Last week, the financial industry lost a pioneer with the death of John “Jack” Bogle.
Bogle, who died of esophageal cancer at age 89, exerted enormous influence on the work of financial planners, including me and my colleagues at Palisades Hudson. Nearly all of the major changes to the financial landscape that we can trace back to Bogle have the same foundation: the index mutual fund.
Passive investment strategies have reshaped the mutual fund industry, but their dominance did not seem inevitable when they first arrived. While the idea of structuring an investment portfolio to mirror a benchmark index may now be so pervasive that it seems like common sense, Bogle was the first to popularize it. An index fund offered a low-cost way to ensure diversification while also limiting trading costs and fees. Bogle’s theory was that trying to beat the market was impractical for most investors; in general, they would do better to simply buy and hold a fund that mirrored it while keeping costs down.
Index funds also underpinned the rise of The Vanguard Group Inc. Bogle founded the company in 1975, and it introduced the first index fund shortly after. The company and the product eventually gained traction together. Today, Vanguard is the largest mutual fund company in the world; as of September 2018, Vanguard managed around $5.3 trillion in assets, about two-thirds of which is invested in index funds.
Much of Vanguard’s success is due to its low fees. Not only are passive funds generally a lower-fee product than actively managed mutual funds, but Vanguard’s unorthodox corporate structure has allowed it to push fees down even further. Bogle developed what he called the “cost-matters hypothesis,” which held that the key to successful stock investing was to avoid high investment fees. That hypothesis turned out to be wildly popular once it gained traction. In turn, Vanguard’s success has pressured other companies into offering lower-fee – and now sometimes no-fee – products, too.
Had Bogle not had the idea to create the index fund, someone else eventually would have. The consumer index mutual fund he introduced mirrored a strategy that had appeared in institutional investing a few years earlier. And Bogle was influenced by others on his way to his breakthrough. William Sharpe, a professor at the University of Washington, had advanced the theory that a portfolio that mirrored the market was more efficient than hand-picking stocks in 1964, and economist Paul Samuelson argued in 1974 that most stock pickers should go out of business after charging hefty fees to do worse on average than the overall market.
Yet getting passive investing for individual investors off the ground required more than someone to conceive the initial idea. It required a strong constitution, a personality capable of shrugging off a substantial wave of doubters and scoffers. In the early days of index investing, Vanguard struggled to stay afloat. Other investment professionals regularly called index funds “Bogle’s folly,” and some Wall Street insiders went so far as to call indexing “un-American.” But Bogle had the tenacity and the conviction to ignore the naysayers. The current dominance of passive investing has proven he was right to stick to his principles; U.S. stock index funds are poised to possibly overtake actively managed mutual funds in overall assets managed later this year.
Burton Malkiel, a Princeton University economist, author and early Vanguard board member, said that Bogle’s approach was truly unique. “His values, his strategy, the culture he established are the reason Vanguard has prospered,” Malkiel told InvestmentNews. Warren Buffett told CNBC, “Jack did more for American investors as a whole than any individual I’ve known.” Even those who found his manner off-putting now admit that, while they may not have liked the way he made his points, Bogle was right most of the time.
Today’s financial advice industry, the broader financial industry, the stock market and the bond market have all been profoundly shaped by Bogle’s work. If you look around our modern financial world, you can trace many of its characteristics directly back to one man. Even if someone else could have thought of the index fund eventually, no one else would have been John Bogle.