Blog Post

AEIdeas

From an email I received today from The Vanguard Group:

We think it’s a big deal. As the first index mutual fund, Vanguard 500 Index Fund started a revolution that made direct investing accessible and affordable for individual investors around the world. Thank you for being a 500 Index Fund investor. It’s investors like you who have helped fuel the growth of this revolutionary idea called indexing over the past four decades. Even though it’s a core holding today in millions of portfolios and brings exposure to 500 of the largest U.S. companies, Vanguard 500 Index Fund first got a chilly reception. Indexing was a curiosity. People scoffed at its simplicity and doubted its potential. Some even viewed it as radical. But eventually indexing caught on. Investors like you appreciate the commonsense yet sophisticated approach the fund represents. Expenses have had a lot to do with indexing’s growth. Index funds cost less to run. And our client-owned structure, combined with our growing community of Vanguard investors, means that we can continue to lower your fees. The graph above shows how expenses have decreased as total net assets in the 500 Index Fund have increased. The current expense ratio is approximately 88% lower than it was in 1976, when the fund was launched. Today, Vanguard offers one of the broadest lineups of index funds in the industry, covering all major sectors of the U.S. stock and bond markets, as well as stock markets around the world. And our low-cost philosophy extends to all of our products and services. All because of the fund that launched a revolution back on August 31, 1976.

From The Vanguard website:

The 500 Index Fund, originally named the First Index Investment Trust, became the world’s first index mutual fund when Vanguard founder John C. Bogle launched it in 1976. In the 40 years since, the fund has won multitudes of converts and spawned countless imitators and competitors. When the 500 Index Fund eyes its 40-year-old reflection, it’s not inclined to spruce up its look or update its image. The fund’s mandate has always been, and always will be, to capture the returns of large-capitalization U.S. companies. Indexing’s reputation has vastly improved with age as more and more investors and advisors embrace the concept. “Indexing becomes more relevant every day,” Vanguard Chief Investment Officer Tim Buckley said. “The case for indexing is stronger than it’s ever been. As long as active managers keep expenses high, we expect indexing to continue to be successful, especially in this low-return environment.” Simple yet sophisticated. Average yet extraordinary. Passive yet progressive. Inexpensive yet invaluable. Rational yet radical. Indexing can be described in many such ways and can provoke a range of reactions. One thing, however, is clear: It has transformed the mutual fund industry and made investing accessible and affordable for millions around the world. When Mr. Bogle introduced that first index fund, it was met with yawns from investors and derision from competitors. The fund was ridiculed as “Bogle’s Folly,” and indexing itself was even assailed as “un-American.” Today, indexing is a cornerstone of the mutual fund industry and has even led to another investment innovation, the exchange-traded fund (ETF). And Mr. Bogle, who served more than two decades as Vanguard’s CEO and chairman, is an industry icon who recently celebrated his 65th year in the investment business. “Indexing is the purest expression of low-cost investing,” said Joe Brennan, a Vanguard principal and global head of equity indexing. “Indexing is diversified. It’s potentially tax-efficient. The biggest headwind that investors face is cost, and indexing reduces costs in many ways.” According to Buckley, “Vanguard has evolved indexing from just one portfolio to giving you a global market, and also components of the global market, so you can build your own portfolio. Index funds can be the foundation for your portfolio. They’re building blocks. Through index funds, you can have a globally diversified portfolio of X stocks and Y bonds for just Z%.” And it all began with a single Vanguard fund 40 years ago.

MP: From a 2013 CD post featuring 15 quotations about index investing, collected from various sources, investors, economists, and fund managers:

1. “Building a portfolio around index funds isn’t really settling for the average. It’s just refusing to believe in magic.” ~Bethany McLean of Fortune

2. “The S&P 500 Index consistently outperformed 98% of mutual fund managers over the past three years and 97% over the past 10 years, ending October 2004. In two 30-year studies, the S&P 500 outperformed 97% and 94% of managers. In addition, only about 12% of the top 100 of managers repeat their performance in the following years. Therefore, it is not possible to consistently pick next year’s hot mutual fund manager.” From IFA.com

3. “Over fifteen years to 1998, on a pre-tax basis the Vanguard S&P 500 index fund outperformed 94% of general equity mutual funds and 97% on a post-tax basis. The post-tax average difference in annual performance was 4.2% in favor of index funds.” ~John Bogle, founder of Vanguard

4. “No matter where we look, the message of history is clear. Selecting funds that will significantly exceed market returns, a search in which hope springs eternal and in which past performance has proven of virtually no predictive value, is a loser’s game.” ~John Bogle, Founder of Vanguard

5. “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund.” ~Warren Buffett, Chairman, Berkshire Hathaway

6. “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” ~Warren Buffett, Chairman, Berkshire Hathaway

7. “Economists, when faced with a conflict between theory and evidence, discard the theory. Stockbrokers discard the evidence.” ~Andrew Smithers and Stephen Wright, authors of “Valuing Wall Street”

8. “I own last year’s top performing funds. Unfortunately, I bought them this year.” ~Anonymous

9. “After taking risk into account, do more managers than you’d see by chance outperform with persistence? Virtually every economist who studied this question answers with a resounding ‘no.’” ~Eugene Fama, Professor at University of Chicago and Nobel Economist

10. “Why does indexing outmaneuver the best minds on Wall Street? Paradoxically, it is because the best and brightest in the financial community have made the stock market very efficient. When information arises about individual stocks or the market as a whole, it gets reflected in stock prices without delay, making one stock as reasonably priced as another. Active managers who frequently shift from security to security actually detract from performance (vs. an index fund) by incurring transaction costs.” ~Burton Malkiel, Professor, Princeton

11. “All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage. Unless you were fortunate enough to pick one of the few funds that consistently beat the averages, your research came to naught. Thereʹs something to be said for the dart‐board method of investing: buy the whole dart board.” ~Peter Lynch, Legendary Manager of Fidelity Magellan

12. “The statistical evidence proving that stock index funds outperform between 80% and 90% of actively managed equity funds is so overwhelming that it takes enormously expensive advertising campaigns to obscure the truth from investors. In fact, one of the reasons that actively managed equity funds under‐perform stock index funds is because they are spending so much money to advertise — money that otherwise would be invested on behalf of the mutual fund shareholders.” ~Internet Advisor, ʺThe Motley Fool ʺ

13. “If active and passive management styles are defined in sensible ways, it must be the case that: 1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and, 2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.” ~William F. Sharpe, Professor of Finance, Nobel Laureate

14. “Indexing is a marvelous technique. I wasnʹt a true believer. I was simply an ignoramus. Now I am a convert. Indexing is an extraordinary sophisticated thing to do. If people want excitement, they should go to the racetrack or play the lottery.” ~Douglas Dial, Portfolio Manager of the CREF Stock Account Fund, largest pension fund in America

15. “Index funds should outperform most other stock‐market investors. After all, investors, as a group, can do no better than the market, because collectively we are the market. Most investors, in fact, are destined to trail the market because we are burdened by investment costs such as brokerage commissions and fund expenses.” ~Jonathan Clements, Columnist, Wall Street Journal