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. In a previous column, I proposed an experiment. It was a bogus mutual fund made up of just four stocks, each bought in January 1990 and sold 10 years later.

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

  • Amgen
  • Genentech (NYSE: DNA)
  • Charles Schwab (Nasdaq: SCHW)
  • Ericsson (Nasdaq: ERIC)

The idea was to show how a modest $10,000 investment could have ballooned to more than $300,000 in 10 short years. But here's the catch.

In those 10 short years, you'd have paid your mutual fund manager nearly $20,000 in fees and surrendered nearly $50,000 in lost profits (money not earned on those fees). So instead of $300,000, 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, I thought you'd say that my $70,000 blood money is unfair and a gross exaggeration.

Wait until you hear what most of you really said. But first, let's revisit my second hypothetical -- namely, that you invested just $1,000 a year for 20 years. In this case, you earned a more reasonable, yet still impressive, 20.02% per year. Guess what? You'd be out a mind-blowing $80,000 in fees and lost profits.

And there's nothing random about this second scenario. That 20.02% return is the figure that 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 my comparing the 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 it turns out 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"
Financial "intermediation" and so-called friction costs would have eaten up just 23% of your total returns ($70,000 out of $300,000) 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, you won't be making 2,900% every 10 years. For every 10-bagger like Symantec (Nasdaq: SYMC) that your skipper turns up, he'll bite on a Charter Communications (Nasdaq: CHTR) or some other highly touted disappointment. But mostly, he'll keep you bouncing between JPMorgan Chase (NYSE: JPM), the other financials, and the rest of the most widely held stocks.

And even when your manager does catch lightning, he'll probably buy and sell too often, and at the wrong times. That's one reason Bogle thinks you'll earn less than "average" -- 8.5% per year, by his estimate. Plus, you won't invest for 10 years, but more likely 25, 30, or even 45 years or more. 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 a mere 19% like in my hypothetical fund, but up to 80%.

For one thing, Bogle uses a more aggressive 2.5% for intermediation costs. That's because he goes beyond reported "management fees" and includes 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 don't share Bogle's "realistic" outlook for stocks. I think we'll do better. But even if we go back to my optimistic assumption that you match the 20.02% per year that Stock Advisor members could have earned since the service started in 2002, you're still forking over $80,000 in intermediation costs every 20 years.

If you sort of resent that, here's a solution a lot of folks try. Consider managing some of your own investments. Of course, you don't have to jump in all at once, and you don't have to dump all your funds this afternoon. But you can see how important it is that you give it some thought -- and soon.

Of course, you're going to need stock ideas, too. Again, give Stock Advisor some thought. You get the top picks each month from Motley Fool co-founders David and Tom Gardner, and you can try it free for 30 days. There's no pressure to subscribe -- and if you do decide to join after your trial, it sure as heck won't cost you $100,000. If you decide not to join, it won't cost you a cent. Just click to learn more about this special free trial.

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

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