The Triple Net Return

As we close out 2010 and begin a new year, many of us will be considering resolutions and goals. I would encourage all investors to commit to determining how much they are spending for investment management. How much are you paying your advisor? How much are the internal costs of the funds inside your portfolio? What is your tax rate for capital gains, dividends and interest?

Jason Zweig, a journalist for The Wall Street Journal, calls this the “net, net, net” return. Every investor should know this. I would suggest that investors who are paying more than 1%-1.5% in advisory fees and portfolio expenses are overpaying. My firm’s clients pay less than 1.00%.

Some investors might argue there is nothing we can do about taxes. So why pay much attention to them? Well, investors can actually do something about portfolio-related taxes. “Asset location” is the process of placing investments in the most tax efficient accounts within a clients’ portfolio. Investments that are inherently tax-inefficient, because they generate current income, should be placed inside tax-qualified accounts like IRAs, Roth IRAs and 401(k)s. Investments that are tax-efficient, because they create little current income can be placed in taxable accounts.

Many investment analysts suggest the next several decades will bring market returns that are significantly lower than they have been. If this occurs, managing fees, expenses and taxes will play a very important part in intelligent investing.

Happy New Year!