Investing prudently is long-term process for most people that can be complex, but many of the critical elements of that process can be simplified, and the costs of investing and time commitment needed to invest efficiently have dropped dramatically in recent decades. By using the right products and services and taking the right steps, most investors that save appropriately can implement and execute a plan to provide for their financial needs and achieve their goals.
Investing involves risk. But if you educate yourself, invest using the right tools, avoid paying too much in taxes and to advisors, as well as avoid self-inflicted mistakes, you can minimize the risks and maximize the probability of having a comfortable financial future and peaceful life.
Investors today have low cost access to information and tools that have levelled the playing field between individual investors and investment professionals. Almost all the worthwhile asset classes that high net worth and institutional investors have historically utilized can be accessed, or effectively replicated by individual investors. Not only can individual investors hope to compete with the so-called professional investors, they can strive to outperform them by minimizing their costs, avoiding speculative and expensive products, and avoiding behavioral and other mistakes that too many investors make.
In 2004 Jack Meyer of Harvard Management publicly called the investment industry a scam. As I discussed in chapter four, I consider most investment services and products to be more inferior or obsolete, than a scam, but a critical point is that even the smartest and richest can struggle to invest successfully. From 1990 to 2005, Harvard’s returns were excellent. But after that period, Harvard’s endowment underperformed simple passive strategies like a 60% stock 40% bond portfolio. Roger Lowenstein summarized in 2015 in Fortune magazine with the following. “Harvard Management Co., which runs the endowment, has been rocked by turmoil. It recently hired a new CEO—its fourth in a decade—and talented investors have departed amid embarrassing publicity over disappointing performance and eye-catchingly generous bonuses.” Through 2015, according to data from Harvard and Nacubo, the average endowment earned 6.3% a year over the previous 10 years, compared with 6.8% for a 60%/40% blend of U.S. stocks and bonds.1
Ben Carlson summarized in February 2017 that for the ten years ending June 2016, a simple portfolio using Vanguard funds (40% U.S. Stock, 20% International Stocks and 40% US Bond Market Index Fund) beat the average endowment fund and would have ranked in the top quartile for the prior three, five, and ten years. The total cost of the respective benchmark portfolio using Vanguard ETFs at that time was about 0.07%. Carlson commenting about the endowments, noted that “the funds are invested in venture capital, private equity, infrastructure, private real estate, timber, the best hedge funds money can buy; they have access to the best stock and bond fund managers; they use leverage; they invest in complicated derivatives; they use the biggest and most connected consultants, and the vast majority of these funds still fail to beat a low-cost Vanguard index fund portfolio.”2
Sandeep Dahiya and David Yermack used IRS filings to calculate returns for over 28,000 endowment funds from 2009-2016 and determined they underperformed a simple 60/40 mix of U.S. stocks and treasury bonds by over 5% per year.3 Similarly, near the end of 2018, Institutional Investor magazine noted that according to a Markov Processes International report, none of the Ivy League endowment funds beat a simple 60/40 U.S. portfolio for the prior ten years covering July 2008 through June 2018 (although they did for the prior 15 years).4
Early in the 1980s, U.S. Pension plan return assumptions averaged more than 8%. Around that time, the interest rate on 30 year U.S. treasury bonds hovered close to 8%, so those return assumptions were not unreasonable. But over the following decades, interest rates trended lower toward less than 3%.5 Pension fund return assumptions dropped only slightly resulting in a large increase in the probability of actual returns falling short of those assumptions. Pensions attempted to increase their returns by shunning bonds and instead flocking to alternative investments...
Jack Bogle’s Legacy
I was working on the final draft of this book when Jack Bogle passed away on January 16, 2019, at the age of 89. I only had the pleasure of meeting him once, but he had an enormous impact on me. Scores of individuals in the financial press and social media wrote public tributes to Bogle following the news of his passing,23 yet it seems difficult to do justice to Bogle because his influence has been so profound on the investment industry. Some of the terms used to describe Bogle included gentleman, entrepreneur, innovator, giant, titan, legend, centurion, hero, and saint.
