Cost matters hypothesis

The cost matters hypothesis is a term coined by John C. Bogle. Bogle explains the hypothesis thus:

But the EMH may well prove less important in investment theory than a new wisdom that is beginning to emerge. I call it the CMH: The Cost Matters Hypothesis. Like the EMH before it, the CMH posits a conclusion that is both trivially obvious and remarkably sweeping: The mathematical expectation of the speculator is a loss equal to the amount of transaction costs incurred.

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We don’t need the EMH to explain the dire odds that investors face in their quest to beat the stock market. We need only the CMH. Whether markets are efficient or inefficient, investors as a group must fall short of the market return by the amount of the costs they incur. And since the cost of our intermediation system is relatively stationary over short periods, the impact of that cost is inversely correlated with the returns on stock prices (i.e., a 3% annual cost would consume one-fifth of a 15% market return, but fully one-half of a 6% return.) Even for investors who incur more modest costs (say, 1% per year), the odds are that 95% of them will fail—often by huge amounts—to earn the stock market’s return over an investment lifetime."

This is a core element of the Bogleheads® investment philosophy.