11 March 2008

Investors spend $100 billion a year trying to beat the market

Kenneth R. French has circulated a working paper titled "The Cost of Active Investing" summarizing an analysis in which he tried to quantify the costs of investors trying to beat the market. The price tag is huge: over $100 billion in 2007 alone. This represents money those investors would have saved had they simply bought an index fund.

The New York Times has this punch line :

One [implication] is that a typical investor can increase his annual return by just shifting to an index fund and eliminating the expenses involved in trying to beat the market. Professor French emphasizes that this typical investor is an average of everyone aiming to outperform the market — including the supposedly best and brightest who run hedge funds.

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