Presidential Address: The Cost of Active Investing



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    • Kenneth R. French is at the Amos Tuck School of Business, Dartmouth College. I had an extraordinary amount of help on this project. Keith Ambachsteer, Van Anthony, Brad Asness, Cliff Asness, Paul Bennett, Jack Bogle, David Booth, Stephen Brown, Kent Clark, Sean Collins, Shrikant Dash, Bob Deere, Doug Diamond, Robert Dintzner, Jim Dunne, Scott Esser, Maribeth Farley, Beth French, Will Goetzmann, Henry Gray, John Griswold, David Hall, Frank Hatheway, Ken Heinz, Terry Hendershot, Sarah Holden, John Howard, Susan Hume McIntosh, Antti Ilmanen, John Liew, Ananth Madhavan, Bernie Madoff, Kevin Maloney, Dave Martin, Charles McNickle, Mike Mendelson, Nir Messafi, Mark Mitchell, Catherine Newell, Terry Odean, John Rekenthaler, Eduardo Repetto, Savina Rizova, Mark Rubinstein, Dave Schneider, Bob Shiller, Jeff Smith, George Sofianos, Hans Stoll, Dick Thaler, Ingrid Tierens, Paula Volent, and Wayne Wagner gave me valuable information and advice, and Robert Batt, Bob Burnham, Marianna Paskar, Savina Rizova, and Blake Tatsuta provided excellent research assistance. I have also benefited from extensive conversations with Brad Barber, Jon Lewellen, Hubert Lum, Sunil Wahal, and especially Gene Fama. I thank TD Ameritrade, CEM Benchmarking, the Common Fund, Dimensional Fund Advisors, Greenwich Associates, Hedge Fund Research, Morningstar, Standard and Poor's, and the Securities and Exchange Commission for data.


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 1980–2006, 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 1980–2006 period if he switched to a passive market portfolio.