John Bogle, the Apostle of Index
Funds, Never Gave Up
His ideas were initially dismissed as “folly,” but
today Vanguard has $5 trillion under management.
16, 2019, 8:42 PM EST
shouted from the rafters: Stay the course! Photographer: Ken
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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To be perfectly crass
about it, you would have made an awful lot of money if you had
followed the advice of John Bogle, the Vanguard founder, better known
as Jack, 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
Last year, when
I asked Bogle about ETFs, he told me that Vanguard had been
offered the chance to market the first ETF 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.
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