Jack Bogle on the Future of Index Investing

When Jack Bogle created the first index mutual fund for individual investors (Vanguard 500) forty years ago, he probably didn’t imagine that it would grow to 20 million investor-clients and more than $3 trillion. In last week’s Wall Street Journal, columnist Holman Jenkins, Jr. shares some of Bogle’s insights and opinions as he marks his 65th year as an industry leader.

The 87 year-old visionary sees the appeal of index funds only magnifying given “the decade of depressed returns he sees ahead,” writes Jenkins. According to Bank of America, he adds, $600 billion in investor cash has exited actively managed funds since the 2008 crash, while some $961 billion has flowed into index-style investments.

While Bogle finds today’s stock scene “puzzling”, Jenkins says that he advises investors to stay invested through the downturns. “If we’re going to have lower returns,” Bogle says, “well, the worst thing you can do is reach for more yield. You just have to save more.” When that savings gets invested into mutual funds, Bogle advises paying close attention to fees. “Inattentive investors,” he warns, “can expect to lose as much as 70% of their profits to ‘hidden’ fund management costs in addition to the ‘expense ratios’ touted in mutual-fund prospectuses.”

There are those who air their distaste for this class of mutual funds, however. The article cites billionaire manager Bill Ackman’s reference to an “index bubble” and a comment by analysts at Sanford Bernstein that index investing is “worse than Marxism.” The complaint, Jenkins explains, is based on their belief that passive investing distorts stock prices and the allocation of capital across the country. Bogle says it would never happen, however. A market of 100% indexing, he contends, “would be chaos. There would be no current valuations.” In such a scenario, Bogle says “big smart money investors….would quickly pounce on any opportunity created by mispricing of valuable securities.”