The term "silent partners" refers to the numerous parties who silently share in the realized and unrealized gains on an investment. Fees, expenses, taxes, and inflation are silent partners that can set an investor back before returns even begin. The investment costs alone of the average active fund can consume nearly fifty-five percent of its gross wealth. By investing in index funds, however, high costs and high taxes can be avoided. In this case, the only uncontrollable partner is inflation.
One illustration over a fifteen-year period demonstrates that 40% of total return is allocated to silent partners. On a $10,000 investment, this translates to $41,000 of compounded return. An index fund limits the partners' take to only 13%. In tax-managed index funds, the percentage is even lower. This step discusses the unnecessary partners involved in your returns and how to keep them from eating slices of your "returns pie."