John C. Bogle
Cut the cost first
You cannot set the return, but you can set what you pay
Bogle, 'The Relentless Rules of Humble Arithmetic' (Financial Analysts Journal, 2005); Common Sense on Mutual Funds (1999); Stay the Course (2018)
He bet on the average. Before you hand your money over, which number should you look at first?
What actually happened?
In August 1976 Bogle's first index fund went on sale. The underwriters had hoped to raise $150 million and came back with $11.3 million. Rivals called it Bogle's Folly: who pays someone to manage money and settles for average? Average was exactly what he was betting on. His sum was simple. All investors together own the whole market, so before costs they earn the market's return between them. After costs they must, on average, earn less, by exactly what they paid.
Returns are a guess, costs are a fact
Nobody can tell you what the market will do next year. The management fee, the trading costs and the sales charges are certain, and they come round every year. Cost, he argued, is the one variable an investor really controls.
Which of two funds did better over three years tells you little. The gap in their fees is written into the contract.
A small fee, compounded for decades
Fees are not paid once. They come out of your capital every year, and whatever they take stops earning for you. The longer you hold, the bigger the bite.
Thirty years at 7% a year against thirty years at 6% leaves the second pot nearly a quarter smaller.
Losing as a group is arithmetic, not luck
Active managers taken together are the market. They win and lose against each other and break even before costs. After costs, as a group, they must trail it. That needs no forecast, only subtraction.
Players at a card table win from one another, but the house's cut is lost by the table as a whole.
How do I use it today?
Where you are: You choose funds by last year's league table and have never looked at the fees.
Ask first: How much does this cost me each year, and what exactly would I give up by going cheaper?
Where it goes wrong: Reading it as 'the cheapest is always best' or 'index funds cannot lose'. An index gives you the market minus a small fee. If the market halves, so does your fund. The saving is certain; the return never is.
Lines to keep
Before costs everyone is average; after costs you lose what you paid.
The market decides what it gives. You decide what you pay.
Every dollar you do not pay keeps working for you.
Same situation, other people are asking
Cash sitting still makes me anxious.I'm busy and earning, and it all stops the day I stop.I spotted something before the professionals did. Is that enough?I can't tell whether now is the time to be careful or bold.Making money work · all 10 questions →If this one named what you are going through,
send it to someone who needs it, or keep it somewhere you will find it again.