Ken French has a wonderful paper called the Cost of Active Investing.
He presented the paper at the 2008 AFA Presidential Address.
I compare the fees, expenses, and trading costs society pays to invest in the U.S. stock market with an estimate of what would be paid if everyone invested passively. Averaging over 1980 to 2006, I find investors spend 0.67% of the aggregate value of the market each year searching for superior returns. Society’s capitalized cost of price discovery is at least 10% of the current market cap. Under reasonable assumptions, the typical investor would increase his average annual return by 67 basis points over the 1980 to 2006 period if he switched to a passive market portfolio.
What is amazing is that Bernie Madoff is credited for helping Prof. French complete the study!
Ironic. Madoff provided investors with the most costly form of active investing one could ever imagine–fraud!
Thanks to Doug Pugliese for pointing this out–keen eye…
Prof. French starts around 8min.
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