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 The
term "silent partners" refers to the numerous
parties who silently share in the realized and unrealized
gains on an investment. Fees, expenses, taxes, and inflation
are silent partners that can set an investor back before
returns even begin. The investment costs alone of the average
active fund can consume nearly fifty-five percent of its
gross wealth.
By investing in index funds, however,
high costs and high taxes can be avoided. In this case,
the only uncontrollable partner is inflation. One illustration
over a fifteen-year period demonstrates that 40% of total
return is allocated to silent partners. On a $10,000 investment,
this translates to $41,000 of compounded return. An index
fund limits the partners' take to only 13%. In tax-managed
index funds, the percentage is even lower. This step discusses
the unnecessary partners involved in your returns and how
to keep them from eating slices of your "returns pie."
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