Jack Bogle, the Apostle of Index Funds, Never Gave Up
(Bloomberg Opinion) -- To be perfectly crass about it, you would have made an awful lot of money if you had followed the advice of Jack Bogle, the Vanguard founder who died Wednesday at the age of 89.
In 1976, a year after starting the Vanguard Group, as it’s now known, Bogle introduced the first index fund geared to individual investors. This was an era, recall, when what mattered most if you ran a mutual fund company was to have a handful of star fund managers you could market. Peter Lynch, John Neff, Bill Miller, John Templeton — these were the financial heroes of the 1970s and 1980s, renowned for their ability to outperform the market.
Bogle’s idea could not have been more different. Instead of trying to beat the market, his Vanguard 500 Index Fund would hold the same stocks as the S&P 500, and would simply match the market. His fund did not require an active manager, much less a superstar like Lynch. It also didn’t require much overhead; Bogle knew that fees chewed up stock gains, and he kept Vanguard’s fees far lower than the rest of the industry.
Finally, Bogle knew that even the greatest fund manager was likely to fall back to earth sooner or later. Investors often threw money at a fund manager just as he was peaking, and wound up losing money. Year in and year out, an astounding 80 percent or more of fund managers fell short of the market. Investors who stopped trying to beat the market — who were simply content with matching it — were far better off.
When he first introduced it, people in the industry called it “Bogle’s folly.” But he had the last laugh. On Jan. 16, the day he died, the S&P 500 closed at 2616.10. If you had stuck with his philosophy, Bogle’s folly would have gotten you a total return of 8,559 percent.
Bogle was a scold — there’s no getting around it. A gentlemanly scold, who could not have been more gracious when you visited him, but a scold nonetheless. It took years for his index fund to catch on. In the 1980s, when the market was rocketing up, investors could not have cared less about “merely” matching the market. That was for wimps. Then, in the ’90s, although index funds had gained acceptance, especially in corporate 401(k) accounts, the internet bubble turned investors’ heads.
All the while Bogle would make speeches, and give interviews, and write articles and books — and shout from the rafters — that fees mattered more than investors realized, and that index funds made the most sense for the vast majority of individual investors, and that people who were always looking for the hot fund or the hot stock were not doing themselves any favors. “Stay the Course,” was the title of one of his books. “The Clash of the Cultures: Investment vs. Speculation” was another.
Bogle’s Vanguard had a panoply of actively managed funds as well — Neff managed the Windsor Fund, for instance — but his heart was always with his beloved index funds. In 1996, the year he stepped down as Vanguard’s chief executive — he had a heart transplant that year — his company had more than $45 billion in a variety of index funds.
But Bogle still felt as if he were preaching to an empty church. In a speech he made that May to a group of portfolio managers, he complained that Vanguard “is the sole apostle of indexing” and that companies now offering an index fund had come to it “kicking and screaming.” And he was right. An index fund represented something people didn’t really want to admit: that the chances of beating the market were slim, and they were better off not trying.
His first converts were the nation’s financial writers like Jane Bryant Quinn at Newsweek and Jonathan Clements at the Wall Street Journal. (“Without a doubt, Jack C. Bogle is the greatest man I’ve had the privilege of knowing,” wrote Clements on his blog.) After the crash of 1987, I became a convert too. Bogle always had time for us. We were the ones spreading his message, pointing out the statistics about how mutual fund managers underperformed, stressing the importance of fees, and talking up the utility of indexing.
Eventually, the great body of investors found themselves in agreement with Bogle. On the strength of its index funds, Vanguard became the nation’s largest mutual fund complex with more than $5 trillion under management. (That’s right, trillion.) Was Bogle happy? Alas, he was not.
As he saw it, far too much of the popularity of index funds was being driven by exchange traded funds, which allowed investors to quickly get in and out of the market — to time the market. Indeed, turnover in the biggest such funds was over 100 percent in a month. Turnover like that represented everything Bogle despised about the financial services industry.
Last year, when I asked Bogle about EFTs, he told me that Vanguard had been offered the chance to market the first EFT in the early 1990s, when he was still running the company. “I said, ‘No way. That’s not what index funds are for.’ Now you can trade the S&P 500 all day long,” he added. “What kind of nut would do that?”
As recently as November, Bogle was still at it, writing an article in the Wall Street Journal offering a series of idea for how index funds should be reformed.
In the end, although he never put it like this, Bogle understood that investing is hard. Most of us lack not only the time to put into it, but also the fortitude to zig when others are zagging, or to buy when others are selling. That’s why we should have listened to Jack Bogle for all those years when we were jumping on hot stocks — and why we should listen to him still, even though he’s is no longer with us.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”
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