John C. Bogle, founder of the Vanguard Group and creator of the index mutual fund for individual investors, died Wednesday. He was 89.
It’s difficult to think of someone else in the financial world who’s had a bigger impact on normal people than Bogle (usually referred to as Jack); the index fund and his philosophy to sit tight and leave your money alone—principles adopted by Two Cents—have allowed average investors like you and me to accumulate wealth and avoid being swindled by the financial industry. He quite literally put billions of dollars back in the average investor’s pocket. As the New York Times’ Ron Lieber said, “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 philosophy about index funds, ironically, a post we ran earlier this week featured Bogle’s superfans and explained it. You only need to invest in a few, potentially just two, no more than three, low-cost mutual funds to build wealth.
The thinking is this: You don’t need to pay people to pick stocks for you and time the market to try to beat its earnings, because they never will, especially over the long term (years of research backs this up). Rather, track the stock market broadly, leave your investments alone, and you’ll at least match the market’s trajectory, which is pretty damn good (historically, the stock market has increased in value). In fact, “more often than not settling for an index fund has led to above-average returns,” notes Morningstar, an investment research firm. The first index fund Bogle created was the Vanguard 500, which tracks the S&P 500 (a collection of 500 large U.S. companies). It’s still around today, and it’s still a pretty good fund.
Beyond providing more value for investors, these funds also cost less to invest in than other funds. When you hear people, like me, say to invest in “low cost” index funds, they are referring to operating expenses like the expense ratio, which is the percentage of a fund’s assets you’re paying to a company like Vanguard or Fidelity to manage your investments (Vanguard in particular, is revered for its low cost).
Because index funds track an already existing index and therefore don’t require a lot of legwork on the fund manager’s part, they cost less to invest in. And over decades, that can add up to a ton of money. Take these stats (from 2016):
One analyst at Bloomberg
calculated this week
that Vanguard has directly saved investors a total of $175 billion in fees that would have otherwise gone to Wall Street guys providing nothing of value; that it has saved investors an additional $140 billion in trading costs that would have provided nothing of value; and that it has saved outside investors $200 billion by forcing competitors to lower their fees to compete with Vanguard.
“Investors paid 40 percent less in fees for each dollar invested in stock mutual funds during 2017 than they did at the start of the millennium,” reports the Associated Press, which can largely be attributed to Bogle.
As I wrote here, billionaire Warren Buffett is a Bogle/Vanguard fan. And he knows a thing or two about investing.
“In investing, you get what you don’t pay for. Costs matter,” Bogle told the New York Times in 2012. “So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”
There have been a number of lovely obituaries published about Bogle, and I recommend reading one or two to get a better sense of his impact. He might not be a household name, but pour one out for ol’ Jack tonight. Our lives are much richer because of him.