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Keep More of Your Hard-Earned Money

Chuck Saletta
May 4, 2011

As an investor, the only thing that matters more than how much you earn on your investments is how much you keep. Whether you're looking to compound your money for future needs or spend it today, the more efficiently you manage your money, the more of it you'll keep.

Over the long haul, even a couple of percentage points can make a huge difference. Say you're planning on investing $500 a month for the next 30 years and hope to match the stock market's long-run returns of around 10% annualized. Depending on the total costs associated with your investments, your net returns may look like any one of the following:

$500 per Month Invested at

Value After 30 Years

10.0% net annual returns $1,130,244
9.8% net annual returns $1,083,143
9.0% net annual returns $915,372
8.0% net annual returns $745,180

The high costs of inefficiency
A recent CNN Money article showcased a Lipper study that said stock investors tended to lose one percentage point of their annual returns to taxes. That same study said bond investors tended to fare even worse, losing around two percentage points per year, just due to taxes.

Throw fund management fees and trading costs into the mix, and the picture gets even uglier. Hedge funds, for instance, often charge on a "2 and 20" arrangement, or 2% of the fund's assets plus 20% of any returns above a predetermined benchmark. That's a ton of money to pay the fund manager.

Blackstone's (NYSE: BX  ) private equity operations, for instance, took in nearly $274 million in revenues last quarter. Fortress Investment Group (NYSE: FIG  ) generated nearly $840 million in management and incentive fees on $44.6 billion of assets under management last year.

Standard mutual funds can also carry high fees that find their way to the fund management companies' coffers, rather than the fund investors' pockets. Even relatively low-priced T. Rowe Price (Nasdaq: TROW  ) pulled in almost $589 million in "investment advisory fees" last quarter -- a 25% jump from last year. Franklin Resources (NYSE: BEN  ) pulled in more than a cool billion in the same time period.

Do you get what you pay for?
It'd be one thing if the money managers you're paying for earned their keep and provided their investors with superior returns. While there are some, like Legg Mason Value Trust (FUND: LMVTX  ) manager Bill Miller, who stayed ahead of the market for 15 consecutive years, many fund managers don't consistently earn their keep.

Take the Calvert Enhanced Equity B (FUND: CDXBX  ) fund, for instance. That fund reports a net 2.67% annual expense ratio, with a staggering 109% annual turnover rate. The direct costs and churn fees will eat your returns alive. To see just how badly you can be burned, check out this chart (seriou