I wanted to get back to discussing Factor Based Investing™ today. We want to teach you some of the things we use to make sure we stay within the guidelines of how we want to help people.

There are 10 principles we focus on in Factor Based Investing™, the first of which is taxes and reducing Tax Friction. Taxes are the single biggest expense that you have in your life, and the interesting thing is that people don’t spend a lot of time and energy controlling for large expenses. People will move into a smaller house to lower their mortgage or turn the AC down in the summer to lower their power bill, and yet, their biggest controllable expense (taxes) aren’t controlled the way they could be through the tax code.

When it comes to portfolios, most broker/dealers fall on the old trope of ‘death and taxes’ and say there’s nothing you can do. This is unequivocally not true! In fact, I’d encourage you to visit our podcast where we interview Ken Kim and he talks about Tax Friction by clicking here. Also, if you’re interested, we’ll send you a free book called Mutual Funds Exposed that has a whole section on taxes and Tax Friction.


Lowering Tax Friction will increase your returns without increased risk.


The problem with mutual funds is that when you buy into the mutual fund, you don’t buy the stock at the value it’s at the day you buy in. Instead, you buy the stock at whatever the value that the money manager bought in at. If the money manager bought Apple stock 10 years ago at $10 a share and you’re buying in today at $100 a share and the portfolio goes down and the money manager sells Apple, you end up paying capital gains tax.

The mutual fund is the only product on the planet that allows you to lose money and still pay capital gains taxes—we have to eliminate that. The first thing we do is not use retail mutual funds, for that very reason. In fact, in some of the better retail mutual funds, the Tax Friction is 1% per year. With most, you’re paying 1% to 3% per year in additional fees because of the Tax Friction. If we could just eliminate that 1% to 3%, we’ll increase your returns without taking more risk.

That’s exactly why Tax Friction is our number one strategy in Factor Based Investing™. We’ll discuss this topic more in the near future, but in the meantime, if you have any questions for me, don’t hesitate to send me an email. I’d be happy to help!

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