My dear child:
In the summer of 1976, a man named Jack Bogle opened a fund that promised to be average.
It would buy five hundred of the biggest companies in America (sound familiar?), hold them, and charge less than the funds trying to pick winners. He hoped to raise as much as $150 million. He got $11 million (an abject failure, in his own words). Wall Street called it Bogle's Folly.
You can see why. Everywhere else in life, paying more gets you something better. So a fund that charges one percent a year feels like the careful choice, and one percent barely even sounds like money.
Let's do the math. Put $500 a month into a cheap fund for forty years, and say it earns you seven percent a year. Nobody can promise you seven, but it keeps the math simple. You finish with $1,312,407. Pay one percent more each year and you finish with $995,745.
That's $316,662 gone, and you only put in $240,000. Run it at five percent or at nine and the fee still eats about a quarter of everything. At seven, it cost you MORE than you saved.
You'd forgive it if the money bought better results. But S&P, the firm behind the index, keeps score on this every year. Over twenty years, more than nine in ten of the big American stock funds run by professionals finished behind the plain average they were charging to beat.
My point is this: when you pay that fee, you've taken on a partner. He puts up none of the money and carries none of the risk, and he gets paid first every year whether you make a dime or not.
Bogle had a line for it. In investing, you get what you don't pay for.
So find out tonight what your partner is taking. Every fund has a number, a small percentage buried in the paperwork, usually called the expense ratio or the ongoing charge. I owned funds for years before I looked up mine, and I'd checked the price of every can of paint I ever bought.
Bogle's Folly charged forty-three cents a year on every hundred dollars back then. It charges four now, it holds more than a trillion dollars, and nobody calls it a folly anymore.
If you want to learn more about Bogle’s strategies, he spawned a movement of “Bogleheads” who are active on forums like Reddit. Google it.
One thing I'd tell my younger self: The cheapest thing I ever owned made me the most money.
From the bookshelf: "The Little Book of Common Sense Investing" by John C. Bogle. It's the book for people who never want to read a second one about investing.
A question to sit with: Do you know what your funds charge you each year? Go and look, then hit reply and tell me the number.
Yours sincerely,
