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The Arithmetic of “All-In” Investment Expenses

Just passing along a good letter here from the CFA Institute and John Bogle.  This message should be burned into the brain of everyone who participates in the market:

“If “active” and “passive” management styles are defined in sensible ways, it must be the case that (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required. . . .”

John Bogle is one of the good guys in the industry with his head in the right place and his understandings in a smart place.  Although I don’t love the idea of passive vs active (I personally think we’re all varying degrees of active so the idea of a “passive investor” is a little misleading), but the message should be clear – fees can make a huge difference in your overall performance and should be one of the primary factors that go into how you choose a manager….

Read the full letter here.


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