If Warren Buffet has a counterpart – it’s John Bogle, retired founder of the Vanguard family of mutual funds. Bogle has gathered a crowd of followers over the years who call themselves Bogleheads.
The Bogleheads had their annual meeting a couple of weeks ago, and among the headlines coming out of the meeting were comments Bogle made about the wealth destroying impact of mutual fund fees.
First – a bit of groundwork. Bogle says that the stock market has returned 6.5% – 7.0% over the long term, adjusted for inflation. One factor that makes that figure so spectacular is the reinvestment of dividend yields – which account for 1.9% of the total.
He emphasizes the importance of dividend yields, because a) they’re pretty consistent – meaning they’re paid even in years where the mutual fund’s share price goes down in value; and b) the compounding effect of a figure that’s positive year after year (dividends) has a profound positive impact on our outcome (remember Einstein’s proclamation that the magic of compound interest is the ninth wonder of the world).
But with the average mutual fund charging 1.2% in fees (and that’s just the fees we can see), the ‘net’ amount of those dividends that remains available to compound for you and I is just 0.7%. In Boglespeak:
“We eat up all of our dividends with stock expenses, [and the] industry – you could easily say – doesn’t give a damn. Fees easily wipe out a huge portion of the yield on stocks, more than 63% of your money.”
Chances are, most of us have never thought of mutual fund fees wiping out 63% of the only predictable part of a mutual fund’s gains. But even if we calculate the same fee as a portion of a 6.5% – 7.0% gain, we still arrive at point where about 15% of our gains are wiped out by fees each year.
There are two dirty little secrets to take away from this. First, fees come out regardless of the fund’s performance. Bogle says “fees are fixed costs that are consciously structured to suck money from your accounts, regardless of performance.”
Second, the mutual fund industry will never tell you their fees are 15% of average gains – they’ll never tell you they’re 63% of average yields – they’ll tell you instead, that they’re a measly 1.2% – almost a rounding error – less than sales tax – don’t worry about them.
My advice: when someone says don’t worry about it – WORRY!