Costs go on forever
Expense ratios, sales charges and trading costs, and why low cost is the most reliable guide Bogle found.
FinanceBogle ch. 11–12About 5 min: 3 reading, 2 practiceUpdated
General education, not financial advice.
- List the costs of owning a fund: expense ratio, sales charge, trading costs
- Estimate a fund's all-in yearly cost
- Explain why costs predict results better than past performance
Builds toward: Invest on your own. Understand low-cost funds, read a fund factsheet, and spot a sales pitch.
Common-sense investing: the case for index funds: lesson 9 of 12
- Costs and the market
- Investors as a group earn the market minus costs 7 min
- Bogle ch. 2
- Where stock returns come from 5 min
- Bogle ch. 3
- Owning the whole market 4 min
- Bogle ch. 5
- Fund returns versus investor returns 6 min
- Bogle ch. 6
- Taxes are costs too 5 min
- Bogle ch. 7
- When future returns are lower 5 min
- Bogle ch. 8–9
- Why past winners rarely repeat 5 min
- Costs and the market
- Is advice worth paying for? 7 min
- Bogle ch. 11–12
- Costs go on forever 5 min
- Bogle ch. 13
- Bonds and money-market funds 4 min
- Bogle ch. 14–15
- New indexes and ETFs 5 min
- Bogle ch. 16–18
- Graham, the arithmetic, and a plan 5 min
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Pairs with Bogle, The Little Book of Common Sense Investing (2007), chapters 11–12, "Focus on the Lowest-Cost Funds" and "Profit from the Majesty of Simplicity"
What it is
Bogle's summary: performance comes and goes, but costs go on forever. A fund's costs tend to stay the same year after year, so they are predictable in a way returns aren't.
A fund's costs have three parts:
- Expense ratio: the yearly running costs (management fee and operating costs), as a % of your money. Shown in every fund's documents.
- Sales charge (load): a one-off charge when you buy (or sell) some funds.
- Trading costs: commissions and price effects when the fund buys and sells shares. They aren't in the expense ratio. Bogle's rule of thumb: about 1% of the turnover rate, so 80% turnover costs roughly 0.8% a year.
In Bogle's data for 1995–2005, U.S. stock funds sorted into four groups by all-in cost had almost the same returns before costs (12.0% to 12.8%), but after costs the cheapest quarter earned 11.7% a year and the most expensive 9.0%. Bogle's "all-in" figure adds the expense ratio and trading costs; sales charges come on top. Costs accounted for most of the gap.
Quick check
Tap an answer to check it.
A fund has an expense ratio of 0.9% and a turnover of 60%. Using Bogle's rule of thumb, its all-in yearly cost is about …
- Add trading costs: about 1% of the 60% turnover
- Turnover cost is about 1% of the turnover rate, so 0.6%
Show answer
1.5%. 0.9% + 0.6% ≈ 1.5%.
Why it matters
When you can't know which fund will do best, the one thing you can know in advance is what it will cost. Bogle argues that choosing on low cost improves your odds more than anything else you can see beforehand.
Worked example
Bogle runs a simulation to show how costs change the odds. He assumes an index fund costs 0.25% a year and an active fund 2% (a figure he calls generous to active funds), with returns varying around the market each year. The share of active funds expected to beat the index falls as time passes:
Source: Bogle, The Little Book of Common Sense Investing (2007), ch. 12, Exhibit 12.1 (assumes costs of 2% for active funds, 0.25% for the index fund).
Text description
Bar chart. 1 year: 29%; 5 years: 15%; 10 years: 9%; 25 years: 5%; 50 years: 2%.
Over one year, luck can easily beat a cost gap of 1.75 points; over decades, the cost gap compounds and luck averages out.
Common mistake
Looking only at the expense ratio. A fund with a low expense ratio but very high turnover, or a big sales charge, may not be cheap at all. Add up all three.
Key terms
- expense ratio
- yearly running costs as a % of your money
- sales charge (load)
- a one-off charge on buying or selling
- trading costs
- costs of the fund's own buying and selling, not in the expense ratio
- turnover
- how much of the portfolio is traded in a year
- all-in cost
- Bogle's term: expense ratio + trading costs (sales charges come on top)
Practise the key terms
Tap a card to turn it over. 5 cards.
| Front | Back |
|---|---|
| expense ratio | yearly running costs as a % of your money |
| sales charge (load) | a one-off charge on buying or selling |
| trading costs | costs of the fund's own buying and selling, not in the expense ratio |
| turnover | how much of the portfolio is traded in a year |
| all-in cost | Bogle's term: expense ratio + trading costs (sales charges come on top) |
Practice
Work it through
Fund X: expense ratio 1.1%, turnover 90%. Fund Y: expense ratio 0.1%, turnover 5%. Use Bogle's rule of thumb for trading costs.
- 1.1 + 0.9
- 0.1 + 0.05
- 2.0 − 0.15
Quick quiz
Tap an answer to check it.
Why do costs predict a fund's future results better than past returns, in Bogle's view?
- Bogle's data show similar returns before costs
Show answer
Costs stay about the same year after year; past returns come and go. Costs persist; performance doesn't.
In Bogle's 1995–2005 data, the cheapest and dearest groups of funds had …
- Before costs they were similar
Show answer
similar returns before costs, but very different returns after costs. 12.0–12.8% before costs; 11.7% vs 9.0% after.
The other view
Costs have fallen a lot since Bogle wrote. The U.S. Investment Company Institute reports that in 2025 the average expense ratio of U.S. equity mutual funds, weighted by assets, was 0.40%, and of index equity ETFs 0.14%. (Bogle, ch. 4, put the average stock fund's expense ratio at about 1.5%; the measure may differ, so compare with care, but the direction is clear.) ICI attributes much of the fall to investors moving to lower-cost and no-load funds, the lower-cost direction Bogle argued for.
Last checked: 27 October 2026.
In short
- Costs = expense ratio + trading costs, plus any sales charges.
- Bogle's rule of thumb: trading costs ≈ 1% of the turnover rate.
- Before costs, funds earn similar returns; after costs, cheap funds tend to come out ahead.
- Costs are the one thing you can know in advance.
Mastery check
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Check yourself
Answer in your head first, then open the answer. Nothing is saved.
Name the three kinds of cost of owning a fund.
Show answer
The expense ratio, trading costs, and any sales charge.
Why is a cost gap more likely to show over 25 years than over 1?
Show answer
Over one year luck dominates; over decades the cost gap compounds while luck tends to even out.
What did ICI report as the 2025 asset-weighted expense ratio of U.S. equity mutual funds?
Show answer
0.40%.
Further reading
- John C. Bogle, The Little Book of Common Sense Investing (John Wiley & Sons, 2007), chapters 11–12.
- Investment Company Institute, "Mutual Fund and ETF Fees Remained Near Historic Lows in 2025" (March 2026).
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