Forex

Transaction costs and the effects of taxes and inflation can greatly reduce
the real returns on your investments. Transaction cost comes in

many forms: brokerage commissions when you execute a trade; sales
loads, 12b-1 fees, and redemption fees when you purchase or sell a
mutual fund; and yearly asset management fees paid to a mutual fund,
stockbroker, or investment adviser. Transaction costs can significantly
decrease the returns on your investment portfolio.
It should be every investor’s mission to reduce her transaction costs
to the lowest possible level. A stockbroker or financial planner can tell
you what stocks to buy, how to allocate your investments among asset
classes, and how to make your investment program tax efficient. If
you benefit from his advice and services, be prepared to pay a reasonable
commission or fee. However, if you purchase a mutual fund
and pay a 5.25-percent commission to an investment advisor, you have
wasted a huge chunk of your money. You have paid far too much for
handholding. You can purchase a similarly managed no-load fund
with no sales charge.
If you make your own investment and asset allocation decisions,
you should search for the lowest brokerage fees or investment management
charges available from reputable financial institutions. We
own individual stocks. When we buy a stock based on our own analysis,
we execute the trade through a well-known online broker at a low
fixed fee. When we purchase a stock based on a recommendation from
a full-service broker, we execute the trade through his firm at a negotiated
fixed commission.
We own no-load domestic index funds and international stock mutual
funds, no-load REIT funds, and no-load intermediate bond funds.
We also invest in a hedge fund with a very specialized market niche
and pay the manager of the hedge fund a substantial management fee
for his expertise. We understand the difference in experience, services
provided, and fees charged, and are willing to pay for performance.
However, we despise paying any unnecessary costs. You should also.
Make it your goal to minimize transactions costs!
Taxes and inflation are also enemies. Exhibit 2-6 shows the longterm
effect of taxes and inflation on investment returns for common
stocks, long-term government bonds, Treasury bills, and municipal
bonds over 1926-1999. The results are dramatic. Common stocks provided
a 5.0 percent compounded annual return after taxes and inflation.
However, taxes and inflation wiped out the returns on Government
bonds and Treasury bills. Given their exemption from federal
The 10 Principles of Finance and How to Use Them 37
income taxes, municipal bonds provided a 2.5-percent positive return
after inflation.
As shown in Exhibit 2-6, taxes can have a negative effect on investment
performance. Each year when you receive dividends, interest
income, and short-term capital gains, you pay a portion of that income
to Uncle Sam at current Federal income tax rates of up to 39.9
percent. Long-term capital gains are taxed at rates up to 20 percent.
Tax payments greatly decrease the after-tax return on your investments,
if they are held in a taxable account. Investors can establish
tax-advantaged accounts to accumulate retirement assets. Three types
of accounts are individual retirement accounts (IRAs), Roth IRAs, and
401(k) retirement accounts.
An investor’s annual contribution to an IRA is tax deductible, if the
investor’s taxable income does not exceed a certain level. The current
maximum tax-deductible contribution to an IRA is $2000 (which is
scheduled to increase to $5000 over time). Tax on the income received
on the IRA is deferred until money is withdrawn. Such moneys are then
taxed as current income.
Contributions to a Roth IRA are not tax deductible, but the Roth
IRA allows dividend, interest, and capital gains on the investments to