Jack Bogle and the Passive Index Fund
Published December 5, 2020
Intro
John "Jack" Bogle was a highly influential figure in the world of finance. He is credited with introducing the first passively managed index fund and championing the average investor saving for retirement. He founded The Vanguard Group that has since grown into one of the largest investment firms in the world.
Aside from Warren Buffet, Bogle is perhaps the most vocal advocate for the "buy and hold" long-term investment mindset. There is a great deal to learn from his life, emphasis on the power of the market economy, and investment strategy.
Early life and education
Bogle was born in 1929. He did not have the best of childhoods. His family lost their home during the Great Depression. Nevertheless, he worked hard at school and persevered through his circumstances, eventually applying and enrolling at Princeton University in 1947. There, he studied economics and investing, particularly with regards to mutual funds and their history up to that point.
Bogle wrote a graduating thesis titled "The Economic Role of the Investment Company." He graduated magna cum laude in 1951 and went on to work for Walter L. Morgan, the founder of the Wellington Fund, having impressed the investor with his thesis paper.
Wellington fund and his "greatest mistake"
As Bogle learned and worked at Wellington, he would rise through the ranks to become the assistant manager in 1955, and then he would replace Morgan in 1970 as chairman. It seemed as if he was "living the dream" as he rose through the ranks in a highly influential investment firm.
Around when Bogle had been appointed as executive VP in 1965, he began working on a merger with another investment firm that held some aggressive mutual funds, particularly the Ivest Fund. Bogle helmed the post-merge company as its CEO, yet despite his best efforts, the company's valuation continued to fall. Shares in the company dropped 90% over the ten year period, and by 1974, the board fired Bogle from his CEO position.
Up until that point, Bogle had climbed the corporate ladder with a string of successes. He had studied mutual funds since Princeton and had succeeded in applying their mantra of "beating the market" up to that point in his career. Nevertheless, despite his failure as CEO, he took those lessons in investment failure and applied them to his next great venture, of which he would be remembered most for building.
Vanguard and the index fund
The same year Bogle was fired, he started Vanguard. Instead of running aggressively, "beat the market" mutual funds, he would avoid his previous mistakes by taking a different approach to market fund management.
Mutual funds are marketed as investment vehicles that "beat the market," which essentially means they will outperform a popular indicator of market trends, such as the S&P 500. The S&P 500, for instance, is an index, or collection, of influential companies that altogether capture the various industries on the stock exchange, from tech to banking to food. A mutual fund will also include a collection of several companies that outperform on market growth or dividend return or some other key metric or metrics.
This way, investment firms handling those mutual funds can market to individual investors that they are better off handing over their money to these firms rather than trying their luck on their own with individual stock purchases. It is a little more complicated than that dichotomy, but essentially, mutual funds are often touted as wealth-generating vehicles that individuals can use to secure a comfortable retirement or stay ahead of consumer price inflation.
Jack Bogle had managed a mutual fund company already at Wellington, but he wanted to approach fund management differently. Rather than actively managed funds that always tried and struggled (even failed) to "beat the market," he established the first passively managed index fund that would instead aim to match the market index, such as the S&P 500.
The index fund would differ from the contemporary mutual funds in the following ways:
- Passively managed. Fewer (taxed) transactions would take place, since shares would be purchased and held for a longer period of time as actively managed mutual funds.
- Lower fees. Because the index fund would inherently have fewer transactions per year, the fees of the fund would also be lower. Bogle made it a point to maintain significantly lower fees, sometimes as much as 75% lower than actively managed funds.
- Follow the index. Most importantly, these index funds would simply ride along with whatever index they were following, such as the S&P 500. Historically, an index like the S&P 500 has always steadily climbed in value, only faltering during significant recessions.
Bogle would lead Vanguard for nearly twenty years as it revolutionized the investment scene. He would later step down as CEO due to health problems, yet Bogle would continue to innovate and contribute for yet another thirty years despite heart issues and cancer. In 1999, he published his perhaps most famous book, Common Sense on Mutual Funds, which emphasizes low-cost, long-term market purchases.
Conlusion
Jack Bogle used his "greatest mistake" in his career to shape his later endeavours. The Vanguard Group that he founded would grow into one of the most influential and largest investment firms on the market. And his index fund would be compared to the likes of the invention of the wheel in its effectiveness. Most importantly, Bogle contributed over his lifetime many different tools available to the "average" investor he always championed.
His groundbreaking work provided the foundation that every working individual could then use as investment vehicles for retirement or other long-term goals. And the concept of a passively managed, low-cost index fund continues to be a powerful tool not only in Vanguard's portfolio but also in many other investment vehicles, such as 401(k)'s and deferred annuities.
