John C. Bogle, 89, legendary founder of the Vanguard Group and the first index fund, is busy publicizing his new book despite undergoing pacemaker surgery just two weeks ago to control the rhythm of his nearly 23-year-old transplanted heart. No doubt this man was made to stay the course.
Indeed, “stay the course” is Bogle’s motto in life as well as in investing, as he told ThinkAdvisor in a wide-ranging interview.
Bogle was chairman and CEO of Vanguard until 1996, senior chairman until 2000. Today he is president of the Bogle Financial Markets Research Center, separate from but subsidized by Vanguard.
With about $5.3 trillion in assets under management, Vanguard is the world’s largest mutual fund company.
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In the interview, the staunch buy-and-hold advocate — known as Jack — argues that the increasing importance of the RIA business and the relative “diminution of the brokerage business” largely accounts for index funds’ heightened popularity.
In “Stay the Course: The Story of Vanguard and the Index Revolution” (Wiley-Nov. 2018), the industry pioneer relates his intention, some 40 years ago, to provide folks with low-cost investing.
He accomplished that by devising a new and different structure for the mutual fund company he started. A year later — 1975 — he created the world’s first stock index mutual fund.
Initially, the fund was met with disdain and derision, especially by brokers, because its design was no-load.
Trading, Bogle argues, is “the investor’s enemy”; and he has made no secret of his reservations about exchange-traded funds. In the last few years, however, he has viewed ETFs somewhat less harshly. Vanguard is the second-largest ETF provider; BlackRock, with its iShares, is No. 1.
Our interview ranged from Bogle’s opinion of Fidelity’s no-fee funds (thumbs down, of course) to his monetary interest in Vanguard (none) to his economic interest in T. Rowe Price (a little bit) to allocation of his personal portfolio (50%-50%).
(Related: Bogle’s 6 Best Books for Investors)
At one point, he gave a nudge to Vanguard management concerning recent glitches in the firm’s digital service, which has caused erosion in robo-customer satisfaction.
ThinkAdvisor recently interviewed Bogle, speaking by phone from his Pennsylvania office. Among other topics: his reaction to critics who, upon debut of the first index fund, dubbed it a dumb idea.
On a personal note, he talked about his recent pacemaker surgery. By age 32, he’d had his first heart attack. At 65, hospitalized, he was being kept alive intravenously. After 128 days of that, the heart transplant saved him. Bogle is one of twins born in Montclair, New Jersey, about six months before the 1929 market crash. In the interview, he gives twin brother David a big shout-out.
Here are excerpts from our conversation:
THINKADVISOR: What do you think of Fidelity’s introducing no-fee index funds?
JOHN BOGLE: Fidelity has figured out that the only way to get big in this business is to charge nothing, or more accurately, to have zero-cost index funds that are subsidized by the shareholders of their other funds. I’m not so sure I like that as an ethical issue.
It took 20 years for the first index fund, which you created, to get investor acceptance. What about broker acceptance?
At first, the index fund had almost no broker acceptance because it was no-load — there was nothing in it for brokers, no incentives. I had eliminated all sales commissions overnight.
Do they accept them now?
With the rise in the importance of investment advisors, a diminution of the relative importance of the brokerage business has emerged. That, along with growing recognition of the index fund’s attributes, explains a) why they’re doing so well and b) why it took so long.
To what extent do advisors object to index funds today?
A lot of brokers still don’t like us — don’t like me. If I were them, I guess I wouldn’t either because I’ve changed the nature of the world of finance — and not in their favor.
How did you feel when critics called the first index fund “Bogle’s Folly”? Did you think they could be right?
Oh, no-no-no. I always knew I was right. In this business, there’s cost and value. The more you pay as an investor, the less you get — and the less you pay, the more you get.
What’s in your personal investment portfolio?
I’m 50% bonds — 50% Vanguard bond funds — and 50% stocks. Half the time I wonder why I have so much in stocks; the other half, I wonder why I have so little.
You’ve made money from buying 100 shares of T. Rowe Price at $42 a share in 1994. By 2018, that “token” investment was worth $384,000, you write. This puts you in an “awkward” position, so you say. Please elaborate.
I have an economic interest in T. Rowe Price, which is a [Vanguard] competitor. At Vanguard, that would not be allowed for the officers. In my case, my association with Vanguard — and this is the awkward part — is only tenuous.
Do you have a financial interest in Vanguard now?
No. None. Let’s just leave it at that.
(Related: Bogle’s 6 Best Books for Investors)
What’s your advice to investors in this very volatile market? I bet it’s to stay the course!
Stay the course. What seems different about this time of extreme volatility is the rapid reversals: first up 1% or 2%, then down 1% or 2%, then up again. When stocks go way up, human emotion makes people excited about buying more; when stocks are way down, they’re frightened into buying less or selling out. Buying at the highs and selling at the lows isn’t an easy way to make money on your retirement plan.
In a 2012 interview with me for Research magazine, you argued that “active management is a loser’s game.” I assume your thinking hasn’t changed?
Brokers like funds that are actively managed because they can make commissions on them. We live in a changing world, but sooner or later the investor is going to do what his own best interests tell him, and his own best interests are to stay the course and do nothing. Don’t trade or pay extra costs, and you’ll do fine.
You stated in that same interview: “It’s nuts to have ETFs in a 401(k) plan.” Still feel that way?
Yes. We know that employees like to trade company stock, which is an indication that they’re not sophisticated enough to know that simplicity and low cost are the way. The investments in 401(k)s aren’t designed to be traded. They’re designed to be bought and held forever. Trading is the investor’s enemy, by definition.
ETFs have overtaken traditional index funds (TIFs) in popularity. But you’re forecasting that the “the vast majority of investors will come to favor” TIFs over ETFs. Why?
TIFs are by and large based on large-cap indexes — they’re passive portfolios designed for passive investing. ETFs are trading the market on a daily basis, betting it will go up or down. [Moreover], leverage [ETFs with leverage] has nothing to do with investing and everything to do with speculation. Trading ETFs, you have no idea whether you’ll do better than the market’s return or worse. Every bit of evidence says you’ll do worse.