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Latest Issue

The Real Cost of Low-Fee Funds

October 19, 2018

Today, rather than tackle some big macroeconomic issue, we’ll go back to this letter’s roots and look at market timing and portfolio construction issues. I expect this will get both enthusiastic support and at the same time, make a number of readers uncomfortable—if not annoyed.

Why? Because I am going to take on a number of shibboleths many hold sacred and dear. But after a great deal of thought over the last few years, I’ve come to realize that all too often, and this includes myself, investment advisors and investors tend to “talk their book.” We bring prejudices and biases into our portfolio construction, and then if it doesn’t work, we just call it “bad luck.” Let’s jump in.

The Real Cost of Low-Fee Funds

I wrestled with the title for this letter because I could’ve substituted the word high or true or hidden for the word “real” in the headline and just as easily have described my thesis. Low-fee funds, used the way that they are generally used, have hidden costs investment advisors don’t want to discuss and investors ignore.

Other things being equal, lower fee funds are better than higher fee funds which do the same thing. That is obvious. The total returns of lower fee funds over time are mathematically precise on this.

Yogi Berra, although he may not have been the first to say something similar, popularized the quote, “In theory, there is no difference between theory and practice. But in practice, there is.” That also applies to low-fee funds.

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