Investing legend John Bogle, the inventor of the index fund and founder of low-fee investing firm Vanguard Group, died on Wednesday at the age of 89.
Bogle probably did more for individual investors than anyone else in the financial world during his career. Not only did he invent the index fund, allowing investors to buy the whole S&P 500, or other indexes, at the click of a button, but he also created a company that would help investors reduce fees.
Vanguard itself is a unique financial business because Bogle set it up in such a way that he was not the primary beneficiary. Bogle could have set Vanguard up in the same way as any normal corporation, but he decided to make investors the shareholders.
There are no outside owners and, therefore, no conflicting loyalties. The company is owned by its funds, which are, in turn, owned by their shareholders, people like you and me who own Vanguard funds. All of the profit generated is reinvested back into the business in the form of lower fees. So the more people that invest, the lower the fees go and the better off everyone is.
Setting Vanguard up in this way was a hugely selfless act, and it has had unintended consequences.
Unintended consequences
Vanguard's fee structure has attracted trillions of dollars to the business and other asset managers have rushed to get in on the action. This has sparked a wave of fee deflation across the financial world, a trend that is only accelerating.
According to data from Morningstar, in 2017, investors paid an average 0.52% expense for funds, down 8% year over year, saving investors an estimated $4 billion in fees in one year alone.
Morningstar data also shows the average fee for passive funds has fallen three basis points, or 17%, in the last three years alone. I don't think it is unreasonable to say that Vanguard is almost entirely responsible for this industry-wide decline.
It is no surprise Warren Buffett (Trades, Portfolio) thinks Bogle "did more for American investors as a whole than any individual I've known." He went on to tell CNBC, "He converted, in a 30-year period, a lot of people to the right religion of investing. And it's a good religion. It pays off."
In a tribute to Bogle's legacy, I've gathered some of his best quotes on the topic of investing.
Bogle's wisdom
In regart to market timing, he believed:
"The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently."
Markets go up and down:
"It's very difficult for any particular segment of the stock market to sustain superior performance. The watch word for our financial markets is 'reversion to the mean' i.e., what goes up must come down, and it's true more often than you can imagine."
Investors shouldn't act on impulse:
"The mistakes we make as investors is when the market's going up, we think it's going to go up forever. When the market goes down, we think it's going to go down forever. Neither of those things actually happen. Doesn't do anything forever. It's by the moment."
He thought investing wasn't as hard as people made it out to be:
"Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes."
And when it came to diversification, Bogle didn't mince his words:
"Don't look for the needle in the haystack. Just buy the haystack."
He thought individual businesses were too complicated to understand:
"Financial markets are far too complex to isolate any single variable with ease, as if conducting a scientific experiment. The record is utterly bereft of evidence that definitive predictions of short-term fluctuations in stock prices can be made with consistent accuracy. The prices of common stocks are evanescent and illusory."
And active funds trade too much:
"In the mutual fund industry, for example, the annual rate of portfolio turnover for the average actively managed equity fund runs to almost 100 percent, ranging from a hardly minimal 25 percent for the lowest turnover quintile to an astonishing 230 percent for the highest quintile. (The turnover of all-stock-market index funds is about 7 percent.)"
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