Cost Control Calculator

March 8, 2014 - Max Osbon (2 mins to read)

Small expenses can seem inconsequential in the short run, however inefficient investments with higher fees and poor tax management can take a big bite out of your portfolio in the long run. Focus on the things you can control – fees and taxes. And use our Osbon Cost Control Calculator (below) to see just how much these small improvements add up over time.

Relentless on expenses
Morningstar’s most recent figures show that the average annual expense ratio on mutual funds is 126 basis points – that’s 1.26 percent out of your pocket into the fund managers’. On ETF index funds, that average drops to 76 basis points with many broad exposure ETFs charging only 5 basis points. The fee war on ETFs should continue to drive these costs lower, but many companies still feel they get away with big fees. Why pay more for the same thing?

It’s all about what you keep, not what you make
Reporting investment performance after fees is mandatory. After-tax, however, is not. And without knowing what your after-tax performance is, you are looking at an incomplete picture. Watch out for performance driven by taxable realized short and long term gains, and capital gains distributions. Tax drag on a standard 50% equity and 50% bond portfolio in our experience is routinely 70-100 basis points. This can be avoided.

How do we avoid a tax drag? Two things. Tax loss harvesting, we like to call it anti-taxing, where we manage all portfolio changes with little to no tax bill. Simple but not easy. Secondly, we use tax-efficient ETFs that pass our efficiency test.

Introducing: The Osbon Labs Cost Control Calculator

The SEC recently released an investor bulletin highlighting the real mathematics behind this called How Fees and Expenses Affect Your Investment Portfolio. Here is a calculator to help demonstrate the impact of the drag that taxes and expenses can have on a $1,000,000 portfolio over 10 years. Simply enter your assumption for annual return (default: 7%) and different levels of expenses in basis points to see the net effect.

Free up your money
Virtually every portfolio we review has and tax exposure lurking in the shadows. We encourage you to ask your advisor about your performance after fees and after taxes. In the end it’s not about what you make, its really all about what you can keep.

So where should you look? And how can you find these fees? We’re happy to do an analysis of your portfolio. You can reach us anytime at 617 217 2772.


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