The Evidence-Based Investor

Fee reductions mean nothing when you can index for 1/12th of the cost

Posted by Robin Powell on January 23, 2018

A new, long-form interview with Jack Bogle has just gone online, and, like all Bogle interviews, it’s worth reading.

The interview was conducted by Lawrence Siegel, who is the Gary P. Brinson director of research at the CFA Institute Research Foundation, a senior adviser to OCP Capital LLC, and an independent consultant, writer, and speaker specialising in investment management.

The interview is published on the Advisor Perspectives website, and you’ll find a link to it below. But here are the highlights.


Jack Bogle quote about investing and fee reductions


Index funds are still 12 times cheaper than active

“Let’s say an index fund can operate at 4 basis points and you’ve got somebody like Fidelity operating at, say, 70 basis points. If Fidelity cut its expenses from 70 to 50, that would have a staggering impact on the firm’s operations. It would eliminate their profits. It would be a mess, for the want of a better word. Yet even that lower cost would still be 12 times as high as the going rate for index funds. There’s really not much point in shaving prices in the world of active management.”


The odds of an active investor outperforming long term are about 0%

“With the counter-productivity of swapping from one expensive fund to another the odds are about 0% that an average investor can outpace the stock market over that long a time period. People are going to tell you there’s a certain chance, a 1% chance or a 2% chance. That’s the chance that a given fund will beat the market, not a given investor. I don’t happen to think even that’s right.”


One of the biggest challenges for investors is the temptation to “do something”

“The temptation to “do something” is one of the worst temptations that investors face. There is always some bluebird on the horizon. Maybe it’s bitcoin or some other kind of coin. These things come and go. In an investor’s lifetime he’s going to be so much better off owning the total stock market and never trading it.”


The ETF industry is largely for active investors using passive funds

“Passive management with passive investors is what I would do. The ETF business, in contrast, is passive management (sort of) with active investors. There, the activity returns, the trading costs return, and the emotions return. By chasing performance, investor returns go down. The traditional route will be the winning route in the long run.”


Fees collected by active management have soared in line with the stock market

“Active managers run a pretty vibrant business when you realize that, in the last 10 years, assets of active managers have gone from $7.3 trillion to $11.4 trillion. That’s about a 60% gain. Since there is not much net new money coming in, almost all of that gain comes from market appreciation. They are sitting on very profitable businesses, and I don’t think they yet feel the pressure to make changes or make some kind of strategic adjustments.”


CEO pay is a moral and social outrage 

“Executive compensation has gotten totally out of hand. Compensation consultants have introduced a process of “ratchet, ratchet and bingo,” to use Warren Buffett’s felicitous phrase. Nobody wants their CEO to be in the fourth quartile of compensation, so they bump them up to the first or second. It is an outrage — a moral outrage, a social outrage.”


You can read the full interview with Jack Bogle here:

“Uneasy lies the head that wears a crown”: A Conversation with Jack Bogle


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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector. Regis Media.

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