Jack Bogle once said (paraphrasing) that average investors gave up 60% of the rewards through costs/fees/taxes. Take on 100% of the risk, for less than 40% of the rewards. The basic example he cited was a average 50 year investment lifetime, 8% market average, 6% investors average after fees/costs/taxes/hidden costs ...etc. 8% compounded for 50 years = 47 gain factor, 6% compounded for 50 years = 18 gain factor.
Whilst many funds seem to have low fees such as 0.2% for SWDA, and even lend shares (add in additional counter party risk factors), and seem to track or even better their benchmark index, you need to factor in that the benchmark is often quoted net ... such as US stocks being net of 30% US dividend withholding taxation. When based in Ireland, as per the UK the Irish/US tax treaty reduces that withholding tax to 15%, so the fund might relatively outperform the benchmark by 15% of the dividend value/yield. In practice however 2% dividends even with 15% withholding taxation = 0.3%. Add on 0.2% fund fees = 0.5%. Better than the 2% difference between 8% and 6% that Jack Bogle used as a example, but still a broad 80% of the rewards outcome for 100% of the risk.
Less of a issue when stocks do well, but in some decades stocks might falter, yielding nothing or worse, maybe -5% annualised. When overheads are 0.5% and you're also drawing a 4% SWR income/whatever and stocks lose -5%/year ... for a decade, then a stock portfolio could see it dragged down to just 27% of the inflation adjusted start date value at the end of the decade long period (less than 15% after drawing the 11th years income at the start of the year).
A broader index comprised of thousands of stocks all around the world may seem to reduce risk on one front, but can induce other risks in its place. With globalisation having seemingly past its peak I wouldn't be surprised if that even intensified, i.e. average global withholding taxes might increase from around 20% average to perhaps 30% average and/or other hidden costs/fees. As might domestic tax risks increase given largescale debt levels. Or some other form of 'tax' ...
http://warrenbuffettoninvestment.com/ho ... -investor/The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5% inflation. Either way, she is “taxed” in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120% income tax, but doesn’t seem to notice that 6% inflation is the economic equivalent.
Some single stocks have economies larger than entire countries and when they also have a global presence they might internally manage the taxation/currency factors in a appropriate manner. By the time you hold ten stocks concentration risk is diluted down to 10% levels; At 25 stocks concentration risk is down to comparable levels as SWDA that holds over 4% exposure to a single stock. Even at 10% however the risk is relatively acceptable, after all entire broadly diversified portfolios can decline 10% or more within a single week.
Old school used to be to buy 10 or so stocks, buy and hold, never sell and where many didn't even bother with any rebalancing. The financial sector, the worlds largest/richest sector however have swayed many into believing they need their products and in return for selling those products even with the 80% or so of the rewards that investors might be attributed, that still leaves that sector with a share of the risk-free 20% remainder - that facilitates owning expensive properties and paying high wages.