Bogle is usually credited with creating the first index mutual fund, but his impact was immense in multiple ways beyond that pioneering creation. Vanguard was not the only firm introducing and promoting index funds, in fact, my former bosses were involved in some of the initial attempts to develop funds that would effectively match the market, rather than try to beat it. Some firms now offer index funds for free (at a loss, expecting to make up the losses through other means).[24]24
Jack Bogle created a unique structure at Vanguard whereby the fund manager is owned by its fund shareholders, rather than by insiders or stockholders. As a result, Vanguard’s interests are aligned with the shareholders and rather than maximize revenues or profit, fees are set to match the costs of running the funds, and the organization. When revenue exceeds costs, Vanguard cuts the fees (something they have done hundreds of times). The unique structure that Bogle created at Vanguard forced the industry to be even more competitive. Laurence Siegel noted in 2018 that Vanguard had reached a 25% market share of long-term mutual fund assets.25 No firm had ever been over 15% before (Massachusetts Investors, Investors Diversified Services, and Fidelity all got 15% market share). Of the 50 largest fund companies, Vanguard is the only one mutually owned (something Bogle actually considered a failure, according to Allan Roth).26
A third major innovation by Bogle was Vanguard's decision to go no-load. Vanguard summarized "Mr. Bogle and Vanguard again broke from industry tradition in 1977, when Vanguard ceased to market its funds through brokers and instead offered them directly to investors. The company eliminated sales charges and became a pure no-load mutual fund complex—a move that would save shareholders hundreds of millions of dollars in sales commissions."27
Another impressive achievement is the fact that Vanguard has had such high customer service rankings. Vanguard historically ranks at or among the top of customer service surveys28 (despite occasional glitches).29 Vanguard's hybrid Robo-Advisor "Personal Advisor Services" claimed the top position in Backend Benchmarking's first edition of The Robo Ranking.30 Bogle described Vanguard's hybrid Robo-Advisor as "robo-plus" in a late 2018 interview, several weeks after having a pacemaker implanted in his transplanted heart.31 In May 2019 Morningstar awarded Vanguard its first "Exemplary Stewardship" award. Morningstar's Laura Pavlenko Lutton stated "The firm's investors have benefitted from its scale and its commitment to straightforward, well-executed strategies that consistently put investors first, which is the hallmark of strong stewardship."32
Customer satisfaction is, of course, related to performance and the performance of Vanguard's funds speaks for itself. Whether you look at all funds, money market funds, stock, bond, or balanced funds, over the long run, Vanguard's funds tend to outperform competitive funds roughly 90% of the time. 86% of Vanguard's funds beat their peer-group averages over the five-years, and 94% surpassed their peer-group averages over the ten-year period ended December 31, 2017.33
Bogle's remarkable list of accomplishments included the following.
- Over 64000 registered users at Bogleheads.org, the forum of Bogle followers.
- He sold over one million books.34
- Vanguard reportedly has over 20 million clients.35
- Vanguard manages over $5 trillion in assets.
I have no idea whether the Nobel committee ever considered Bogle for the Nobel Prize (by rule they do not consider the award posthumously). I would certainly give him credit for being the most important and impactful person in the history of investing. Bogle made it possible for tens of millions of investors to live more peaceful financial lives. Nobel laureate Paul Samuelson is credited with the idea of the index fund and he ranked Bogle's index fund "invention along with the invention of the wheel, the alphabet, Gutenberg printing, and wine and cheese."36
In 1995 Tyler Mathisen wrote in Money Magazine in an article titled "BOGLE WINS: INDEX FUNDS SHOULD BE THE CORE OF MOST PORTFOLIOS TODAY" that "Indexing should form the core of most investors' fund portfolios."37 For most investors in public securities, Vanguard's index funds are a good default. There are other index fund providers and assets that Vanguard that does not offer directly through funds, but given Vanguard's structure and history, it should be the first choice. All other firms and funds need to have a strong enough advantage to justify getting ahead of Vanguard in the pecking order. That's not to say there aren't other good firms and investing options (in fact, I use others in addition to Vanguard). It's just rational to start with Vanguard and only use others if there are compelling reasons.
