Actively managed mutual funds in taxable accounts suffer significantly due to the high impact of taxes. Bogle explains that taxes can drag performance down by up to 4 percentage points each year. In contrast, index funds are 'tax-friendly,' logging fewer trades and allowing capital gains to grow undisturbed until shares are sold. 'Taxes are a crucially important financial consideration because the earlier realization of capital gains will substantially reduce net returns,' he notes. | John C. Bogle | The Little Book of Common Sense Investing

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The Little Book of Common Sense Investing

Finance

The Impact of Taxes on Returns

Actively managed mutual funds in taxable accounts suffer significantly due to the high impact of taxes. Bogle explains that taxes can drag performance down by up to 4 percentage points each year. In contrast, index funds are 'tax-friendly,' logging fewer trades and allowing capital gains to grow undisturbed until shares are sold. 'Taxes are a crucially important financial consideration because the earlier realization of capital gains will substantially reduce net returns,' he notes.

-- John C. Bogle