%!
Actively managed mutual funds (funds that try to outperform a given benchmark) have high turnovers of their portfolios. High turnover generates taxable transactions. The tax hit is carried by the investors in the fund, even when they don't sell their shares.
Here is one example:
The actively managed Fidelity Contrafund had a turnover of 60% in 2006. The passive Vanguard 500 Index Fund had a turnover of 7% during the same year.
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