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Ho-Ho-Hoax for Investors this Christmas by Wall Street


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(ALISO VIEJO, CA)—James Burns, Esq. a tax attorney whose new book “The 3 Secret Pillars of Wealth” is timely in describing the costs involved when investing in mutual funds as we await the bonus announcement for Wall Street elite, no matter how much jeopardy they placed our economy in with the risky subprime mortgage investments.

Burns states, “Wouldn’t it be nice to get a Christmas bonus that is like winning the lottery and you could retire from it if you chose? But you might not want to retire if you could get one of these bonuses year after year whether you did a good job or not.”

In a year where Wall Street should be getting coal rather than sweet meats they are poised to award themselves 10% more in 2007 regardless of the mortgage mess they invested in. Most U.S. businesses – 66 percent – give no bonuses at all. Last year in 2006, Goldman Sachs gave $16.5 billion in bonuses to dozens of its bankers and traders. The top “rainmakers,” as they are called, each took home as much as $20 to $25 million just in bonuses. Where did all that money come from?

Burns begs the question in his book, “did you ever wonder where all this bonus money comes from?”

When you invest in the typical mutual fund (assuming outside of a qualified retirement plan), you face costs that erode your benefit. Chances are you’re not aware of them, they’re not in your prospectus and your broker isn’t going to sit down and tell you about them. The five costs of mutual fund investing are:

1. Tax costs – excessive capital gains from active trading.

2. Transaction costs – the cost of the trades themselves.

3. Opportunity costs – dollars taken out of portfolios for a fund’s safekeeping.

4. Sales charges – both seen and hidden.

5. Expense ratio, or “management fees” – no end to increases in site. This is a calculation based on the operating costs of the fund divided by the average amount of assets under management.

How radically do fund expenses affect you? Well, with the expense ratio, which averages 1.6% per year, sales charges of 0.5%, turnover generated portfolio transactions costs of 0.7% and opportunity costs of 0.3%—when funds hold cash rather than remain fully invested in stocks— the average mutual fund investor loses 3.1% of their investment returns every year just on fees. While this might not seem like much on the surface, costs and fees alone could consume 31% of a 10% market return. Think about that. You could be losing almost a third of your return before it’s even taxed. You’re losing a third of your return just for the cost of maintaining your investment. Add in the 1.5% capital gains tax bill that the average fund investor pays each year and that figure shoots up to 46% of your return being lost to fees and expenses, nearly half of a potential 10% return.

In the end, Burns states that if you feel these numbers are hard to believe, you should run your own numbers based on any mutual funds you have outside of an index fund and see if you’re getting terrific gains. Burns says “the Christmas bonuses have to come from somewhere as they are not created out of thin air. “


 stock market
 mutual funds

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