Personal Investors

What we think about investment costs, taxes, and manager risk

  • Costs matter a great deal. Investment returns are reduced dollar for dollar by the fees, commissions, transaction expenses, and any taxes incurred.
  • Low-cost funds may have an advantage compared with high-cost funds that have similar objectives because expenses act as a drag on returns.
  • You should consider maximizing the tax efficiency of your portfolio because taxes have the potential for taking the biggest bite out of your investment returns over the long run.
  • To save on taxes, think about using tax-advantaged retirement accounts to the extent possible. If you're in a high tax bracket, consider municipal bond funds and tax-managed funds.
  • Although tax-efficient investing is important, you should think about your asset mix. When necessary, adjustments should generally be made in tax-advantaged accounts whenever possible.
  • It is difficult for anyone to predict—consistently and accurately—which individual securities or actively managed funds will outperform the market.
  • Diversified portfolios can minimize risk because subpar performance in one area often may be tempered by good performance in another.
  • Index funds, which seek to track the returns of a market benchmark and don't try to predict which individual securities will perform well, are an efficient and low-cost way to diversify across a market or market segment.
  • Although most actively managed funds don't outperform the market over the long term, some actively managed funds do offer the potential for above-market returns. Consider selecting actively managed funds that operate at the lowest possible cost.
  • Combining active and indexing strategies can benefit your portfolio: You get the lower costs and relative performance predictability of index funds and the potential for outperformance offered by actively managed funds, albeit at a higher cost than index funds.
  • Holding individual securities can dilute portfolio diversification and can significantly amplify portfolio volatility.

We recommend that you consult a tax or financial advisor about your individual situation. Diversification does not ensure a profit or protect against a loss in a declining market.


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