Cost Efficiency

The biggest determinant of total return over an investor's lifetime, aside from asset allocation, is cost. There are many costs associated with investing that can slowly eat away at returns. IFA Sustainable see these as pollutants to the portfolio and, therefore, should be minimized as much as possible. Here is a list of the most prominent costs to investing and how IFA Sustainable attempts to minimize their impact on portfolio returns:

Mutual Fund Management Fee:

The portfolio managers and their teams do not like to work for free, so paying the management fee of a mutual fund is necessary, but not all fees are alike. Many active funds, that constantly try to beat the market, typically have higher management fees. Conversely, IFA Sustainable follows a passive approach to investing, where these unnecessary costs are eliminated. On average, the mutual fund management expenses are over 75% lower than the average actively managed fund, which can be substantial over an investor's lifetime.


Transaction Costs:

Trading a portfolio also incurs its own cost. Active managers trade a lot more than passive managers given that they are constantly trying to outperform their benchmark. But similar to expensive fund management fees, IFA Sustainable believes constantly trading a portfolio provides no long-term benefit for investors. In terms of actual turnover, IFA Sustainable turns their portfolios over substantially less than the average actively managed fund.


Sources, Updates, and Disclosures: © Morningstar, Inc., IFA, ifabt.com

Taxes:

Uncle Sam is always looking to collect his share of wealth, whether it is income taxes, sales taxes, excise taxes, or even capital gains taxes. Although capital gains may seem insignificant, they can add up substantially within an actively managed fund, incurring many short-term gains that are taxed at the same rate as income tax. Taxes on these capital gains take away returns directly from the investor. As such, IFA Sustainable uses passively managed index funds that minimize capital gains realization due to its lower turnover. A recent study by John Bogle from the Vanguard Group analyzed the returns and tax implications of the average equity investor vs. an investor in an S&P 500 Index. For the 25 years ending December 31, 2005, $10,000 invested in the average managed equity fund would have grown to post-tax results of only $71,700 versus $159,000 for the Vanguard S&P 500 Index Fund.


Inflation:

One of the major costs that is so often overlooked is inflation, the ultimate “invincible” cost. Inflation is simply the percent increase in the goods and services that we investors pay for every day. For example, in the 1950's, a cup of coffee was 10 cents versus $1.50 today. Over the last 85 years, we have experienced an annual inflation rate of approximately 3% per year. So $1 today is really only worth 97 cents on average the next year. Thus, it is important to invest in assets that can help to mitigate the impact of inflation over an investor's lifetime. Saving your money and putting it in cash is subject to this “invincible” cost every year. If an investor is hoping to save a $1 million dollars by the time they retire, that $1 million dollars will really only be worth about $412,000 dollars in 30 years. Not what they were expecting! IFA Sustainable recommends that investors hold both passively managed equity and fixed income mutual funds to ensure that the “invincible” cost cannot rear its ugly head on returns overtime.