Jack Bogle’s counter-intuitive lesson on American excellence: Don’t chase it
If Vanguard Group founder Jack Bogle, who died this week at the age of 89, represented the pinnacle of American success, his success is one that includes a counter-intuitive lesson. Mediocrity can be its own form of excellence.
Americans have long been taught to reach to keep up with the Joneses, that paying more means getting more and moving up the societal ladder on the way to the elite class. But in investing, mediocrity (or the average return produced by a broad market index) has consistently beaten the active stock pickers’ search for excellence. At a time when the historically striving American culture has become equally obsessed with fears of its own decline, Bogle’s success shows that there are situations in which being average is actually the best bet.
Bogle brought the concept of low-cost index funds to the individual investor, and brought it to them directly, upending the way asset managers construct and charge for their fund products, and how and where they are sold.
“Jack did more for American investors as a whole than any individual I’ve known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount,” Berkshire Hathaway chairman and CEO Warren Buffett said of Bogle.
Buffett, who generated returns for his investors over the past half century that have few equals, has warned his own shareholders for years that it has become increasingly difficult to outperform the index. And Buffett has put his money where his mouth is to make this point, through a winning charity bet against hedge funds that they would not be able to beat the S&P 500 Index over a decade, and in the advice to his own wife to invest in the S&P 500 after his death.
Vanguard and other low-cost fund providers now dominate trillions of dollars in the investing portfolios of average Americans saving for retirement. In recent years, Vanguard’s success against the active management industry has been posed in stark terms: while it has continued to take in hundreds of billions of dollars from investors annually, the rest of the mutual fund industry has experienced net outflows. When I started covering mutual funds in the late 1990s, that would have been unthinkable.
The index fund’s truest sign of success may be that it so riled Wall Street power brokers that at their worst they have taken to calling it “un-American”, even “worse than marxism.”
It is not hard to understand why the reaction can verge on the hysterical: Bogle’s insight strikes at the heart of the Wall Street belief that human beings can produce the financial genius to triumph over the average. But the Bogle success template is not wholly unique. When compared to other major American success stories, in fact, it is far from radical. It is part of a trend. Many of the most successful companies in the past half century of American capitalism were founded on delivering an average product to a consumer at a price point that was reasonable: think Amazon, Walmart or McDonald’s, which many of those active stock pickers on Wall Street have sung the praises of time and time again. If Walmart and Amazon and McDonald’s are “American,” why not Vanguard, or are they all “un-American?”
There are major downsides to these examples of accepting less as the key to excellence. To name just a few: low worker wages, traditional industries being wiped off the American map, and declining health standards. It may even be fair to ask whether successes like Walmart and McDonald’s are leading indicators of American decline rather than capitalism’s ability to transcend it. There is a way to look at the index fund’s domination that considers decline. It may be no coincidence that the index fund rose at the time it did.
Over the 20 years from 1980 to 1999, the S&P 500 compounded at an annual rate of 17.7 percent, according to markets analysis firm DataTrek Research. Over the 20 years from 1999 to 2018, the S&P only compounded at an annual rate of 5.6 percent. Paying an active manager 1 percent to 2 percent a year over the past two decade would have cut returns by 18 percent to 36 percent, DataTrek Research noted this week in a note analyzing Bogle’s impact.
“The upshot here is that indexing didn’t damage the active management business (as critics often claim) as much as structurally lower US equity returns pushed asset owners to lower cost solutions like index funds. Mr. Bogle and other indexers caught this wave beautifully, but they did not create it,” DataTrek wrote.
Vanguard Group has been among the most vocal asset managers telling investors in recent years to expect a world of low returns.
The big returns have left the public stock market for the world of private equity, where they are available only to the largest institutions. During this same period, housing has become more unaffordable for many Americans, rising college costs have led student loans to become the second-largest source of debt in the country, and health care costs are among the reasons that retirees are told to downsize and live on less if they want to have a “successful” retirement.
The defined benefit pension plans that guaranteed an income in retirement and were once a standard part of worker benefits in the private sector are virtually extinct. You can now make an argument that the most important innovation in the history of retirement investing wasn’t even the index fund, but automatic enrollment in employer 401(k) plans rather than leaving it up the individual. Most Americans are now on their own when it comes to long-term investing.
It doesn’t matter whether Bogle’s index fund was perfectly timed for a deteriorating wave or helped to create it, especially for the average American saving today for a home, college or retirement.
When I started covering mutual funds in the late 1990s for Institutional Investor, making my way through the maze of sales commission structures that were used by retail brokers to sell funds was a daunting task. After two decades, something equally alarming may have happened: I became blind to the fact that even for all of Vanguard’s success, brokers are still out there selling mutual funds on a commission basis and finding takers. A freelance writer in their 30s who covers technology recently asked me to take a look at their investment statement from a major retail brokerage house. I was floored. There were roughly a dozen actively managed mutual funds, some duplicating coverage of the same asset classes, and with various types of sales commissions being charged across the board and which the writer did not understand.
The fear and paralysis when it comes to investing that I have seen on the part of many people I know personally has led them to put off decisions for too long, or end up “buying” the belief that someone else can sell them something better and relieve them of their fears about the future. Bogle believed in keeping things simple and his example can be set down in simple terms for the vast majority of Americans: Belief in, and acceptance of, being average can be its own form of success. If that is humbling for a culture long sold on its excellence, it doesn’t change the fact that for many it is their best chance.
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