Investment costs are a key driver of long-term performance.
The zero-sum game helps explain why. The theory states that the aggregate holdings of all investors in a particular market form that market. At any time, half of invested assets must outperform the average market return and the other half must underperform it. Once costs are subtracted, though, it becomes increasingly difficult to beat the average market return. This graphic helps tell the story.
Source: Vanguard.
The zero-sum game provides a theoretical explanation for why costs are such an important influence on returns. It makes a case for keeping costs low, regardless of whether you choose an index or active strategy.
But it’s more than just theory. Research by Vanguard and others shows that what an investor pays for an investment can affect their net returns more than anything else.1