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Bogle On Mutual Funds: New Perspectives For The Intelligent Investor by John C. Bogle

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Chapter Ten Mutual Fund Costs The Price of Everything

According to Oscar Wilde, a cynic is someone “who knows the price of everything, and the value of nothing.” True as this sentiment may be about the evaluation of a Renaissance masterpiece, it hardly applies in the ownership of mutual funds. In no other section of the financial services field are cost and value more closely linked. In the case of mutual funds it might be said that knowing the price of everything reveals the value of everything, since each dollar of cost that you pay reduces your return by a precisely equal amount. This principle does not lead to the conclusion that you should always own the lowest-cost mutual fund. It simply makes the point that, under good and bad management alike, a fund provides a gross return that is reduced, dollar for dollar, by the cost incurred in its ownership. Other things being equal, lower costs mean higher returns.

In several previous chapters, I referred to the impact of costs on mutual fund investment returns; however, cost is so central to mutual fund investing that it really deserves its own chapter. During the earlier days of this industry, most mutual funds had reasonably low expense ratios (annual operating expenses usually ranged from 0.60% to 1.00% of a fund's average net assets) and all funds were either load (with sales charges of about 8% on purchases of fund shares) or no-load (without sales charges). Then it was a simple matter to calculate the impact of costs. ...

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