Monday, March 10, 2008

Q. What Costs Americans Over a Quarter-Billion Dollars a Day?

A. Active investing.

Yes, as reported in Mark Hulbert's NY Times column yesterday, a study by Dartmouth professor Kenneth French suggests that Americans now spend about $100 billion a year trying to beat the market.

Back in 1980, Professor French estimates, the comparable figure was only $7 billion.

Included in the $100 billion total are all mutual-fund expenses and fees, trading costs, fees charged by hedgers and other investment managers, etc.

The moral of the study, “The Cost of Active Investing,” is, buy index funds.

Two caveats:

1. Some fees and commissions in effect pay for tax strategies, estate planning tips and other personal-finance guidance, not stock-picking.

2. We need a healthy minority of ever-optimistic active investors to keep the market honest and thus make index-investing practical. This point is being made today by, among others, this post on Seeking Alpha.

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