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Individual stocks lag the market by about 2.5%. Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Stock market risk, however remains. Stocks have brokerage commissions, portfolio transaction costs, plus legal and custodial? costs. Invest only in index funds Keep expense ratios low Make portfolio changes infrequently The S&P 500 represents about 80% of the market value of all U.S. stocks. 96% of all mutual funds fail to meet or beat the return of the Vanguard Index 500 fund Individuals holding stocks directly costs an average of 1.0-1.5% per year Management fees and expenses (the expense ratio) in equity mutual funds average 1.5%, plus any load. The costs of a managed funds turnover is estimated to be 1%. Therefore, equity fund ownership can cost as much as 3.0-3.5% per year. This is a major reason that fund managers have lagged the returns of the stock market. During the 1980s and 1990s, stock returns average 17.5% per year. During this same time, the average fund returned 15%.

Taxable Accounts (non IRA) This is the worst place to own an actively managed account because taxes are a drag on overall performance of up to 4% per year. Index funds do not trade securities and thus avoid capital gains taxes. Title In the past 25 years (since 1971) the U. S. stock market returned 12.5% per year. In the future, returns will be less since P/E ratios have increased substantially in the past decade. Bogle expects the U.S. stock market to return 7% per year in 2007 and beyond. This is partly because dividend yield is about 2%, less than half that of historical rates of 4.5% (for the last 100 years) and 3.4% for the last 25 years. Only three out of the 355 equity funds that started the race in 1970 (8/10 of 1%) have survived and supplied a record of sustained excellance. o Davis New York Venture (Chris Davis since 1991) o Fidelity CountraFund (Will Danoff since 1990) o Franklin Mutual Shares (Michael Price until 1997) o Note: Legg Mason Value Trust (Bill Miller since 1982) has outperformed the S&P 500 for a remarkable 15 consecutive years, from 1991-2005 inclusive. This funds average annual return of 15.3% beat the S&Ps return of 12.9% per year.

March 14, 2012

Since so few funds perform well over the long term, Bogle says Dont look for the needle in the haystack. Just buy the haystack!

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