Why Index Funds Have Tax Advantages For Americans

Investing in index funds is a lot like fishing.

You drag a net around a lake. You sit back in your boat, enjoy a nice drink and you can sell what you catch.

Investing in actively managed funds is much the same. But you hire a few scuba divers to swim around your net. They try to corral the fish. Before you pay the divers, things might look good. But after expenses, this industrious approach usually comes up short.

This isn’t the case with index funds. They charge low fees, so they beat about 80 percent of actively managed funds. Still, plenty of investors still like to roll the active dice with actively managed funds. In a tax-deferred account, they face long odds. In a taxable account, such odds stretch even longer.

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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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