You never cease to amaze me.

Was I a little rough? Yes. Did I bash the mutual fund industry for robbing us blind? Sure. Did I expect some hate mail? Of course.

Feeling a little lost?
Don't worry -- here's a quick summary. Last June, I proposed an experiment. It was a bogus mutual fund made up of just three stocks -- bought in January 1990 and sold exactly 10 years later.

For my portfolio, I chose these three stocks, but any number of former highfliers could have done the trick:

  1. Microsoft (NASDAQ:MSFT)
  2. Dell (NYSE:DELL)
  3. Oracle (NASDAQ:ORCL)

The idea was to show how a modest $10,000 investment could have ballooned to more than $3.3 million in 10 short years. But there's a catch.

In those 10 short years, you'd have paid your mutual fund manager nearly $130,000 in fees and surrendered nearly $600,000 in lost profits (money not earned on those fees). So, instead of $3.3 million, you'd be sitting on a lot less.

So, you hate me, right?
Of course you do, but I thought you'd take the funds' side. I thought you'd point out that nobody could pick just those stocks, much less time the market so perfectly. In other words, my $730,000 blood money is a gross, unfair exaggeration.

Just wait until you hear what most of you really said. But first, let's revisit my second hypothetical from back in June -- namely, that you invested just $1,000 a year for 20 years. In this case, you earned a slightly more reasonable, yet still impressive, 22.8% per year. Guess what? You'd be out a mind-blowing $90,000 in fees and lost profits.

And there's nothing random about this second scenario. That 22.8% return is the figure industry watchdog Mark Hulbert says David and Tom Gardner have delivered annually to their Motley Fool Stock Advisor subscribers, going on five years now. For details, check out "Don't Invest Another Penny." But please come back, because this is where it gets good.

You got worked like a chump!
Or so you told me. Apparently, you're fine with me comparing the U.S. fund industry to an IRS on steroids. You took me to task for understating the case -- for trivializing the real cost to you as an investor, at least on a percentage basis.

And you're right. John Bogle -- the founder of Vanguard Funds -- makes the case bluntly in his latest book, The Battle for the Soul of Capitalism. Bogle shows how you don't need blowout returns (like in my superstock '90s example) to make the case against mutual funds ... you need time. Here's why.

Beware the "tyranny of compounding"
As it turns out, financial "intermediation" costs would have eaten up just 22% of your total returns ($730,000 out of $3.3 million) in my outrageous first example. That sounded like a lot to me, but apparently not to Bogle -- and to some of you, either. In fact, for most of us, it will be worse.

For one thing, we won't be making 30,000% every 10 years like in my example. That's because for every Corning (NYSE:GLW) your skipper catches for a 1,700% bounce off the bottom in October 2002, he'll clutch a Lucent (NYSE:LU) for a 97% plunge. But mostly, we'll ride the usual tigers like Johnson & Johnson (NYSE:JNJ) -- if we're lucky, that is.

And even if your fund manager does stumble in front of a freight train like Research In Motion (NASDAQ:RIMM), he'll buy it and sell too often -- and at the wrong times. That's one reason Bogle thinks you'll do even worse than "average" -- 8.5% per year by his estimate. Plus, you won't invest for 10 years, but more likely 25, 30, even 45 years or more. Think that's good news? Well, brace yourself, because this thing really gets ugly.

That'll be 80% off the top, sir
According to Bogle, if you invest for 45 years at his expected market return of 8.5% per year, these dastardly "intermediation" costs can steal up to 80% of your rightful profits. You read that right. Not 22% like in my ridiculous little scenario, but up to 80%. Ouch.

For one thing, Bogle uses a more aggressive 2.5% for intermediation costs, going beyond reported "management fees" to include taxes, transactions, and timing costs. And given that Bogle founded Vanguard, the most trusted mutual fund company in the world, I'm inclined to believe him.

More importantly, Bogle realizes that the more "realistic" your returns, the more deadly that 2.5% becomes, especially when compounded over the years. In other words, costs kill when your portfolio keeps doubling every six months -- but when it's doubling every 10 years or so, costs kill you dead!

What you can do about it
Frankly, I think we'll do better with stocks than Bogle says. But even if we go back to my optimistic assumption that you can match the remarkable 22.8% per year that Stock Advisor members could have earned since the service started in 2002, you're still forking over $90,000 in intermediation costs every 20 years.

If you sort of resent that, here's a solution a lot of folks are considering: Start managing your own investments. You don't have to jump in all at once, and you don't have to dump your funds right away. But you can see how important it is that you give it some thought -- and soon.

Of course, you'll need some great stocks. Give Stock Advisor some thought. You get a top pick each month from Motley Fool co-founders David and Tom Gardner, and you can try the whole service free for a whole month. If you do decide to join after your trial, it sure as heck won't cost you $730,000. To learn more about this special free trial, click here.

This article was originally published Sept. 29, 2006. It has been updated.

Paul Elliott doesn't own shares of any stock mentioned. Dell is a Stock Advisor pick. You can see all of David and Tom's recommendations instantly with your free trial. Microsoft and Dell are Inside Value recommendations. Johnson & Johnson is an Income Investor pick. The Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.