Once learning about the long odds of success with actively managed mutual funds versus passive index funds, most investors will be keen to jump ship.
And if they follow the ideal of doing what’s right and spread the word, their friends will also climb aboard their own metaphorical Vanguard to sail away from the most profitable industry on Earth: active money management.
But the “profitable industry” isn’t profitable for the average mutual fund investor.
No, the money isn’t made from investing in money management products—it’s made from selling the advice and fee-laden funds.
The man dubbed “Saint Jack” is the financial service industry’s pariah. But he’s looking out for you, and he’s looking out for me.
Find out more about this great man and his fight against the self-serving financial service industry.
by Chris Taylor
Vanguard’s Jack Bogle helped create the American mutual fund industry. Now, in the climactic battle of his life, he’s railing against it — and trying to revolutionize it once and for all.
Jack Bogle could be on a beach somewhere. The 80-year-old founder of mutual fund giant the Vanguard Group could be with his wife, Eve, soaking up the sun at a Caribbean resort and enjoying the fruits of a lifetime of hard work with a frothy drink in one hand and a bottle of sunscreen in the other. In fact, he could own that resort, probably a whole chain of them, and still have enough left over to exceed the annual gross domestic product of many small countries.
Jack Bogle could’ve been a billionaire — but that’s not who Jack Bogle is.
Who Bogle is is the fellow who still shows up to work every day in his modest offices in Malvern, Pa . He’s the guy who flies coach, books the cheapest hotel room available (even if it’s a “broom closet,” says one confidante), drives an 8-yearold Volvo with 140,000 miles on it and debates with his wife about whether to finally use the L.L. Bean coupons they’ve been saving up.
In short, in an age of eye-popping Wall Street bonuses and swashbuckling hedge fund managers who pay themselves in the billions, Jack Bogle is both a throwback and a curiosity. And he wouldn’t have it any other way.
“I never wanted to run a big company,” says Bogle, founder and former chairman of the firm that heads up $1.3 trillion in assets, recently surpassing Fidelity as the biggest player in the industry. “I’m not a businessman, I’m not an entrepreneur, I’m not a manager. I’m not sure what I am. Maybe a missionary.”
Bogle certainly does a lot of preaching — not least in his many books, like The Little Book of Common Sense Investing and Enough: True Measures of Money, Business, and Life. He’s an evangelist for average mom-and-pop American investors who quietly put money away in their 401(k)s or IRAs or kids’ college funds and pin their retirement hopes on the quaint belief that their money will be well managed and grow over time.
In a perfect world, maybe. But as the recent financial meltdown revealed — during which the Dow Jones industrial a verage sank like a stone from 14,000 to almost 6,500 before bouncing back again — we don’t live in a perfect world. Investor returns are hampered by everything from high mutual fund fees to corporate shenanigans (like Enron’s and WorldCom’s) to executive salaries that can reach into the tens of millions of dollars a year to a Byzantine financial system whose excesses almost led to a total economic collapse.
That’s why Bogle has become fed up with the industry he helped create. He regards its sins, like excessive fees and gaudy compensation, as if someone were stealing money from his own pocket. Or, even worse, from the pockets of shareholders. He’s had enough, and at 80, he’s not about to mince words. It’s not the kind of stuff that well-heeled executives want to hear.
“Investors right now are at the very bottom of the food chain,” Bogle says from his office couch, from which he’s leaning over a coffee table adorned with such financial classics as Graham & Dodd’s Security Analysis. “Money managers and CEOs all take their cut first, maximizing their share of the pie. What good does it do to make any money if it never goes to shareholders?”
This kind of talk makes industry types very, very nervous. After all, it’s not coming from a controversial firebrand like Michael Moore but from the highly regarded dean of the industry. It’s from someone who walks the walk: Because of the way Bogle structured Vanguard, as a firm owned collectively by its shareholders, profits don’t go to him personally but back to investors in the form of lower fees.
“He could’ve been a billionaire, like the Fidelity folks,” says Mel Lindauer, a self-professed ‘Boglehead’ in Daytona Beach Shores, Fla., and co-author of The Bogleheads’ Guide to Investing. “[Fidelity’s] Abigail Johnson and her family are worth billions. With Jack, those billions have gone to investors, and that’s why he’s considered by many as a true American hero.”
Others, though, consider him a pariah for his saber-rattling views. He sees the financial system as essentially broken, with corporate managers primarily interested in enriching themselves and with little regulatory or shareholder oversight to contain the rampant greed. And he just won’t shut up about it. “I don’t think anything I do shocks anyone anymore,” he says. “In this industry, I have people’s respect — but not their approval. A lot of them won’t even make eye contact with me.”
Not content with merely appearing on CNBC or writing newspaper op-eds, Bogle is taking the battle against his own industry to the Supreme Court. In the landmark case Jones v. Harris Associates, investors in three Oakmark mutual funds sued the adviser for skimming off what they viewed as excessive fees. While the case was initially dismissed , the number of dissenting judges in the appeal — including famed conservative justice Richard Posner — led the Supreme Court to snap up the case for review.
Filing a brief to the court on behalf of the aggrieved investors: none other than Jack Bogle. Bogle wrote that the case revolves around the simple question of whether “an investment adviser to captive mutual funds may simply take as much compensation as it can get, with no regard for the interests of fund shareholders.”
