"All-in" Mutual Fund Costs & the MF business

[Packer16]

An interesting article on mutual funds.  Based upon recent MF flows, it looks like the active MM business may decline in the future to  be replaced by passive investing.

 

http://johncbogle.com/wordpress/wp-content/uploads/2010/04/FAJ-All-In-Investment-Expenses-Jan-Feb-2014.pdf

 

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[LC]

I certainly see the trend. Every personal finance blog/forum I've seen of late has the standard operating procedure of recommending passive indexing. Every time I am asked for advice I recommend three options: dedicating your time and energy to individual stock selection after reading the standard volume of value literature (a very unpopular option), investing with someone you know and trust, who has a track record of success and transparency (something not common), or vanguard index funds.

 

My fear of the eventuality is that, people will make the smart choice initially. Put their money in SPY and forget about it. Until of course the next panic hits, the media blasts fear and emotion from the rooftops, and human nature takes over.

[writser]

The interesting thing is, if too many people make the smart choice of buying SPY that will become the next bubble in itself. SPY is up 32% over 2013, VT (Vanguard total stock market) is up 'only' 23%. It could very well be that part of this outperformance is caused by asset inflows in passive S&P 500 funds. If so, that effect will only grow due to the rising popularity of passive investing.

 

Until at some point the S&P 500 crashes and active investing will replace passive investing again :)

[Packer16]

One question that does come to mind is can active management fees overcome active management out performance or is there a wash or a loss after fees.  Do the managers take all the excess return and leave little or none for the investors.  If you compounded the fee savings over time it can be quite significant (up to 65% in terminal wealth over 40 years).

 

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[Guest longinvestor]

Do not allow the tyranny of compounding costs to overwhelm the magic of compounding returns

 

Bogle's punch line! It is a travesty that a whole generation of 401K/retirement plan participants are locked into a lifetime of wealth corrosion due to fees.