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Presidential Address: The Cost of Active Investing

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  • KENNETH R. FRENCH

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 1980–2006, 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.

Suggested Citation

  • Kenneth R. French, 2008. "Presidential Address: The Cost of Active Investing," Journal of Finance, American Finance Association, vol. 63(4), pages 1537-1573, August.
    • Handle: RePEc:bla:jfinan:v:63:y:2008:i:4:p:1537-1573
    DOI: 10.1111/j.1540-6261.2008.01368.x
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