Taxes

A later study1 by Bogle analyzed the returns and tax implications of the average equity investor vs. an investor in an S&P 500 Index Fund. Figure 7-2 details the end results for the 25 years from January 1, 1981 to December 31, 2005. The chart shows that $10,000 invested in the average managed equity fund would have grown to post-tax results of only $71,700. The same amount invested in the S&P 500 Index Fund would have grown to a much larger post-tax sum of $159,000.

Figure 7-2

Sad Uncle Sam
Sad Uncle Sam

Figure 7-3 further reveals the contrast between the post-tax returns of both Vanguard index funds and their respective Morningstar categories. From July 1999 through June 2014, a $100,000 investment in the Vanguard 500 Index Fund lost only $10,627 to taxes, while the Morningstar Large Blend category lost $23,994. Looking at another index at the bottom of the chart, the Vanguard Total International Index Fund lost $19,454 to taxes, while the Morningstar Foreign Large Blend category lost $28,680. It is important to note that the annualized returns for the Morningstar categories are upwardly biased due to the impact of survivorship bias. Such contrasts in taxes reveal why index funds investing makes for one very sad Uncle Sam, as seen in the painting.

Figure 7-3

    -1 John Bogle, The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Hoboken: John Wiley & Sons, Inc., 2007).
Step 7John Bogle