In times of extreme market volatility, similar to what investors experienced during the final months of 2018, early into this year, it usually makes sense to seek out sage advice, especially from the investors who have experience in both bull and bear investment cycles.
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John Bogle, who founded The Vanguard Group, the world’s largest mutual fund company, has been instrumental in giving investors a way to get broad diversification, a proven path to growing your nest egg.
Vanguard created the world’s first index mutual fund in 1975 – First Index Investment Trust (since 1981, Vanguard 500 Index Fund) – now 44 years later, the industry has attracted trillions in assets for millions of investors.
Bogle’s new book, “Stay the Course,” offers a history of Vanguard, the evolution of the index fund and how it's paid off over the years. In the following excerpt, chapter 12 to be exact, FOX Business takes a look at some of Bogle’s top tips.
Our Index Fund Is Copied . . . and Praised
The 500 Index set the standard for the index funds that followed Vanguard’s innovation, first at Wells Fargo (1984), then at Colonial (born 1986; died 1993, R.I.P.), and then at Fidelity (1988). The first exchange-traded index fund (ETF), the now-famous SPDR (or “Spider”) formed in 1993, also tracks the S&P 500 Index. If more adulation were needed, Warren Buffett is among the most enthusiastic proponents of the Vanguard 500 Index Fund. He continues to make our 500 Index Fund his major – indeed his almost universal – recommendation to investors seeking guidance. He’s been doing so for at least two decades.
Here’s what he wrote in the 1996 Annual Report of Berkshire Hathaway Corporation:
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.
Yet from the beginning we realized that the S&P 500 Index, while was not a perfect reflection of the U.S. stock market, was a fine proxy for the total stock market index. (In those days, the Wilshire 5000 was the accepted index of the total U.S. stock market.) Over the long term, the differences between the S&P 500 and the total U.S. stock market index have been trivial. Since S&P data were first published in 1926, the annual return on the S&P 500 has averaged 10.1 percent, compared to 9.9 percent for the Total Stock Market Index. Since 1930, the returns have been identical – 9.7 percent annually for the S&P 500 and 9.7 percent for the total market. The record shows that the returns of the Wilshire 5000 explain more than 99 percent of the variation in the returns of the S&P 500.
Betting on the 500 Index Fund
Even when we chose the S&P 500 as the target for our firms’ index fund, we were aware that in the ideal, the Total Stock Market Index would be the most pristine means for capturing the market’s returns. So in 1987 we created our second equity index fund, Vanguard Extended Market Index Fund. This was a “completion fund,” holding the mid- and small-cap stocks that were not included in the S&P 500.
Vanguard investors who wanted to hold the entire stock market could simply allocate roughly 80 percent of their investment to Vanguard 500 Index Fund and the remaining 20 percent to Vanguard Extended Market Index Fund. While Extended Market was used for that purpose by some investors, its principle use came from investors who believed that The Index Funds 179 mid- and small-cap stocks would earn higher long-term returns than their large-cap cousins. Whatever the case, Vanguard Extended Market Index Fund has earned a strong place in the index fund pantheon, with assets of $68 billion in mid-2018. It has provided investors with their full share of the returns earned by its 2018 portfolio of 3,270 non–S&P 500 stocks. As the 1990s began and the evidence poured in about the success of index investing, we continued to seek to broaden Vanguard’s lineup of index funds. The broad U.S. stock market was already covered by our 500 Index Fund (1975) and Extended Market Index Fund (1987). Bonds were covered by our Total Bond Market Index Fund (1986). The next logical step was to offer index funds that tracked stocks beyond the borders of the United States.
Market Indexes Have Outpaced 91 percent of Actively Managed Funds
In the spring of 2018, Standard & Poor’s Corporation produced its annual comparison of the 15-year returns on all major classes of actively managed funds and compared them to the returns achieved by the S&P index in each category. The report is titled “Standard & Poor’s Index Versus Active,” commonly referred to as the “SPIVA Scorecard.” The across-the-board superiority of the indexes reflected in the SPIVA Scorecard is astonishing. The S&P indexes outperformed some 93 percent (!) of actively managed funds in the U.S. large-, mid-, and small-cap categories, from a low of 86 percent of smallcap value, to a high of 99 percent of small-cap growth funds. The S&P 500, the best-known of the indexes, outperformed 92 percent of all active largecap funds. The SPIVA Scorecard offers overwhelming evidence that indexing strategies have given investors their best chance at investment success.
Index Funds Dominate
From the fortuitous creation of First Index Investment Trust in 1975 – the world’s first index mutual fund – to today’s portfolio of 75 index funds in the United States alone, Vanguard has been the leader in the burgeoning index fund sector of the mutual fund industry. The index fund share of the assets of all U.S. equity funds has soared from a market share of 4 percent of assets in 1985 to 43 percent in mid-2018. Yes, we have seen the triumph of indexing, and it isn’t over yet. Vanguard’s traditional index funds now account for almost 80 percent of the TIF category and our exchange-traded funds represent 25 percent of the ETF category. Together, Vanguard funds represent approximately one-half of the assets of all U.S. index mutual funds. The continuation of Vanguard’s leadership depends upon our deserving it: earning the confidence of the investors who have entrusted their savings to Vanguard, and meeting their long-term expectations for the efficient and economical administration of their accounts. Such leadership also depends, in part, on growing investor recognition of the demonstrably higher value to investors provided by TIFs relative to their ETF cousins 25 percent.
We know that index funds that are focused on broad diversification in the major market sectors, bought and held for the long term, have proved to be the optimal strategy for investment success. My bet is that the vast majority of investors, informed by their own experience, will come to favor TIFs over ETFs. Time will tell.
Excerpted with permission of the publisher, Wiley, from Stay the Course by John C. Bogle. Copyright © 2019 John C. Bogle. All rights reserved. Available wherever books and eBooks are sold.
John C. Bogle is the founder and former CEO of The Vanguard Group and the world's first index mutual fund. A graduate of Blair Academy and Princeton University, he has spent his entire career in the mutual fund industry—67 years (and counting). Stay the Course is Mr. Bogle's twelfth book, a string that began with Bogle on Mutual Funds (1993). Subsequent books include: Common Sense on Mutual Funds (1999, updated 2010), The Battle for the Soul of Capitalism (2005), Enough. (2008), and The Little Book of Common Sense Investing (2007) and its 10th Anniversary Edition (2017). A prolific writer for the investment profession, Mr. Bogle has had 28 of his papers published in The Financial Analysts Journal and The Journal of Portfolio Management. In 1998, CFA (Chartered Financial Analysts) Institute presented Bogle with its highest homage, the Award for Professional Excellence. For his extraordinary lifetime achievements in serving investors, Bogle has received honorary doctorate degrees from 13 universities, including Princeton, Georgetown, Delaware, Villanova, and Trinity. In 2004, TIME magazine named him as one of "the world's 100 most influential people." Despite a devastating setback in his career in 1974, and frequent serious health challenges (he received a heart transplant in 1996), John Bogle remains fully active in his career and with his family—wife Eve, six children, twelve grandchildren, and (so far) six great-grandchildren. His advice to his family is the same as his advice to investors, entrepreneurs, and readers of this book: "In good times and bad times alike, Stay the Course."