O'Reilly logo

The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website by Gregory Curtis

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

What Should Edith Do?

John Bogle has an answer to Edith's dilemma, and it will surprise no one who knows him: index funds.27 Perhaps we can be forgiven for suspecting that Mr. Bogle would also view index funds as the cure for world hunger, the solution to the Arab-Israeli conflict, and a handy way to deal with killer asteroids. But in this case he's onto something. If Edith had used index funds instead of Mildew Trust Co., she would have reduced both her investment costs (index fund fees are very low and, given their relatively low turnover, generate lower frictional investment costs than do active managers) and her taxes as well (lower turnover translates into lower taxes).

Although we don't subscribe to Bogle's claim that the use of index funds will “reduce both investment costs and taxes almost to the vanishing point,”28 if Edith could cut her cost- and tax-drag in half she would at least move her long-term rate of return back into positive territory. Adding 2 percent back to her bottom line annual return would bring her overall return to 1.1 percent and would allow Edith to grow her principal modestly and leave her grandchildren slightly more money than her grandmother left her.

But that's if everything else goes right, including Edith's ability to achieve an 11.3 percent annual compound return over 50 years. A far more likely outcome, we fear, is the one we reached a few paragraphs ago: Edith's $10 million inheritance will gradually diminish in value, not grow.

One reason ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required