Vanguard for investors

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.

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. 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 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 January 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 per cent.

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. 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 realised, and that index funds made the most sense for the vast majority of individual investors.

Bogle’s Vanguard had a panoply of actively managed funds 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.

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. 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.

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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