Vanguard’s Jack Bogle discusses how the indexing business has changed over the years and the problem with index funds.
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?
Vanguard's Jack Bogle On The Problem With Index Funds
Transcript
Oh I guess I'd start by saying everything is change changed Maria won the mutual fund industry is a totally different business. It's now probably 70 percent of the cash flow sometimes 100 percent of the cash flow is going into index funds which didn't even exist when I came in and when I started Vanguard all those years ago and indexing is up to I think around 45 percent of mutual fund equity mutual fund assets. So it's been a revolution. Indexing has and it's it's changed the nature of how people look at investing and most important of all Maria. It's made people start to think about cost. Cost is everything in this business because when you think about where returns generated for investors they are generated by corporate America they earn money they pay dividends they reinvest the remainder in the business and that's where value is created. The financial markets are the way we access that value. But the financial markets don't give us all of it. They take their share first and then give us what's left for us. And we investors. So any time we can shorten that gap bridge that gap minimized that gap is a good thing for the American investor. You make a great point about costs because people were not focused on that until you put it front and center with such low fees at Vanguard and now you've got industry after industry trying to copy Vanguard and whether it's the ETF industry the index industry or even just brokers trying to take their fees down. Is this a race to the bottom Jack in terms of how low fees have gone.
Well that's really a great question Maria because most of the competition in truth is in the in the ETF Exchange Traded Fund area. Because that's where a lot of the activity is. That's where a lot of the cash flow is and the competition is moderate for actively managed funds and really very very light for what I call traditional index funds tās index funds. TMF I should say index funds of the type I started back in 1975 that are bought and held together and forever. And let me explain it this way. We changed the business the indexing business from an index passive index held by passive investors to passive indexes held by active investors. A lot of trading goes on in ETF land and that's not such a good thing. So that's where the competition is because you can make money starting a little company. I call them financial Buccaneers trying to find the little hole that nobody else has filled the little niche if you will. And in the other there's not much appetite in the traditional index fund business for a lower cost because as I say both.
Vanguard's Jack Bogle On How To Manage Your 401 (K) Plan
Vanguard Group Founder Jack Bogle on index funds and how people should manage their 401 (k) plans.
Transcript
It tells us that people are crazy Mary. We don't need 5000 the index funds are six thousand. The whole idea of in some homes. Simplify simplify simplify right out of Ralph Waldo Emerson simplify everything and we've now complicated it by giving people many choices and building a system where they can trade those choices into growth and out of value out of value and into growth and so on. And so there's too much trading going on which is the investor's enemy. Finally the answer is to buy and hold the stock market very well exemplified by the 500 and hold it forever. And that's the winning strategy. And the other strategy involves changing things over an investment lifetime. You can probably have 40 changes 50 changes there's no way that can be a winning strategy. Yeah you make a really good point. What about the idea that people want to cash out sometimes. I mean what are your most important issues in terms of selling and you say hold on for a long time. But what is a long time in me when can you actually get those returns and what do you look for as a reason to sell. Jack Yeah that's a great question. I guess my favorite time period is the same as Warren Buffett's favorite time period forever. You know for your whole life there will be opportunities along the way. We've seen them in the last 25 years to get out and get back in. Vanguard is changing the retirement plan not having the flagship S&P 500 fund in the 401k. Why is that. What are you.
What is your reaction to the fact that Vanguard is dropping 12 funds from the employee 401k retirement plan. It will now offer 15 funds that's down from 27. Why. Well the answer is that for companies all over the country and I presume Vanguard although I don't run this place anymore. There have been too many choices in retirement plans. You know there really could you could you could run a retirement plan with three or four choices a stock index fund a bond index fund a balanced index fund. And that could be it. And investors can make those choices fairly easy. It's an asset allocation issue. And by giving them quite so many issues at Vanguard and in the industry generally I think we've confused investors for Vanguard in particular. This is not going to surprise you. I think it's too bad not to have the 500 as an option but it's pretty much any different from an investment standpoint because our crew members as we call them here and Bogle himself just goes into the total stock market fund which is 85 percent of the S&P 500 anyway. So I like the S&P 500 but I'm perfectly satisfied with the Vanguard Total Stock Market Index Fund.
