Jun 19, 2005

Bogle on the Fund Industry

From Marketwatch:
"The mutual fund croupiers rake huge sums off the stock market table," says Bogle. He estimates that management fees average 0.9%. Other expenses are 0.6%. So the average expense ratio is 1.5%, five to seven times the take for index funds.
Next deduct "hidden portfolio transaction costs of at least 0.8%" from managed funds says Bogle. Then deduct the long-term costs of "sales commissions on load funds, another 0.7%." So the total cost in an actively managed fund can run as high as 3%, leaving investors with just 4% on a 7% return.
But it's even worse on an after-tax basis: "Because of the shocking tax inefficiency" of funds' average turnover, which is greater than 100% for an actively managed stock portfolio, you deduct another 2.2%, says Bogle.
Bogle goes further and compares the results of compounding the two alternatives over a 20-year period: "The cumulative profit of each $1 initially invested in the managed fund came to just $1.55 in real terms, after taxes and costs, only 34% of the real profit of $4.50 in the index fund." In short, indexing is almost three times more profitable.

1 comment:

  1. Sounds good to me. I'm reluctant to believe that with so many well-informed traders competing for the same advantages on returns anything in the index could be significantly mispriced. And isn't that form of arbitrage the only way to consistently beat the market? The odds that your broker will be the perceptive lone soul rising above the movements of the herd seem slim, at best. Give me a low-cost index anyday and let me compound my returns; I am not I don't think I (or my forecasting models) am any smarter or better-informed than the market as a whole.