Consider these silent partners: • The sales agent or stock broker who earns a commission for individual stock trades and loads, and 12b-1 fees on mutual funds • Federal and state income tax agencies that tax realized gains • A fund manager who actively invests stocks in a mutual fund • Accountants • Firms that charge investment advisory fees • Market makers who earn a bid-ask spread on transactions • Transfer agents who handle share transfers • Mutual fund distributors • The brokerage firm that earns interest on margin accounts
Problems The Silent Feast According to a 15-year study conducted by Vanguard founder John Bogle,83 investors kept 47% of the cumulative return of an average actively managed equity mutual fund, but they kept 87% in a market index fund, as reflected in Figure 7-1. This means $10,000 invested in the average actively managed equity fund grew to $49,000 versus $90,000 in an index fund. That’s a $41,000 drain that pads the pockets of the silent partners in the form of sales commissions, taxes, cash drag, expense ratios, and transaction costs. Cash drag relates to the cash balance held in a fund that is maintained for redemptions, and therefore is expected to earn a lower return than the investments.
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...