{"id":909,"date":"2014-01-02T16:34:56","date_gmt":"2014-01-02T21:34:56","guid":{"rendered":"http:\/\/johncbogle.com\/wordpress\/?p=909"},"modified":"2014-02-26T11:38:00","modified_gmt":"2014-02-26T16:38:00","slug":"ring-in-the-new","status":"publish","type":"post","link":"https:\/\/johncbogle.com\/wordpress\/2014\/01\/02\/ring-in-the-new\/","title":{"rendered":"Ring In the New"},"content":{"rendered":"

January 2, 2014<\/span><\/p>\n

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To VANGUARD VETERANS AND PRINCIPALS:<\/span><\/span><\/span><\/b><\/p>\n

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\u201cRing In the New\u201d <\/b>follows the \u201cRing Out the Old\u201d note that I sent you on December 31, 2013.\u00a0 As 2014 begins, I\u2019m pleased to send my first mailing of the new year, an essay entitled, The Arithmetic of \u201cAll-In\u201d Fund Expenses<\/a><\/strong>. <\/b>(Financial Analysts Journal, <\/i>January\/February 2014, ahead of print.) This Perspectives<\/i> piece is my eighth article for this top professional journal, aimed importantly at CFA charterholders. (Congratulations to our 200 Vanguard crewmembers who have met these demanding standards!)<\/span><\/span><\/span><\/p>\n

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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 My FAJ essay breaks new ground in its attempt to fill a huge gap in the analysis of the impact of mutual fund costs on shareholder returns. Up until now, consideration of fund costs has been almost universally limited to expense ratios, which currently average 1.12 percent for actively-managed equity funds. My piece notes that there are other, even higher costs that must be taken into consideration: fund portfolio turnover costs, cash drag, and sales loads and fees paid to brokers and financial advisers. By my calculation, those costs come to about 1.15 percent (a conservative estimate), bringing total costs of actively-managed equity funds to 2.27 percent annually.<\/span><\/span><\/span><\/p>\n

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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 I go even further in my article, and consider the impact of taxes for investors in active funds\u2014I estimate 0.75 percentage points\u2014and the costs of investor behavior (buying funds after<\/i> they hit the jackpot). Based on Morningstar data, I use an estimate of 1.20 percentage points. Now we\u2019re up to a total of 4.22 percent in costs of actively-managed funds.<\/span><\/span><\/span><\/p>\n

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Now, let\u2019s assume a stock market annual return over the coming decade at a reasonable 7 percent in nominal<\/i> terms. With, say, 2 \u00bd percent inflation, that\u2019s a 4 \u00bd percent real<\/i> return. \u201cAll-in\u201d fund costs would confiscate 94 percent of the stock market\u2019s annual real return.<\/i> In essence, that\u2019s why \u201ccosts matter,\u201d and why low-cost index funds are thriving.<\/span><\/p>\n

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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 My article represents an extension of the data produced by Nobel Laureate William F. Sharpe in the FAJ of a year ago on the subject of expense ratios of active funds vs. index funds. He likes my broader approach, and has already endorsed my new article: \u201cWhat a wonderful combination! . . . Your final sentence says it once again, concisely and powerfully.\u201d<\/span><\/span><\/span><\/p>\n

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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Morningstar\u2019s veteran analyst (and noted skeptic) John Rekenthaler has also endorsed my essay: \u201cThe best treatment yet of the subject.\u201d As John approvingly comments on my cost estimates, \u201cBetter roughly right than precisely wrong.\u201d<\/span><\/span><\/span><\/p>\n

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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 I hope those of you concerned with these issues will give \u201cThe Arithmetic of \u2018All-In\u2019 Investment Expenses\u201d the attention I believe it merits in making an even stronger case for index funds, well beyond the data that we conventionally rely upon. The final three paragraphs of my long paper provide the essential message, and I encourage all crew members to consider this vital addition to the full understanding of the \u201call-in\u201d costs of active investing.<\/span><\/span><\/span><\/p>\n

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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span>Jack<\/b><\/em>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/em> <\/span><\/span><\/p>\n

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P.S. As is my practice, I\u2019m also posting this paper on my eblog, www.johncbogle.com, where it is available to all crew members and to the public.<\/span><\/p>\n

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[1]<\/a> The final sentence of my essay: <\/span>Do not allow the tyranny of compounding costs to overwhelm the magic of compounding returns.<\/span><\/i> (Italics in original.)<\/span><\/span><\/span><\/p>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

January 2, 2014 \u00a0 \u00a0 To VANGUARD VETERANS AND PRINCIPALS: \u00a0 \u201cRing In the New\u201d follows the \u201cRing Out the Old\u201d note that I sent you on December 31, 2013.\u00a0 As 2014 begins, I\u2019m pleased to send my first mailing of the new year, an essay entitled, The Arithmetic of \u201cAll-In\u201d Fund Expenses. (Financial Analysts […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","advanced_seo_description":"","jetpack_seo_html_title":"","jetpack_seo_noindex":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[3,15],"tags":[],"class_list":["post-909","post","type-post","status-publish","format-standard","hentry","category-commentary","category-memos-to-principals-and-veterans"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/posts\/909","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/comments?post=909"}],"version-history":[{"count":3,"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/posts\/909\/revisions"}],"predecessor-version":[{"id":923,"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/posts\/909\/revisions\/923"}],"wp:attachment":[{"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/media?parent=909"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/categories?post=909"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/johncbogle.com\/wordpress\/wp-json\/wp\/v2\/tags?post=909"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}