Vanguard’s value proposition, your fair share of market returns at a low cost, has proven to be extremely popular capturing 60% of the mutual fund industry’s net cash flow this year with $3 trillion in assets under management. And it’s not just Vanguard, index and index-like products have proliferated as all manner of ETFs have started to crop up for different slants on the market, but Vanguard founder Jack Bogle isn’t impressed.
“I’m just a simple guy. I started off with an idea that has been, for want of a better word, bastardized. Our S&P 500 index fund—the world’s first index mutual fund—simply allows investors to own the whole U.S. stock market and hold it forever, at very low cost,” says Jack Bogle in an interview with Heather Bell at ETF.com.
If you’re sure you’re right, you’re ‘a damn fool’ says Jack Bogle
Jack Bogle’s insight, which he has stood by for decades, is that anytime you take a position someone else has to be on the other side of the position, and the net gain for investors overall is neutral – minus the transaction fees and other expenses that are generated along the way. If you are consistently on the right side of the trade that’s fine, but practically no one is (and Bogle would probably even attribute the most successful traders to the long tail of the distribution).
“You’d better be sure you’re right, but if you’re sure you’re right, you’re a damn fool. You may like to be right, you may hope to be right, but to be sure you’re right is the formula for investment failure,” says Jack Bogle.
While ETFs could be one inexpensive way to accomplish this, in practice people tend to trade it pretty heavily. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY), for example, turns over at a rate of 5500%, not even in the same universe as the 3 – 4% that Bogle considers to be the high end of responsible re-balancing.
Index funds could be half the mutual fund industry by 2040, says Jack Bogle
Index funds account for about a third of mutual fund assets, up from 9% in fifteen years, but Bogle says that has to slow down simply due to ‘the law of large numbers,’ but could still make up half the mutual fund industry by 2040 or so. Jack Bogle isn’t worried that some new investment idea will supplant indexing, but he is concerned about whether market returns themselves will be any good in the coming years.
Weak global economic growth, tension with Russia, and religious fundamentalism are among the issues that make Bogle think risks are higher now than they have been in the past.
“These big global issues are challenges and risky for investors, but we really have no choice—I have no choice. I’m not heading for the hills,” says Jack Bogle.