The Silent Feast

According to a 15-year study conducted by Vanguard founder John Bogle,1 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.

Figure 7-1

    -1 John Bogle, Bogle Financial Markets Research Center, Remarks to the Philadelphia Chapter of the American Association of Individual Investors, November 23, 1999.
Step 7John BogleStudytransaction costssales commissionsexpense ratiostaxescash drag