The father of passive index investing — Jack Bogle, founder of Vanguard
Endowus Insights

The father of passive index investing — Jack Bogle, founder of Vanguard

Updated
8
Aug 2022
published
25
Sep 2018
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jack-bogle-passive-investing

Markets have gotten more volatile in recent years.

Amid the frenzied financial markets rich with cash pouring in from stimulus packages, it is sometimes difficult to make sense of everything. Cryptos have crashed, bubble troubles are imminent, and a lot of concerns on inflation and the future outlook abound.

As a young investor looking for a way to invest and grow my very first paycheck, timing the market and picking the right fund, stock, or bond to invest in is daunting. Which is exactly why I spent my weekend cozying up in a corner, reading The Little Book of Common Sense Investing by John C. Bogle.

Starting the first index fund and Vanguard

John C. Bogle, also known as Jack, was the creator of both Vanguard (in 1974) and the world’s first index mutual fund/ unit trust (in 1975) — Vanguard S&P 500 Index Fund.

With index funds, he revolutionised the mutual fund scene by creating a passive investment product that was not only low-cost, but yielded considerable long-term returns that were higher than that of actively managed funds. Unfortunately, many investors failed to see the merits of a passive investment strategy early on.

Upon its launch, the head of Fidelity (then the fund industry’s largest firm) commented, “I can’t believe that the great mass of investors are going to be satisfied with just receiving average returns. The name of the game is to be the best.”

The fund’s IPO was arguably the worst underwriting in Wall Street History, falling short of its $250 million target by 95%. However, fast forward to 2018, and index funds assets have surpassed $6 trillion, in which about 70% is invested in broadly diversified funds modelled on the original Vanguard fund. This begs the question: what is the eventual appeal for Jack Bogle’s passive investment strategy of buying the market portfolio?

That leads to my two biggest takeaways from Jack Bogle on investing:

  1. Don’t look for the needle, buy the haystack
  2. The more the managers take, the less the investors make

Be passive: Don’t look for the needle, buy the haystack

Individual stock picking, betting on certain sectors or themes to outperform, or buying into actively managed funds are highly unlikely to reap sustainable long-term returns. The Random Walk Hypothesis laid out by Professor Burton Malkiel from Princeton University, posits that the price of securities move randomly, and therefore, attempts to predict future price movements are futile.

While there will undoubtedly be periods of outperformance, how much is attributed to luck as opposed to skill? How can we be sure that our bets will continue to win?

As quoted in Bogle's book, “Only 3 out of the 355 actively managed equity funds that started the race in 1970 have survived and mounted a record of sustained excellence.” That is just 0.8%. While this was over the period from 1970 to 2004, little has changed since then. According to S&P, over a period of 10 years, 85% of large cap funds underperformed the S&P 500, and after 15 years, nearly 92% trail the index.

As such, the lesson learnt is that the past is not a prediction of the future, and that sustained outperformance for active managers is near impossible.

The most sensible thing to do would therefore be to invest in an index fund that tracks the broad market, and hold it forever. Why? Because as John Bogle posits, in the aggregate, businesses grow with the long term growth of the economy, and as such, the market portfolio will most definitely increase in value over time. That’s the power of markets.

Read more: Endowus includes new Vanguard global stock index fund in its CPF portfolio

Keeping fees low: Vanguard’s approach

Performance comes and goes, but fees are here to stay.

Unsurprisingly, these fees eat into your returns. While 1-2% may seem minute each year, compounded over an extended period, fees can do extensive damage to the value of your investment.

Imagine you have $100,000 invested. If the account earned 6% a year for the next 25 years and had no costs or fees, you'd end up with about $430,000. If, on the other hand, you paid 2% a year in fees, after 25 years you'd only have about $260,000. 2%, doesn't seem so small anymore, does it?

the effect of your investment fees on your investments in 25 years

Taking into view that active management is unlikely to yield consistent outperformance, and the hefty fees you have to pay for mediocre returns, it is only common sense that one should 1) adopt a passive investment strategy, and 2) buy into low cost index funds that track the overall market.

This keeps you well diversified and minimises the damage dealt by fees.

In a world where the norm was exorbitant fees charged by active managers who often failed to earn their keep, Jack Bogle fought for fairer fees for the everyday investor. He advocated for an easy-to-adopt, low-cost, passive investment strategy with which we could all be winners in the long run.

Vanguard, Jack Bogle’s creation and legacy, continues to hold the torch for investors today and is committed to driving down fees.

Vanguard’s funds’ asset weighted average expense ratio was lowered from 0.18% in 2010, to 0.12% in 2015, and finally to 0.09% in 2020. It’s fees are considerably lower compared to the corresponding industry average of 0.54%

Here at Endowus, we are Bogleheads and fans of Vanguard and their mission. Our team works closely with Vanguard in providing best-in-class, low-cost, passive funds to our clients. With Endowus, you can now buy the haystack and enjoy the lowest fees. Investing does not have to be complex or expensive, so long as you invest with common sense.

Learn more about how we invest. To get started, click here.

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Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

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