Practical Applications of The 50% Rule: Keep More Profit in Your Wallet

Practical Applications Summary

Taxable investors may not always know how much profit they pocket after taxes and expenses, an issue that can hurt their ability to build wealth. In The 50% Rule: Keep More Profit in Your Wallet, published in the Fall 2017 issue of The Journal of Wealth Management, Stuart E. Lucas and Alejandro Sanz of Wealth Strategist Partners analyze how fees and taxes eat away at returns, sometimes hurting taxable investors' ability to retain at least 50% of profits, a bottom-line strategy they call the “50% rule.”

Investment vehicles have a wide range of profit-retention profiles. The "two and twenty" fee structure of hedge funds, where managers earn 20% of profits on top of a 2% management fee, can make it difficult for taxable investors to achieve 50% profit retention. Investors are often surprised to find that they are retaining far lower after-tax profits than they expected, because so much is return is eaten up by fees and taxes. Evaluating net returns can be difficult, but it’s an important step for the 50% rule.