Don’t believe it? Consider that the long-term return on equities is roughly 11%. Imagine that two fictional investors, Sarah and John, each are 25 years old and want to invest $10,000 per year until they retire at 65. Sarah focuses on buying high quality blue chip stocks with fat dividends and established businesses, parking the stock certificates in a safety deposit box and forgetting about them. John, on the other hand, frequently trades and racks up an additional 3% per year in frictional expenses, some of which are invisible to him (you, for example, don’t really realize you are paying a mutual fund manager or a market maker but the costs to you are very real.) Over the next 40 years, Sarah will retire with over $5.8 million. John, on the other hand, despite investing the same amount of money and working much harder, frequently turning over his portfolio, will only have $2.6 million as a result of his lower 8% compounding rate (11% - 3% in frictional expenses = 8% compounding annually.)
For more information on specific frictional expenses you can avoid, read Frictional Expenses: The Hidden Investment Tax.
