Remember, Jack Bogle, you get what you don't pay for. It's true. So I want to convince you of two things. Get real, and arithmetic still works. Now, for get real, which is better, earning 10% when inflation is 12% or earning 3% when inflation is 2%? Which do you think makes people happier?

We like to see the balance go up even if the spending power is going down. So stocks-- this is all speculative, but stocks may have a real inflation-adjusted return of, let's say, 5% annually. High-quality bonds, maybe 1%. So that means a 50/50 portfolio might, in the long run, beat inflation by 3%.

So how much of it do you want to give away? Now, I ran something by Mike Piper on a spreadsheet last night, but I should have run this by-- 3 minus 2 does equal 1, right? Mike agrees. He's nodding. So the most brilliant paper you'll ever read is three pages and incredibly simple by Nobel laureate William Sharpe, Arithmetic of Active Management.

And what it says is that if the stock market-- let's just define it as the US stock market-- earns 10%, the average dollar invested is going to earn 10% less the fees. And by the way, that's over any period of time-- year to date, 20 years, et cetera. And Rick is right.

Over the long period of time, the total stock funds do better and better and better. So the doctor analogy-- the first time I met Gus Sauter, who was the chief investment officer of Vanguard and launched the Vanguard Total Stock Index Fund, he gave me this analogy. If you needed heart surgery, would you find the cheapest heart surgeon or the best?

What's wrong with this analogy? And by the way, he gave me this analogy as what other active managers were using. My doctor wouldn't have to make somebody else die in order to make me live. The stock market is a zero-sum game. We do not live in Lake Wobegon. This is where 90% of us are above average.

So how much do you want to give up between fees, the expense ratio, hidden fees, bid-ask, market impact, hedging, et cetera? Advisor fees, my hourly rate is a drag on returns. Emotions, taxes-- and remember, taxes are charged on a nominal basis, not inflation-based. So I showed you this slide earlier.

And again, it's incredibly important, the cost of emotions. Those are very, very large-- 1.7%. So if you think about it, if a 50/50 portfolio might earn 3% above inflation, if we pay 1% in fees to the fund managers, our financial planner, investment advisor, et cetera, we give up another 1.7% in emotions.

And the government taxes us. That tax number is much lower because the active fund is going to have lower returns and be a little bit more tax-efficient from that standpoint, which is not a good thing. So maybe the average investor loses 0.7% of spending power. This is illustrative. So the Vanguard Total Stock Index Fund-- Christine showed this slide.

Boy, I'm really glad that we both came out with 4,052 holdings. An expense ratio of 0.03% plus Vanguard returns all the profits from securities lending. So the net cost is even less than that. The total capital gain distributions over the last 10 years is zero. And by the way, a lot of active fund holders are going to get 1099s this year when their value has gone down because they've sold stocks within the portfolio.

So mathematically, the average dollar invested in US stocks over any period of time must be higher for Vanguard Total Stock than active funds, right? This next slide from a research company-- I shouldn't have used their name-- it was very, very stressful to me because what it shows is that the Vanguard Total Stock Index Fund underperformed its peers by 1.7%, and 73% year-to-date of mutual funds bested the Total Stock Index Fund.

I can't tell you how stressful that was for me and how much research I spent to get to the bottom of it. And how I got to the bottom of it is what Rick showed is that the S&P 500 Index Fund year-to-date beat most of its peers. And then there's another fund out there called the Extended Market Index Fund, which are every company based in the United States that's not in the S&P 500, and both of those beat their peers.

So how could the sum of the two beat their peers? And John Reckenthaler helped me get to the bottom of this. Morningstar has changed the way it looks at the total market. It used to be a third growth, a third value, and a third core. Now growth is much larger.

So I argue the market is the market. It's neither growth nor value. If you own everything, you own everything. So John Reckenthaler is just absolutely brilliant. And you really know somebody who's good when you disagree with them, and they get to the bottom of things. So as he puts it, owning a low-cost, market-cap-weighted index fund is both psychologically and mathematically superior.

So we hate to lose money. I've lost money this year. But I know that I've lost less money in the US market than most other people. So the most important sentence I've ever written on investing is minimize expenses and emotions, maximize diversification and discipline. It's that simple. So conclusion, you can have a bad low-cost portfolio, but you can't have a good high-cost portfolio.

I could have had everything in a low-cost Russian index fund, and that wouldn't have worked out all that well. Not very diversified. So John Bogle gave us access to low-cost and high diversification. It's up to us to manage discipline and emotions. Smart beta was the rage about 10 years ago.

Let's put everything in value, equal-weighted, small-cap, momentum. And that's active investing. I embrace dumb beta, which Christine was nice enough to interview me on The Long View and appropriately titled Why I Embrace Dumb Beta. So understand what Jack Bogle meant by the tyranny of compounding, of costs on our financial freedom.

Costs must be low, diversification high. you