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RIP John Bogle (1929-2019) The Old Man Who Made Investing Easier For The Little Guy

Alright fine, so he wasn’t old when he started doing stuff that actually mattered, but still… Have you ever heard of Vanguard? This is the guy that started it. On it’s own, that still doesn’t matter if you don’t have money there. It matters because of how it got started.

 

John Bogle started Vanguard essentially based around the creation of the first index fund in 1975. If you’re new to investing, an index fund means instead of buying a bunch of stocks individually, you can buy ALL the stocks in a certain market by just buying a share of an index fund. The other name for this approach to buying is passive investing. The index fund is the passive investment vehicle you now get to use to not have to pay high priced fund managers or waste time pretending you know how to pick stocks.

Think of indexing like this: instead putting your money into one slot machine or another or playing a hand in black jack and hoping for the best, you just buy the damn casino and call it a day. That’s what he created. Before Bogle’s index fund came on to the market, every fund out there was actively managed. You HAD to pay the price of somebody choosing the stocks for you. The issue is that in the late 60’s the academic nerd types realized that 90% of fund managers people were paying weren’t beating the overall market. Once this information became public,  a few pension funds started trying to take advantage by just buying every company in the markets. It didn’t take long to realize …it sucked. Remember, this is the late 60’s, early 70’s. Try buying 500 companies over the phone and you’ll get a fair idea.

The second reason the creation of this index fund matters is cost. It wasn’t uncommon in the 60’s for mutual funds to have sales charges of 8%+ and on-going expenses in the multiple percents. Today, sales charges are usually referred to as “loads” but it means the same thing: before your money gets invested, they get to take a big chunk of it. At first, when the First Index Investment Trust was being underwritten Bogle charged a 6.5% fee for small investors down to 1% for $1 million+. This was used to help with the underwriting costs of getting the fund moving. Only 6 months later, he had to board vote to throw out the sales charges altogether. On the expense ratio side:

“In our final proposal to the Directors, in April 1976, we nervously prepared a draft prospectus. I sent the Board the articles referred to above and projected the costs of managing an index fund to be 0.3% per year in operating expenses and 0.2% per year in transaction costs. Since fund annual costs at that time appeared to be about 2.0%, I concluded that an index fund should reasonably be expected to provide an annual return of +1.5% above a managed fund. Ever vigorously selling the idea, we also presented a table showing that $1 million invested at an assumed market return of 10% would be worth $17.5 million after 30 years, while a similar investment at 8.5% (using the 1.5% cost differential) would have been worth but $11.5 million. The cost saving resulted, I noted, in a $6 million payoff that was a mere six times the original amount of the initial investment. “

Flash forward to today:

If you wanted to buy just 1 share of every stock in the S&P 500 index, it would cost approximately $51,215 before commissions as of the close on 1/16/19. Most of the big discount brokers are charging an average $6 commission (give or take a few bucks). So you can tack on an extra 493* commissions for $2,958. For $54,173 you get 1 share of each of the companies in the SP500 without rhyme or reason to how much of each company you own. After all, one share of company A might represent a bigger share of the business than a share in company B.

As a result of John Bogle’s creation, today you could just buy 1 share of the Vanguard S&P 500 index ETF fund (VOO) with no sales charges and a .04% expense ratio. Meaning you can buy all of the same companies as above, have them proportional to their size as a company in the US market and you’d pay about $245 including commissions. A 99.55% savings. You also wouldn’t have to worry about switching companies out or buying more or less of them in the future. That’s all done for you. For their efforts, you’d pay Vanguard about 10 cents a year based on today’s share price. Pretty incredible contribution for those who don’t have $50k to throw around just to get started. A NSFW Hall-of-Fame level contribution. Thanks John Bogle!

Oh… and also he died today. So that’s pretty lame…

Useless Trivia: The name Vanguard comes from the HMS Vanguard, Horatio Nelson’s battleship in the Battle of the Nile. Bogle got the idea from a book on British naval history that an antiques dealer gave him.
*Index funds are constantly changing constituents, especially when the market is moving a lot, so it’s very rare for the index funds to hold exactly 500 stocks while things are being recalculated and moving in and out.

Further Reading:

The First Index Mutual Fund: A History of Vanguard Index Trust and the Vanguard Index Strategy (Vanguard)