John Bogle, also known as the “father of index investing”, passed away in January. Few people have changed the investment landscape in the way and to the extent that he did. As Warren Buffett told CNBC, “A lot of Wall Street is devoted to charging a lot for nothing… [Bogle] charged nothing to accomplish a huge amount.”
In 1951, as part of his undergraduate thesis, Bogle conducted a study that showed that most mutual funds did not outperform stock market indexes. And where they did, he found that the fees they charged often reduced the fund returns to below the benchmark after fees.
John, also fondly known as Jack, went on to found The Vanguard Group in 1975. He did not invent the index fund. Rather, index funds for institutional investors were launched first by Wells Fargo and American National Bank in 1973 in response to academic research suggesting the advantages of passive investing. However, the legendary Bogle followed a few years later when Vanguard launched the first index fund for individual investors in 1975. Called the First Index Investment Trust, his fund tracked the S&P 500 and started with just $11mn in assets. Referred to derisively by some as “Bogle’s folly”, the assets under management of the fund crossed $100bn in 1999.
The Vanguard fund lowered fees for individual investors and, in so doing, lowered barriers to entry to the investment world. With that, investing became accessible to the average person. Bogle and Vanguard also challenged the industry when, in 1977, Vanguard began directly marketing to investors without going through outside brokers, which eliminated brokers’ fees from the equation.
This was the start of a new era in the investment industry and resulted in increased scrutiny of asset managers, their investment performance, and associated fees. The net effect was to create greater competition and a material reduction in fees. For example, investors paid an average of 40% less in fees per dollar invested in mutual funds in 2017 than they did in the late 1990s. Index funds have since become an increasingly popular choice for investors.
In an essay titled “Balancing Professional Values and Business Values” which Bogle wrote in 2017 for the Financial Analysts Journal, he offers seven investment lessons, drawing on decades of industry and investment experience. In his own words, these are:
- Invest you must. The biggest risk facing investors is not short-term volatility but, rather, the risk of not earning a sufficient return on their capital as it accumulates.
- Time is your friend. Investing is a virtuous habit best started as early as possible. Enjoy the magic of compounding returns. Even modest investments made in one’s early 20s are likely to grow to staggering amounts over the course of an investment lifetime.
- Impulse is your enemy. Eliminate emotions from your investment program. Have rational expectations for future returns, and avoid changing those expectations in response to the ephemeral noise coming from Wall Street. Avoid acting on what may appear to be unique insights that are in fact shared by millions of others.
- Basic arithmetic works. Net return is simply the gross return of your investment portfolio less the costs you incur. Keep your investment expenses low, for the tyranny of compounding costs can devastate the miracle of compounding returns.
- Stick to simplicity. Basic investing is simple—a sensible allocation among stocks, bonds, and cash reserves; a diversified selection of middle-of-the-road, high-grade securities; a careful balancing of risk, return, and (once again) cost.
- Never forget reversion to the mean. Strong performance by a mutual fund is highly likely to revert to the stock market norm—and often below it.
- Stay the course. Regardless of what happens in the markets, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor. (Just ask investors who moved a significant portion of their portfolio to cash during the depths of the financial crisis, only to miss out on part or even all of the subsequent eight-year—and counting—bull market that we have enjoyed ever since.) “Stay the course” is the most important piece of advice I can give you.
While few things are certain in the world of investing, these truths are timeless. Regrettably, as is the old adage, “the more things change, the more they stay the same”. For all Bogle’s work, many areas of the asset management industry remain untransformed. Large parts of the industry still hide in plain sight, erecting many layers of fees which erode investor returns at best, and eradicate them at worst. And many index products retain fees and fee structures that eat away at returns. To this end, much work remains to be done to ensure greater transparency in the industry.
Jay Clayton, Securities and Exchange Commission Chairman, commented that “Jack Bogle had unwavering passion for America, our capital markets, and most of all our Main Street investors.” It is this passion and vision that inspires us; whether we are finding innovative, effective and efficient investment solutions for our corporate clients, or building next-generation investment bundles that are flexible and affordable for first time investors of all ages and income groups. In the spirit of Jack Bogle, we are driven to build a stronger and more prosperous South Africa, one client at a time.