Jack C Bogle, founder of Vanguard group and father of Index mutual funds died at the age of 89, this week. He created the first index fund in 1975 and is widely believed to have changed how ordinary people invest in the stock market and his firm Vanguard grew to have $5.1 trillion worth of assets under its management. He basically chose to forego an enormous personal fortune in order to do the right thing for millions of people. A true legend, who made the financial industry a much better place.
About a decade earlier I was introduced to Jack Bogle through his book – Common Sense on Mutual funds, which was a honest and refreshing take on merits of long term investing and on index funds. I have been a huge fan and follower of Bogle ever since.
Vanguard was started on the belief that over the long term, most investment managers cannot outperform the broad stock market averages. Vanguard is known for its low-cost focus, and among its 70 ETF’s in the market are giants such as the Vanguard Total Stock Market ETF (VTI) and the Vanguard S&P 500 ETF (VOO), both of which cost only 0.04% in expense ratio, or $4 per $10,000 invested.
Investors who struggled to keep pace with the stomach churning market volatility in 2018 , and those looking at starting their journey of financial independence by building long term assets in the stock market will benefit tremendously from following Jack Bogle’s advice. Read below top three tips from Jack Bogle.
Basic arithmetic works
“Net return is simply the total return on your investment portfolio less the costs your incur. Keep your investment costs low”. Bogle was a harsh critic of the mutual fund industry and the high fees charged to investors for stock-picking expertise.
“In investing, you get what you don’t pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.”
Vanguard’s fund shareholders own it collectively, so there is no parent company or private owner to siphon profit, allowing the firm to keep costs down.
Impact of 2% fee over 25 years.
Investment fees eat away at your return and over a period of time can have a significant negative impact on your net worth.
Imagine you have $100,000 invested and if the account earned 6% a year for the next 25 years and had no costs or fees, you would end up with about $430,000. If, on the other hand, you paid 2% a year in costs, after 25 years you’d only have about $260,000.
That’s right: The 2% you paid every year in investment fee would wipe out almost 40% of your final account value. 2% doesn’t sound so small anymore, does it?
Stick to Simplicity
Basic investing is simple – a sensible allocation diversified among the broad stock market together with a portion in bonds and cash reserves. “The S&P 500 is a great proxy” he said – adding that he has not bought a single stock in about 25 years.
The S&P 500 is a fund of the top 500 listed corporations in the US and is representative of the market. According to historical records, the average annual return for the S&P since its inception in 1928 through 2016 is approximately 10%. Adjusted for inflation the return has been around 7%.
If the investing time frame is long enough and spread over few decades, not many fund managers will be able to consistently beat the returns of an index fund, after adjusting for their fees. For the average investor who does not have the time or the skill or the intention to monitor the nuances of the market and sectors, he can simply invest in the broad market index and still hope to handsomely beat the returns of most fund managers.
Annual S&P 500 returns from 1930 till date
Stay the course
Regardless of what happens in the markets, stick to your investment horizon. Changing your course at the wrong time can be the single most devastating mistake you can make as an investor. “ Wise investors won’t try to outsmart the market”, he said. “ They will buy index funds for the long term, and they will diversify”
Market Timing : Ending figures for $100,00 invested in S&P 500 from 1988 to 2017.
Time in the markets is more important than timing the market. The chart above from Bloomberg shows that for a initial investment amount of $100,000, the total portfolio value at the end of 29 years would be lower by almost $1.5 Million, by missing the 25 best days. Ouch! Stay invested. No expert can predict the market gyrations and investment timing.
Money managers missed all the warning signs before the 2008 financial crisis . Bogle had noted “ How could so many highly skilled, highly paid security analysts and researchers fail to question the toxic and highly leveraged balance sheets of leading investment banks”. He told younger investors to stay away from financial advisors.
Devotees of JackBogle call themselves Bogleheads and follow the ethos of low cost investing. They started initially on internet message boards and are now organized on a website called bogleheads.org which is widely successful and has received over 4 million hits per day with over 70,000 unique visitors per day. Last year 220 registered participants attended the three day Bogleheads conference near the Vanguard headquarters. The groups philosophy is simple: costs matter in investing, and with a plan to save and invest deliberately, the average person can retire comfortably. And those plans don’t need to be complicated.
For more stories on personal finance read How much do you need to achieve financial independence.