Observers called Bogle’s comments a “blistering” takedown of an industry that’s out of control. But to friends and associates, it was par for the course. “Jack has never, ever been afraid to speak truth to power,” says William Bernstein, author of books such as The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between and The Four Pillars of Investing: Lessons for Building a Winning Portfolio. “The plain fact of the matter is that the very structure of the modern financial system is corrupt to the core, extracting wealth from the nation’s ordinary people and placing it in the hands of a very few, and Jack has spent the better part of his life exposing these inequities. This has not made him a lot of friends in the business.”
The Supreme Court heard the case last fall, with the result expected to come down this year. The decision could rock the $11 trillion mutual fund industry and affect every one of the 92 million investors who entrust their money to it. Bogle, lining up against opponents like the Investment Company Institute — which he once chaired — finds himself in the thick of it. “I don’t get any joy about being a lightning rod,” he says. “But someone has to say these things.”
You get the sense, though, that Bogle secretly enjoys a good battle. After all, his office is papered with prints from the great naval conflicts of British Admiral Lord Nelson, like the Battle of Trafalgar, which established British dominance of the seas in the early 1800s. It’s in memorable clashes like those that Bogle finds his greatest inspiration — and even the name of Vanguard itself, which was Nelson’s flagship at the Battle of the Nile.
Vanguard’s story goes back 35 years, when Bogle founded the firm and created the world’s first index mutual fund , an investment designed to track an entire market like the S&P 500. To him it was common sense, since so many actively managed mutual funds were underperforming the stock market. Instead of paying fund managers so handsomely for such terrible stewardship of your cash, you could just buy every company on the market and pass the savings along to investors.
A simple-enough idea, but in an investing world where everybody thinks they’re brilliant, it requires a certain humility. You’re basically admitting that you can’t outsmart the market and accept the market’s return . But combine those market returns with rock-bottom investment fees and, compounded over time, you have a compelling case for index investing . Investors seem to have voted with their feet: Vanguard now oversees $1.3 trillion in assets, up from $564 billion just 10 years ago.
As a result, Bogle has attracted a cultlike following on Bogleheads.org, a fan site that grew out of the “Vanguard Diehards” forum on the popular financial site Morning star.com. There are now 16,000 registered Bogleheads, with the site garnering 9,000 unique hits a day. Bogle’s not your typical cult leader — instead of owning a Gulfstream jet or a personal fleet of Rolls-Royces, he wraps up half-finished sandwiches for eating later and was famous for prizing an old $12.95 watch — but fans worship him nonetheless.
Take, for instance, the time the Bogleheads met for their annual convention and Bogle was unable to attend because of a personal health crisis. Instead of missing it altogether, he arranged to be patched in via telephone from his hospital room. “Don’t ask me how he did it,” remembers Lindauer. “[But] he spoke to us direct from intensive care for about 15 minutes. It was so moving and just remarkable.”
Indeed, Bogle’s body has slowed a bit in recent years. He’s had to give up his beloved golf and squash, although he still sails on Lake Placid in New York. But he quips modestly that his mind is “not bad” as he enters his 80s, and he still relishes diving deep into obscure financial data, founding the Bogle Financial Markets Research Center out of his Pennsylvania offices . It’s not surprising that he still finds himself at work: When he was a kid growing up in New Jersey and his friends headed to the shore to relax, he was working his newspaper routes or toiling as a pinsetter in a local bowling alley.
Bogle himself, though, worries that he doesn’t have much time remaining on the clock. After all, for many years he’s been chugging along on someone else’s heart, having received a transplant from a 26-year-old after his own started failing. “I don’t think I have many years left in me,” Bogle says, his baritone voice going a little softer. “Fourteen years with a heart transplant: How much more can you ask for?”
Somehow, though, you can’t imagine Jack Bogle ever slowing down. And whenever Bogle thinks his campaign for reforming the American financial system seems to be going nowhere, he thinks of one of his favorite naval stories: Lord Nelson’s famous Battle of Copenhagen. Nelson was outnumbered and under heavy fire, with barely a dozen ships, and was ordered by his commander to retreat. He ignored the order — intentionally placing his telescope to his blind eye so as not to see the signal — and went on to wipe out the Danish fleet. “My battle may not be going well for improving the industry,” says Bogle. “But I’m turning a blind eye to all the opposition. And eventually, we’ll beat all the others.”
Advice from the Master
For investment advice, you could do worse than to talk to the man Fortune magazine once called one of the four investment giants of the 20th century.
Best of all, Jack Bogle’s tips aren’t peppered with financial jargon. Rather, they’re simple, straightforward and geared toward the average investor. The key for those assembling a long-term portfolio: Don’t “chase” mutual fund returns by picking the hot fund of the moment. Instead, build the proper asset allocation into your portfolio. Draw up a long-term investment plan, and then diversify your portfolio between different asset classes like stocks, bonds and cash, which will help insulate you from huge swings in any one sector. Then comes the hard part: Stick with that plan, no matter what insanity the market is going through on any given day.
One Bogle rule of thumb: Your bond position should equal your age, so a 40-year-old investor might have 40 percent of his or her portfolio in fixed-income investments. Bonds also serve as a useful portfolio anchor so that investors don’t panic and ditch their plans when the markets are swinging wildly.
As for stocks, even though they have scared the daylights out of investors for the last couple of years, Bogle thinks they now look relatively promising and that we’re in for an era of slow, steady gains. Expect 8 to 9 percent returns a year for the next decade, with stock valuations creeping back to historical norms. Says Bogle: “It’s hard to believe that, in the coming decade, stocks won’t outperform.”