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Portfolio for the Common Man

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Portfolio for the Common Man

John Bogle’s positive—but complex—legacy. January 17, 2019
Economy, finance, and budgets

John Bogle, founder of the Vanguard Group and creator more than four decades ago of the first low-cost investment fund, died Wednesday at 89. Like many twentieth-century innovators, from Pan Am’s Juan Trippe, with his insight that airlines could cater to a mass market, to Howard Johnson, with his realization that newly affluent Americans would flock to a reliable chain restaurant and motel, Bogle made a luxury boutique product—in his case, stock- and bond-market investing—accessible to the baby-boomer masses. In democratizing the markets, Bogle likely saved Americans trillions of dollars in investment fees, commissions, and losses. He was also the partial cause (and effect) of the creative destruction of traditional finance—and of Americans’ rather forced embrace of risk, not stability, in trying to save money or to secure retirement.

Born in 1929, Bogle was ready for a career in the staid world of finance upon his graduation from Princeton. In 1951, Walter L. Morgan, founder of the Wellington Fund in Philadelphia, impressed by fellow Tiger Bogle’s thesis, “The Economic Role of the Investment Company,” hired him. Bogle might have expected to settle into a long and not particularly arduous career of picking stocks and bonds for the fund, selling its shares to affluent clients, and managing up-and-comers looking to do the same.

Instead, the 1970s intervened. Global and market turmoil strained Wellington. As Vanguard notes of Bogle’s history, “the bear market of 1973-74 led to poor performance . . . and caused friction among the partners.” Bogle found himself fired at 45. A year later, he launched Vanguard, and a year after that, the First Index Investment Trust. Rather than hiring expensive portfolio managers to pick and choose stocks and bonds for investors, the trust would simply follow the broader stock market, thus giving its investors exposure to the wider economy. Because it wouldn’t try to pick winners, the fund was viewed as a “sure path to mediocrity,” and it attracted only $11 million in investor interest. Today, the Vanguard 500 and the company’s similar index funds control $4 trillion in assets.

Vanguard was good for investors in several ways. Without having to pay active managers, the company could cut internal fees; today, for index funds, it charges about one-tenth of one percentage point of assets, or ten “basis points.” (One percent or more is still common for actively managed funds.) In the late 1970s, Bogle did something even more radical, cutting out “middlemen” brokers who sold such funds to the public on commissions. Direct sales, later made easier via the Internet, saved clients several more percentage points of their investments on initial purchases. And returns did not turn out to be “mediocre.” Vanguard’s creation anticipated the biggest stock and bond market boom the West has ever seen, from the early 1980s to the present. It turns out, too, that active managers are no better than a random index at predicting returns, so investors didn’t trade savings on fees and commissions for poor performance.

Pooling investor money across a diverse portfolio gave people without tens or hundreds of thousands of dollars to invest all at once access to the markets for the first time. By contrast, many traditional portfolio managers would not even consider speaking to a small investor (and still won’t). Bogle summed up his philosophy in a 2012 interview with the New York Times: “Intelligent investors will use low-cost index funds to build a diversified portfolio . . . and they won’t be foolish enough to think that they can consistently outsmart the market.”

As with any innovation, Bogle’s heralded wrenching change. The first was to the financial industry itself. Just as Walmart—and now Amazon—crushed small, independent food and clothing retailers, and CVS and Walgreens helped kill small pharmacies, Vanguard, though it hasn’t exactly wiped out the financial industry, did transform it. The old-fashioned brokers, salesmen, and portfolio managers who persisted well into the 1980s and 1990s to sell wealthier Americans stocks, bonds, and high-fee mutual funds all made middle-class, upper-middle-class, and even affluent livings without being particularly specialized in their financial or mathematical knowledge. An affable young man from a decent school could set out a shingle selling stocks and bonds on high commissions or go work for a big investment firm doing the same.

Now, like much of the American economy, Wall Street is less egalitarian. Support staff at banks and investment funds make decent enough salaries and wages, but the real money is at the top: huge bonuses for the people who have mastered esoteric, often mathematically complex, strategies for trading and investing. In 1988, the average Wall Street bonus was $29,000 in today’s dollars, according to the state comptroller; today, the average bonus is close to $200,000 (heavily weighted toward the top).

Moreover, with much of its old-fashioned business gone, finance has had to take ever more risks to keep profits up. Those risks helped precipitate the global downturn of 2008. Since then, with risk-taking somewhat reined in, the industry cannot ignite employment growth. Though securities jobs nearly doubled between the early 1990s and 2008, the industry hasn’t created new jobs since the financial crisis. Lower fees for the masses mean fewer good jobs for a certain class of financier: adequately educated but not brilliant, a diligent worker but not particularly entrepreneurial. The millennial economy has not been friendly to him.

The second change that Vanguard both hastened and reflected is in Americans’ savings and retirement security. Before Bogle launched Vanguard, the average American wasn’t particularly upset at his lack of access to the stock and bond markets, because he didn’t need such access. A lifelong worker could expect a decent pension from his employer, and there wasn’t much need to amass other financial assets. Houses were cheap, property taxes were negligible, and education was affordable. If a working family or retired couple had some savings, such money would go into a conservative certificate of deposit or savings account, offered by a bank and guaranteed by the federal government’s deposit insurance.

Today, an uncomfortable truth for market evangelists is that even with low-cost index funds, many Americans with 401ks and IRAs are not exactly eager investors. They invest in equity and bond markets because they have no other way to attempt to save money for retirement, their kids’ college educations, or a home. Private-sector pensions are long gone. Savings accounts and CDs don’t pay enough to keep up with inflation. The government can’t increase broader interest rates—and thus allow for higher returns on such safe investments—because of enormous pressure to keep interest rates low in order to keep stock and bond markets up. The government motive to keep markets up, in turn, is driven in part by mass market exposure: private-sector workers close to retirement, or even not so close, can’t withstand sustained downturns. This element of Americans’ economic anxiety, heightened by the 2008 meltdown, has helped roil politics over the past decade.

Finally, a mass scale of investors itself represents a new risk. Trillions of dollars of demand for stocks and bonds don’t just follow markets; they make markets. Like any finite product subject to supply and demand, stock and bond prices go up when lots of people and companies want to buy and down when lots of people and companies want to sell. It’s hard to see global markets as efficient indicators of individual companies’ future prospects when they’re largely driven by enormous flows of funds that pour in every pay period. The markets are like a giant, undifferentiated public trust fund, largely reflecting global demographic trends.

John Bogle, a decent man who struggled with heart trouble all his life and stayed married to the same woman for 63 years, adamantly stuck up for the little guy. In Enough, his 2008 book, he reiterated his purpose. “What I’m battling for—building our nation’s financial system anew, in order to give our citizens/investors a fair shake—is right. Mathematically right. Philosophically right. Ethically right.” But the top echelons of the political and business classes did not keep these ideals in mind until public anxiety, reaching crisis points over the past few years, forced them to think a bit more like him.  

Photo: The Institute for Fiduciary Standard

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