Learning from John Bogle
John Bogle, founder of Vanguard, profoundly shaped modern investing. I met him casually at the Vanguard cafeteria after his retirement. He always prioritized low costs above all else. He championed diversification—but never at the expense of paying high fees.
Bogle’s key lessons? First, the S&P 500 index typically outperforms stock-picking strategies. Second, high expense ratios drain returns over time.
In his classic book Common Sense Investing, Bogle warned that higher expense ratios eat into returns over time.
What Is an Expense Ratio?
An expense ratio is the annual fee a fund charges. It covers management, administration, and marketing. For index funds, this might be around 0.05%. Actively managed mutual funds often charge 0.50% or more. That’s ten times the cost, with no guarantee of better returns.
Vanguard’s index funds are among the cheapest. But even there, some mutual funds cost 0.40% or higher. Add a registered advisor’s fee (typically 1%), and your total cost could reach 1.4% annually. For a $5 million portfolio, that adds up to $70,000 a year.
Every dollar taken in fees is one less dollar working for your future.
The True Cost Over Time
Bogle introduced the concept of all-in costs. This includes not only expense ratios, but also costs tied to portfolio turnover, cash drag, and advisor compensation. He found that some active funds imposed 2.3% all-in costs. That level of expense can eat away nearly half of long-term investment gains.
By comparison, a low-cost index fund might charge just 0.05%–0.15% total, leaving much more to compound.
A Real-World Scenario
Imagine a $10,000 investment growing at 8% annually. After 20 years:
- With 0.05% fees, it grows to roughly $66,600.
- With 2.5% fees, it ends at just $42,500.
That’s a difference of $24,000, lost to expenses alone.
Low-Cost Funds Often Win
Index funds track benchmarks like the S&P 500. They charge very little and aim to match market returns.
- Vanguard 500 Index Fund (VFIAX) costs 0.04%.
- SPDR S&P 500 ETF (SPY) charges 0.0945%.
Studies show that these low-cost vehicles often outperform higher-cost active funds because less money gets taken away in fees.
Fees Still Add Up
Despite lower trends, average fund expenses still matter. In 2024:
- Mutual funds averaged 0.40%
- Bond funds averaged 0.38%
- The average for all U.S. mutual funds and ETFs fell to 0.34% from 0.83% in 2005
Still, the lowest-cost 20% of funds saw $930 billion inflow, while the rest lost assets. Those dollars matter over a lifetime.
When High Fees Can Make Sense
Some niche or aggressive strategies, including hedge funds, charge well over 1%, sometimes up to 1.65% or more. These strategies can offer value during volatility or in niche markets. But they need to outperform by even more to justify the cost. That happens far less often than most people think.
Best Fee-Wise Practices for Investors
- Compare funds within the same category.
- For passive stocks, target expense ratios under 0.15%.
- Watch for additional costs like 12b-1 and advisory fees.
- Ask, “Is this fund’s net return outperforming its benchmark?”
These steps help you keep more of your money growing.
How Michael Leslie Investments Helps
At Michael Leslie Investments, cost efficiency is a core part of our approach. We believe that every dollar you save on fees is a dollar that can stay invested and keep growing.
Here’s how we help you keep more of your returns:
- We prioritize low-cost investments. Whenever possible, we use index funds and ETFs with minimal expense ratios, avoiding high-fee products that rarely outperform.
- We monitor total costs. That includes fund fees, advisory fees, and any additional charges. We ensure you know exactly what you’re paying, and why.
- We build cost-conscious portfolios. Your strategy is tailored to your goals, not driven by commissions, trends, or excessive fund turnover.
- We focus on net performance. What matters is how much you keep after fees, not just the headline returns. We help you evaluate investments on their real, after-cost results.
- We provide clear guidance. From fund selection to rebalancing, we help you stay aligned with long-term goals—without overpaying for it.
Our goal is simple: give you more control, more clarity, and more value from your investments.
Final Word
Expense ratios matter more than many people think. A 1% difference today can cost tens of thousands over time. John Bogle knew this. That’s why he prioritized low-cost investing over stock picking.
Following his advice, aim for the lowest possible expense ratio. A well-structured, low-cost portfolio can outperform higher-cost alternatives. It’s that simple.
At Michael Leslie Investments, we focus on keeping costs low. Schedule a call today to build a transparent, cost-efficient portfolio designed for your long-term success.
