Buzz
John C. Bogle, the founder of Vanguard Group and the pioneer of the index mutual fund for individual investors, passed away on Wednesday at the age of 89.
It's hard to imagine anyone else in the financial sector who has had a more profound effect on everyday people than Bogle (commonly known as Jack). The index fund and his philosophy of holding steady and letting your money grow—principles embraced by Two Cents—empowered ordinary investors like you and me to build wealth and avoid being exploited by the financial world. He quite literally returned billions of dollars to the hands of the average investor. As Ron Lieber of the New York Times aptly put it, “How much more money do so many of us have because of him? His memory is a blessing.”
If you’re not familiar with his perspective on index funds, ironically, a post we shared earlier this week highlighted Bogle’s passionate supporters and explained it. The key is simple: invest in just a few, possibly only two or three, low-cost mutual funds to build your wealth.
The logic is this: There’s no need to pay others to pick stocks for you or try to time the market to beat its returns, because they never will—especially over the long run (years of research supports this). Instead, track the overall stock market, leave your investments alone, and you’ll at least match the market's growth, which historically has been quite favorable. In fact, “more often than not, opting for an index fund has resulted in superior returns,” notes Morningstar, a leading investment research firm. The first index fund Bogle introduced was the Vanguard 500, which mirrors the S&P 500 (an index of 500 major U.S. companies). It remains active today, and it’s still considered an excellent fund.
In addition to offering greater value for investors, these funds also come with lower investment costs compared to other options. When people, like myself, recommend investing in “low-cost” index funds, we’re referring to operational expenses like the expense ratio, which represents the percentage of a fund’s assets you’re paying to a company like Vanguard or Fidelity for managing your investments (Vanguard, in particular, is renowned for its affordable fees).
Since index funds track pre-existing indices and don’t require much active management from fund managers, they are less expensive to invest in. Over decades, these savings can accumulate into significant sums. Consider these figures (from 2016):
One Bloomberg analyst
estimated this week
that Vanguard has directly saved investors $175 billion in fees that would have otherwise gone to Wall Street brokers offering no tangible value; it has saved another $140 billion in trading costs that would have provided no benefit; and it has helped outside investors save $200 billion by compelling competitors to lower their fees in order to stay competitive with Vanguard.
“Investors paid 40 percent less in fees for each dollar invested in stock mutual funds during 2017 compared to the beginning of the century,” reports the Associated Press, a shift largely attributed to Bogle’s influence.
As I explained here, billionaire Warren Buffett is a supporter of Bogle/Vanguard. And when it comes to investing, he’s someone who knows what he’s talking about.
“In investing, you get what you don’t pay for. Costs matter,” Bogle told the New York Times in 2012. “Thus, wise investors will choose low-cost index funds to create a well-rounded portfolio of stocks and bonds, and they will stick to their plan. They won’t be naive enough to believe they can consistently outsmart the market.”
Numerous heartfelt obituaries have been written about Bogle, and I suggest reading one or two to gain a deeper understanding of his profound influence. While he might not be a household name, let's raise a glass for ol’ Jack tonight. Our lives are undeniably better because of him.
