John Bogle passed through New Orleans this weekend to speak at one of those daylong personal finance events that pop up here and there; this one was free, so I stopped by to hear what he had to say.
The founder of mutual-fund giant the Vanguard Group, Bogle is well-known among many investors, and in fact he is an object of veneration among “Bogleheads” across the country. (For more on the Bogleheads, see this article from an issue of Money magazine last year by my former colleague Jason Zweig, and for more on Bogle himself, there’s an accompanying sidebar by my other former colleague William Green.) On the other hand, plenty of people aren’t particularly familiar with him at all. (I was surprised to find in a quick search that he’s apparently never been mentioned in Slate.) At this conference I attended, he gave what I assume is his standard stump speech summarizing his ideas. Most of what he had to say was not particularly new, but that’s kind of the point. He’s the sort of person whose influence, although considerable, happened gradually and is worth consideration from a couple of angles.
Part of what’s striking about that influence is that it reached its great critical mass during an era in American life (the 1990s) when the notion of the do-it-yourself stock-picker pitting him- or herself against Wall Street took hold on a mass scale. Yet Bogle’s idea had nothing to do with the popular idea of Joe Investor doing his own research and becoming a Peter Lynch-like market-beater. Bogle advocated not even trying to beat the market; he placed a great premium on passivity. In the mid-1970s, he founded Vanguard, which subsequently became the first fund company to make an index fund available to the general investing public. An index fund is one that is not actively managed, or managed at all, really. It merely seeks to track a given stock market index—like the S&P 500, the index that Vanguard’s flagship fund follows.
It seems almost un-American to believe that an unmanaged fund would be better for investors than one run by a savvy and heroic expert, but in general, very few managed funds are able to beat the indexes for very long. This is one of the things that made Vanguard, gradually, a hit: It has the power of diversification on its side. The other factor is that with a passive approach, expenses for investors are lower. Fund companies tend to make their real money, and water down your real return, by charging fees that seem small but in reality are not. Railing against fees is another one of Bogle’s recurring themes—the flipside of the magic of compounding returns, as he put it this weekend, is “the tyranny of compounding costs.”
The first and most obvious point to be made about Bogle is that his ideas are quite sensible, even if they do cut against our natural tendency to believe in the power of the active over the passive. The Vanguard 500 is now one of the biggest in America, with roughly $72 billion in assets under management (or nonmanagement, I guess), according to Morningstar. (Lynch’s old fund, the actively managed Magellan, is the biggest at the moment, with $75 billion; it’s an offering of Fidelity, which Bogle referred to in passing as “our little rival.”) The bottom line is that practically all home-based stock jocks of recent vintage would likely have been better off following the Vanguard approach: Simply do nothing! (Well, not nothing, since even the most passive investor still has to decide on a stock-bond-cash mix.) One could conclude that much of the vast investing-advice business is thus a giant waste of time.
The second point is about the broader implications of passivity. What’s a bit troubling about index funds, and to some extent mutual funds in general, is that they serve as a kind of buffer between Joe Investor and the consequences of his investing. Maybe you’re a conscientious person, and you worry about whether corporations behave in ways that have negative effects on, oh, I don’t know, the environment, or domestic jobs, or Third World working conditions, or America’s tax coffers. (Or maybe you’re not, in which case please feel free to write in and call me a socialist, as people always do when I go down this road.) You can say whatever you want to at cocktail parties, but a side effect of investing in index funds is near-total ignorance of what sorts of firms you’re investing in and total complicity in the behavior of any S&P 500 company whose actions you might find offensive if you actually knew anything about them.
Post-Enron, it’s fashionable to worry and complain about corporate behavior, and that’s probably healthier than the blind faith of a few years ago. But a good number of mutual-fund investors remain just as blind as ever about precisely which companies they (indirectly) own, and thus about the extent to which their nest eggs benefit from some of the exact corporate behavior that they claim to find bothersome. That’s actually the whole point of funds, of course, and especially of index funds—you don’t have to sweat the details, just enjoy the power of passivity. Few people seem to worry at being ignorant of (or indifferent to) how funds deploy their money because what’s good for small investors must always be good for America. Is it?