John Bogle’s Index Fund Improved Your Life

When someone becomes famous, particularly if they are famous because they have some type of views that are relevant in the public policy sphere, their ideas can often become oversimplified and indistinguishable from the person himself.

John Bogle made Wall Street fee managers feel like a bird flown into a badminton match.

I have noticed this already occurring in the remembrances of John Bogle, who recently died, and by all accounts, was one of those rare individuals whose adult life successes managed to exceed the ambitions he set out for himself in youth.

As you all know, Bogle pioneered the concept of the S&P 500 index fund in 1976. In that year, the average cost for an investment in a mutual fund was 1.89%. There was a common practice to charge 2-5% sales loads at the time you made an investment.

As in, if you gave your broker $100,000 to invest in a particular fund with a 5% sales load, then $5,000 would immediately go to the fund as a fee, and then you would have $95,000 working for you that would then be subject to what was typically a 1.89% expense. If, say, the investment didn’t change in value in the first year, you would still pay $1,795.50 in management fees, bringing your total down to $93,204.50. If you then decided to sell, you would then pay 5% again, and your sales load on the back end would be $4,660.23, leaving you with $88,544.27. It’s actually a little bit worse than that, as there was often a separate $75 trading fee cost for buying and selling the fund, which was a broker fee that would cut out $150.

In a truly hellish scenario, you could have hired an investment manager who charged 1-2% fees to make investments for you, and then that investment manager could have selected a fund with a 5% sales load on each side of the transaction with its own 1.89% fee. Your wealth was being treated like wood thrown into a den of termites. For people susceptible to these types of common practices, John Bogle rode into town driving a truck spraying fipronil.

While I do believe there are close to a hundred thousand families and individuals, and perhaps several thousand money managers in the United States, capable of delivering double-digit investment returns over long periods of time, Bogle was no doubt correct that there were hundreds of thousands of money managers that were taking people’s hard-earned money and charging very high fees to not even come close on a pre-tax basis to what the collection of America’s five hundred or so largest companies were producing in value. It was a formula of paying a lot more to get moderately less.

Since index investing has only been around in a generally knowable manner for two or three decades, we are just now in the very early stages of beginning to see “Vanguard millionaires” dot the landscape, in the same way as the Coca-Cola investors in Quincy, Florida that held the stock for half-a-century one attracted public attention. If someone invests $1,000 per month for thirty years and pays 0.1% for a Vanguard S&P 500 fund and earns 9% returns on a pre-fee basis, he will end up with $1.7 million over the course of thirty years. If the same investor pays the 2018 average fee of 0.79% and earns 6% (which is based on active manager’s record from 1992 through 2012 in a study conducted by Dalbar), the same investor would end up with only $1 million.

The opportunity of the former investor to collect that extra $700,000 in lifetime accumulation was made available by Bogle, who forced every other major investment house to follow suit or lose client funds due to competition, meaning even those who use Schwab or Fidelity index funds are reaping the benefits of the seeds that Bogle has sown. Extending further, even the investor paying the 0.79% for active management is paying a much lower rate than forty years ago due to Bogle, as active management had to make fee concession to pose as a plausible alternative to Vanguard and other similar S&P 500 index funds.

While the principle is often taken too far, and some assume that the investment charging 0.1% must produce better net-of-tax value than the investment charging 0.8%, Bogle never made this argument. Heck, while everyone talks about Bogle’s $5 trillion index fund colossus at Vanguard, they forget that he candidly admitted that beating the market due to skill was possible (followed quickly by the caveat that most people could not locate such investors) and even helped develop Vanguard’s $1.5 trillion actively managed fund portion of the empire. Heck, possibly my favorite niche mutual fund, the Vanguard Health Care Fund, has delivered 15.99% annual returns since 1984 while charging investors a fee that is now below 0.4%.

My analysis of Bogle is that he could recognize really bad propositions being offered to well-intended people, and he went out and created a remedy. The amount of homes purchased, college tuitions paid for, charities in receipt of donations, late-in-life medical bills paid for, and general sense of financial security that is both directly and indirectly traceable to what Bogle made available due to the launch of the index fund is staggering.

Your chances of having a successful retirement are improved dramatically because John Bogle executed his dream.

Originally posted 2019-01-19 23:21:26.

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