Friday, January 28, 2011

Bogle: A System Destined to Fail

In this SmartMoney interview, Bogle says that in a ~13 percent stock market...

-the average mutual fund earns 10 percent
-the average mutual fund investor earns 6.5 percent

From the interview:

"And I haven't even talked about taxes, which take out another 100 basis points.... That's pretty stunning. This never would've happened if not for the greatest bull market in history. Managers' fees didn't matter because it didn't feel like you were being cheated.

People understand the magic of compounding returns. But few investors know about what I call the tyranny of compounding costs.... You put up 100% of the capital and take on all the risk, but you get only 20-something percent of the return. That's a system that is destined to fail. People will not be that dumb forever."

Let's hope not. In the example above, it would seem like the average mutual fund investor will earn half as much as the overall market (13 percent versus 6.5 percent). It's actually worse than that. When you take into account compounding effects, the average mutual fund investor actually ends up with more like less than one fourth as much money over 25 years.

Adam

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