South Florida Sun-Sentinel (Sunday)
A tribute to the father of the index mutual fund
John C. “Jack” Bogle, the founder of the Vanguard Group and the father of the index mutual fund died at age 89 on Jan.
16th. The pioneer's impact on the world of investing and finance was transformative and we are all better off as a result of his innovation.
Bogle wrote a thesis at Princeton in 1951 about investment companies and then entered the investment world when he joined the Pennsylvania-based Wellington Fund. More than two decades later, Bogle was inspired by economist Paul Samuelson’s 1974 piece “Challenge to Judgment,” which called for the formation of “a noload, no-management fee, virtually-notransaction-turnover fund.”
In 1976, Bogle unveiled the Vanguard First Index Investment Trust, which eschewed the common wisdom that someone (not some algorithm) could consistently beat a market index. Instead, by driving costs down, people would be able to gain access to the stocks within the S&P
500 index, which as Bogle noted, “would guarantee that our investors would earn their fair share of stock market returns.”
Before the word “fiduciary” came into the modern investor lexicon, Bogle was putting the interests of investors first. Unlike its peers, Vanguard was a mutual company, which meant the investors in the funds owned the company.
As a result, Bogle said shareholders were “in the driver’s seat (rather than reposing in the back seat, with the management company driving the car for a fee),” enabling the company “to deliver extremely low operating and management costs to shareholders.”
It was such a breathtaking concept that the so-called stewards of investment dollars were quick to dismiss it as a cop-out, a search for mediocrity and my favorite, “Bogle’s Folly.”
Some folly! The index fund laid bare the fallacy that even the most seasoned professionals could consistently beat the market over the long term. The reason, as Bogle noted, is just arithmetic: “Because of the costs of managing funds — the management fees, the operating expenses, the marketing costs, the sales loads, the hidden costs of portfolio turnover — the net return earned by the average fund must fall short of the return earned by the market itself.”
Though laughed at early on, Bogle’s index fund came to be seen as a blockbuster breakthrough. Samuelson said: “I rank this Bogle invention along with the invention of the wheel, the alphabet, Gutenberg printing, and wine and cheese: a mutual fund that never made Bogle rich but elevated the long-term returns of the mutualfund owners.”
The index fund also ended up in Financial Times journalist Tim Harford’s “Fifty Inventions that Shaped the Modern Economy.”
More than four decades after Bogle unveiled his first index fund, there are trillions of dollars invested in passive investments. Those smart enough to utilize them realize that they will never beat the stock market, but they can allow us to focus our energy on myriad other financial matters that demand our attention. Bogle’s Foley has indeed become our fortune.
The world of investing and more importantly, financial planning is far better off for his enormous contribution.