It may be fair to say that John Bogle has done more for the individual investor than anyone else on Wall Street.
If you've not heard of this Wall Street legend before, Bogle founded Vanguard, which is one of the largest asset managers in the world today. He founded the business on the simple principle that fund managers can't do better than the average market return over the long term.
Therefore, he believed the best investment strategy for the average investor is to buy the market index itself. The added bonus to this strategy is that it costs a fraction of the cost of managed funds to implement, which means investors not only get better returns over the long term, but they also pay less to asset managers as well. Bogle went on to launch the world's first index fund in December 1975, the Vanguard 500 index fund.
A booming market
Since 1975, Vanguard has massively increased the range of low-cost funds it offers, and the rest of the asset management industry has moved into the business as well.
The low-cost index and exchange-traded fund (ETF) market is now worth over $5 trillion a year, and it is estimated that passive funds now make up around 50% of the market. The cost of these funds has declined to, in some cases, 0%. And it all started with Bogle's first fund in December 1975.
Bogle's greatest lesson
Bogle was an outspoken critic of mutual funds. He believed that most funds charged more than they needed and that the mutual fund industry "has been built, in a sense, on witchcraft."
Reading through Bogle's quotes and advice on investing, it is clear that there were two main reasons he believed most investors would be better off with index funds.
First, mutual funds tended to over-trade and didn't outperform their benchmarks over the long term.
Second, most mutual fund managers charged excessive fees for their underperformance. Those are the two main reasons: cost and performance. These two factors, as Bogle observed, got in hampered investors' attempts to get rich because, as he once said, "The miracle of compounding returns is overwhelmed by the tyranny of compounding costs."
It is unreasonable to say that Bogle was obsessed with costs and believed that keeping costs low was one of the most important jobs every investor has. For example, he once commented, "Lower costs are the handmaiden of higher returns."
Index funds are a better investment vehicle than most mutual funds, but the fact remains that these passive instruments are only designed to track market indexes. If you want to outperform or own a portfolio that is less volatile than the market, mutual funds and individual stocks may be your best option. But, even though index funds might not be suitable for every portfolio, a laser focus on costs is.
What we can control
As investors, there are few things we can control. We can control when we buy a stock, when we sell a stock and what our investment strategy is. Everything in the middle is uncontrollable. Although we can also control costs, which implies that we should be doing everything we can to keep costs as low as possible.
Reducing costs should be just as important as the Investment strategy used, as high costs can quickly erode any alpha generated over the market.
So yes, John Bogle did a tremendous amount for the average investor by inventing the index fund, but if there is one thing you should take away from his legacy, it should be the Wall Street's legends obsession with keeping costs low. Investing in an index fund is not a universal investment strategy; however, keeping costs to a minimum is.
Disclosure: The author owns no share mentioned.
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