The ancient Greek poet Archilochus wrote, “The fox knows many things, but the hedgehog one great thing.” The fable tells the story of a wily, hedgehog-stalking fox, repeatedly defeated by the hedgehog’s prickly spines, which proved to be an impenetrable defense. Jack Bogle did, in fact, know many things, but he never forgot the one important thing, which he defended until the end, sometimes in a prickly fashion: Costs matter in investing.
Bogle, founder of the Vanguard Group and creator of the first retail index fund, stuck by the conclusion of his senior thesis at Princeton. The mutual fund industry’s growth was best maximized by cutting sales loads and management fees, argued the young Bogle.
To a modern investor, this is just common sense. The less money you give to your fund (or your broker), the more money you keep. But to people in the pre-Vanguard world—especially those in the mutual fund industry—it was heresy. The commissions you paid for stocks and mutual funds were the entrance fee to the magic kingdom of Wall Street. Ads extolled listening to E.F. Hutton’s brokers, and the business press lionized active fund managers.
Bogle didn’t buy it, especially since fat commissions and fees kept investors from beating the returns of an index, such as Standard & Poor’s 500-stock index.
Bogle didn’t endear himself to the industry that he worked in his entire life, thanks to frequent—and frequently blunt—criticisms. “I have a lover’s quarrel with the industry,” he said. In his best-selling Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor, first published in 1999, he wrote, “The mutual fund industry has been built, in a sense, on witchcraft.”
Bogle helped break the spell. Actively managed funds were 85% of the industry’s assets in 2007; that share is 65% today. Expense ratios, pressured by low-cost index investing, have fallen from an average of 1.04% for all U.S. stock funds in 1996 to 0.59%, on average. And the low-fee bandwagon he set into motion rolls on. Fidelity Investments now offers mutual funds with an expense ratio of zero. Fidelity and Charles Schwab & Co. have eliminated commissions on hundreds of ETFs.
John Clifton Bogle died on January 16, 2019, but his legacy lives on.
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