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The ‘linked benefits’ of index investing

Compounding reveals the true value of long-term investing and minimising costs
The writer is a former chair of Yale’s Investment Committee, an ex-board member of Vanguard and the author of 21 books including the forthcoming Rethinking Investing

The idea of linked costs was made clear to me by my father when I was 11 and he asked: “Why does the cinema charge you kids only 20 cents for admission?”

“Because we’re kids?” was my reply. My father said that was part of it but there was also a specific reason that I should understand. After several guesses, he decided to let me in on the secret: the owner of the cinema wanted as many kids as possible to come inside where they might buy popcorn at 25 cents that cost only 5 cents to make.

Later, while doing graduate work in economics, I learnt that the commercial world has many similar linked costs, including what we are learning to call “junk fees”. Happily, there are examples in this complex world of what might be called “linked benefits”. One rather generous source of these comes with tracker or index fund investing.

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