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Don't forget about your taxes. Who pays your taxes? You do! Financial advisers and money managers don't dig into their pockets to pay taxes on your gains. Fidelity's Magellan fund, for example, has an incentive fee based on its before-tax performance against the S&P 500. Hedge funds also generate their incentive fees based on the gross rate of return, not on an after-tax rate. They have no incentive to generate long-term gains instead of short-term gains, which can result in twice as much tax or more. Look for low-turnover mutual funds, consider index funds, and/or allocate tax-qualified capital like IRAs to investments that generate a lot of short-term gains. Be serious. Try this exercise: Extrapolate a 7% return on your capital for the next 10 years. Now bump up that rate return by 4% -- that's a 1% higher rate of return each quarter, or one-third of 1% per month -- and your capital growth doubles over 10 years. A fractional amount like one-third of 1% per month may not seem like a big deal -- and it isn't, in the short-term -- but it's a huge deal over the long term. That's why you should pay attention to 12b-1 fees, taxes, slippage, turnover and other costs that lower your rate of return. Concentrate -- or buy an index fund. Because most equity funds hold 100 or more positions, they are effectively closet index funds, but with much higher fees. If you don't concentrate your portfolio or own a concentrated mutual fund, you're better off keeping the fees and investing in an index fund.
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At time of publication, Alsin and/or ACM was long Ethan Allen, Liz Claiborne, Millennium Pharmaceuticals, Hasbro and Monaco, although holdings can change at any time. Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to arne.alsin@thestreet.com.
Brokerage Partners
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