1. The full bill: every cost of a real portfolio

Costs 6: The full bill

The five levels before this one have taken the bill apart piece by piece: commissions, custody, currency conversion and the TER (level 1); the spread, slippage and market impact (level 2); what happens to your order after you send it and who pays to see it (level 3); what the product wrapper charges and how far it drifts from its index (level 4); and what the tax authority takes and, above all, when (level 5). Each piece, looked at on its own, seems negligible. This module does the one thing that genuinely changes how you decide: it adds them all up on a concrete portfolio and looks at the total in one go.

The rules of the exercise

What follows are two example portfolios, built on stated assumptions. They describe no particular broker and they are not a recommendation: prices vary enormously between firms, countries and account sizes. What matters is not the exact figures but the method: list every item, put a number in euros on it, convert it into percentage points of the portfolio and set it against the return you genuinely expect.

Both portfolios are the same size, 50,000 euros, and have the same owner. The only thing that changes is how they are run.

Portfolio A: passive, low turnover

Composition: 80% in a global accumulating equity ETF and 20% in a euro bond ETF, both listed on a European market and denominated in euros. Operation: twelve monthly contributions of 500 euros and one annual rebalancing. Thirteen trades a year, with a total traded volume of some 8,000 euros.

Price assumptions: 3 euros per trade, custody free, weighted average TER of 0.18%, spread of 0.05% (half-spread, 0.025%), slippage of 0.01% and a leakage from foreign withholding inside the fund of 0.20% on the equity portion.

• Commissions: 13 trades x 3 euros = 39 euros.
• Custody: 0 euros.
• Currency conversion: 0 euros. The fund does convert currency internally, but that is already captured in its TER and its tracking difference (level 4).
• TER: 0.18% of 50,000 = 90 euros.
• Half-spread: 0.025% of 8,000 = 2 euros.
• Estimated slippage: 0.01% of 8,000 = 0.80 euros.
• Unrecovered foreign withholding: 0.20% on 40,000 = 80 euros.
• Tax realized: the rebalancing sells 2,000 euros with 300 of capital gain; at 19%, 57 euros.

Total: 269 euros a year, which is 0.54% of the portfolio.

Portfolio B: active, high turnover

Same portfolio size, 50,000 euros. Composition: twenty individual shares, half European and half American, plus 10,000 euros in two thematic funds. Operation: 300% turnover a year, which means selling and buying back the equivalent of three times the portfolio in twelve months. At an average trade size of 2,500 euros, that is 120 trades and some 300,000 euros traded a year.

Price assumptions: average effective commission of 5 euros per trade (the minimum rules, because the trades are small), custody of 5 euros a month, currency conversion fee of 0.30%, TER of 0.65% on the thematic funds, spread of 0.12% on mid-cap shares and slippage of 0.05% of volume from trading at market.

• Commissions: 120 x 5 = 600 euros.
• Custody: 60 euros.
• Currency conversion: half the volume, 150,000 euros, at 0.30% = 450 euros.
• TER: 0.65% of 10,000 = 65 euros.
• Half-spread: 0.06% of 300,000 = 180 euros.
• Estimated slippage: 0.05% of 300,000 = 150 euros.
• Tax: suppose 2,000 euros of net realized capital gain, taxed at 19%: 380 euros, plus 80 euros of unrecovered foreign withholding on dividends = 460 euros.

Total: 1,965 euros a year, 3.93% of the portfolio.

An honest qualification about the tax line

Tax is not exactly money lost: the passive investor will pay on his capital gain some day too. What portfolio B loses is not the whole of the tax, but the fact of paying it twenty years early and giving up the compounding that money would have done, plus the loss of any say over the timing. That is the lesson of level 5, and it is why the bill is worth looking at both with and without the tax lines: strip both out and portfolio B still costs 3.01% against portfolio A's 0.26%.

What fraction of your expected return is this

This is where the exercise stops being bookkeeping. Assume, as a reasonable and openly stated working hypothesis, an expected return of 6.5% nominal a year for a diversified portfolio of global equities with some fixed income. Against that bar:

• Portfolio A delivers 5.96% net. Costs take 8% of the expected return.
• Portfolio B, if its stock picking adds absolutely nothing, delivers 2.57% net. Costs take 60% of the expected return.

And the decisive comparison: for portfolio B to draw level with A's net figure, its stock picking has to generate 9.9% gross, that is, beat the market by 3.4 percentage points every year, every single year, before costs. Not once: sustainably. That is the real bar anybody who operates this way sets themselves, and almost nobody ever states it in those terms.

It is also worth noticing where that 3.93% comes from. There is no outrageous item in it: no abusive product, no crooked broker, no hidden fee. It is seven perfectly ordinary charges, every one of them defensible on its own, that add up because nobody ever adds them up. That is precisely the mechanism by which a portfolio bleeds out without its owner ever spotting the moment it started.

What this exercise does is not prove that active management is impossible. It proves that cost is not an administrative detail but the share of your expected return that is already committed before you get a single decision right. And unlike the return, it is known in advance.