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Jonathan Yates is the founder of EarnedMediaUnlimited. He has had thousands of articles appear under his byline in websites and periodicals such Seeking Alpha, The Washington Post, AOL Daily Finance, Foreign Policy, and The Motley Fool, among many others. The views expressed are his own. In his... More
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  • Yes, You Can Go Broke Making A Profit! 0 comments
    Sep 10, 2013 1:19 PM

    While it has often been said in investing that, "No one ever went broke making a profit" that is not always true. Due to fees, taxes, and other transactions costs, it is quite possible to sell an equity, bond, or shares of a hedge fund, private equity investment, or mutual fund at a higher price than paid and still lose money.

    There are a wide range of fees confronting those who invest in mutual funds, private equity holdings, hedge funds, or have other forms of asset groups with professional management.

    Investing legend John Bogle, founder of the Vanguard family of mutual funds and creator of the first index fund, railed against these high fees for professional management his entire career; and wrote about it in his book, Enough. According to Bogle, investors must protect their assets from being, "destroyed or severely eroded by the tyranny of compounding costs."

    These "compounding costs" can take many forms with mutual funds, private equity groups, hedge funds, and other forms of alternative investments.

    Fees charged by mutual funds are generally taken annually. Some mutual funds dun investors immediately with "up front fees." Those are like the commission for a stock broker when buying shares of a company.

    There will also be annual fees for expenses. Mutual fund family groups such as Vanguard and T. Rowe Price, among others, are known for having low annual expenses. The higher the annual fee for a mutual fund, the lower the net return for the investor.

    Still more fees can be added on by mutual funds.

    Should the fund be actively managed, there will be higher fees for a variety of factors. A passive index fund, like that created by Bogle and favored by Warren Buffett for the average investor, will have much lower fees than one with active management. That is, in theory, to compensate the fund advisors that are demonstrably superior with a higher alpha than that of the accumulated knowledge of the investment community as represented by a broad index fund with passive management.

    It rarely works out that way for investors, however.

    In addition, the higher the turnover in a mutual fund, private equity group or hedge fund, the more that must be paid in transaction costs and other expenses. These expenses consist of commissions, research costs, and taxes among other.

    With hedge funds, depending on the particulars, it can be much more costly. For the industry, there is generally a 2-3 percent fee to invest along with a 20 percent slice of profits going to the management of the hedge. For the more successful hedge funds, like Renaissance and SAC, it can be much, much higher.

    Professional management fees for hedge funds, private equity, mutual funds, and other investing can be fixed or variable

    Depending on a variety of factors, such as the size of the amount invested or the success of the fund, many fees are negotiable. What will never change, however, is that fees and expenses are always paid for by the investor. As a result, these costs can reduce alpha greatly over time if not fully monitored and factored into all investing decisions at every juncture.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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