The Cost of Active Investing

50 Pages Posted: 16 Mar 2008 Last revised: 12 Apr 2008

Kenneth R. French

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

Date Written: April 9, 2008

Abstract

I compare the fees, expenses, and trading costs society pays to invest in the U.S. stock market with an estimate of what would be paid if everyone invested passively. Averaging over 1980 to 2006, I find investors spend 0.67% of the aggregate value of the market each year searching for superior returns. Society's capitalized cost of price discovery is at least 10% of the current market cap. Under reasonable assumptions, the typical investor would increase his average annual return by 67 basis points over the 1980 to 2006 period if he switched to a passive market portfolio.

Suggested Citation

French, Kenneth R., The Cost of Active Investing (April 9, 2008). Available at SSRN: https://ssrn.com/abstract=1105775 or http://dx.doi.org/10.2139/ssrn.1105775

Kenneth R. French (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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