Vanguard founder and prolific investor Jack Bogle passed away this week at age 89. In 1976 Bogle created the very first index mutual fund, a low-cost investing vehicle that valued the interests of investors over companies.
In Vanguard’s online tribute to its “near-legendary” founder, the firm recalled the negative early reactions lobbed at Bogle’s index fund:
“Ridiculed by others in the industry as ‘un-American’ and ‘a sure path to mediocrity,’ the fund, First Index Investment Trust, collected a mere $11 million during its initial underwriting,” the tribute reads.
As Bogle said in a 1997 speech published on Vanguard’s website, “the criticism was hardly muted. It was described as ‘Bogle’s folly’ more than once.” But the investor held firm to his belief that index funds would offer a way for investment firms to act efficiently and honestly, and still make money.
One of the chief criticisms of the index fund, he continued, was that it would lead to “average,” or “mediocre” returns for investors. But Bogle was sure this wouldn’t be the case.
“[The fund] would operate on an at-cost basis, the better to put the shareholder in the driver’s seat (rather than reposing in the back seat, with the management company driving the car for a fee). Such a structure, we reasoned, would enable Vanguard to deliver extremely low operating and management costs to shareholders,” Bogle said in the speech.
Today, 70% of Vanguard’s $5.1 trillion in assets are made up of index funds. That first index fund, now called the Vanguard 500 Index Fund, has more than $400 billion in assets and is one of the industry’s largest. Index funds regularly outperform actively managed funds.
Billionaire investor Warren Buffett was one of Bogle’s most vocal supporters, once calling him “a hero” for creating low-cost index funds. Buffett wrote to shareholders of his company, Berkshire Hathaway, in 2014: “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”
Investing in index funds works for two main reasons, Bogle wrote in his book “The Little Book of Common Sense Investing“: They’re low cost and broad diversification eliminates individual stock risk.
As Bogle wrote, “It is a simple concept that guarantees you will win the investment game played by most other investors who — as a group — are guaranteed to lose.”