The question of whether too much money is chasing stock market anomalies or risk factors like value investing (as I discussed in chapters 20-24) at any given time is a very legitimate concern. Others ask whether index investing has become too popular. Given the marginal costs of active investing and the argument that most active investing is speculative rather than investment oriented, I think more investors and money should be indexed than less. But the fewer the number of active investors and the lower the turnover from active investors, the less liquid markets can become and the more volatile markets can be.
Estimates of the percentage of investment funds that are indexed vary depending on the date and metric, but the trend toward indexing that Bogle initiated is continuing. Index fund assets under management have grown from near zero in the 1980s to about 30% of registered fund assets globally in 2017 according to a January 2018 Vanguard release.38 In 1997, I posted a commentary titled “The Magic Number” about the significant of Vanguard's index fund becoming the largest mutual fund in the country.39 I updated an online scorecard through 2000 when the Vanguard index fund outgrew the Fidelity Magellan fund to take the title of largest mutual fund. By the end of 2018, Vanguard not only managed the largest mutual fund, they managed the three largest U.S. stock40 and three largest U.S. bond funds.41
Barron's noted in May of 2018, that index funds accounted for 43% of all stock fund assets, and were expected to reach 50% in the next three years,42 yet in September of 2019, according to Morningstar data, U.S. indexed equity assets exceeded active equity assets at the end of August 2019.43 In total, there were almost $7 trillion in U.S. funds that don’t use active managers. The Wall Street Journal noted in 2018 that active mutual funds accounted for 92% of U.S. stock funds in 1997, but that had fallen to 56%44 and Bloomberg reported in early 2019 that according Morningstar, large cap equity index funds already had more assets than large cap active equity funds as of the end of 2018.45 In March 2019, Moody's projected that passive investing will overtake active investing in the U.S. in 2021 (passive assets in Europe are expected to rise from 14.5% in 2018 to about 25% by 2025).46
Calvin Coolidge said “After all, the chief business of the American people is business." U.S. investors depend on the success of America's business to generate returns on their investments. While many have won Nobel and other prizes for academic and other advancements, no one has had the tangible impact on America's investment business like Jack Bogle. Occupy Wall Street and many commentators have argued that Wall Street and investment professionals make too much money, and there is some validity to those arguments. What we know for sure, is that the financial industry would have made a lot more money, and millions of investors would have less, if it weren't for Jack Bogle.
Checklist for the Peaceful Investor
1-12
Chapter 31 Notes - The Footnotes in the Book are sequential and for this chapter start at #591 and end at #647.
These notes are provided for those that have purchased the book and would like to access the notes and links directly.
1. Roger Lowenstein "Why Colleges Are Getting a ‘C’ in Investing" Fortune, 12/9/2016 http://fortune.com/college-endowments-investing/
2. http://awealthofcommonsense.com/2017/02/how-the-bogle-model-beats-the-yale-model/
3. Sandeep Dahiya and David Yermack, Investment Returns and Distribution Policies of Non-Profit Endowment Funds, January 2019 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3291117
4. Julie Segal,Not One Ivy League Endowment Beat a Simple U.S. 60-40 Portfolio Over Ten Years, November 29, 2018 https://www.institutionalinvestor.com/article/b1c1c4tq2bjm3c/Not-One-Ivy-League-Endowment-Beat-a-Simple-U-S-60-40-Portfolio-Over-Ten-Years
See also https://www.markovprocesses.com/blog/measuring-the-ivy-2018-a-good-year-for-returns-but-is-efficiency-becoming-an-issue/
https://www.nytimes.com/2018/12/13/business/ivy-league-endowments-investments-portfolio.html
https://finance.yahoo.com/news/ivy-league-endowments-same-old-110008104.html
https://ritholtz.com/2019/10/measuring-the-ivy-2018/
5. See figure 3 in link below. State Public Pension Funds’ Investment Practices and Performance: 2016 Data Update Substantial investment in complex and risky assets exposes funds to market volatility and high fees, September 26, 2018 https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/09/state-public-pension-funds--investment-practices-and--performance-2016-data-update
6. Jeff Hooke and Ken Yook “The Grand Experiment: The State and Municipal Pension Fund Diversification into Alternative Assets,” The Journal of Investing, Fall 2018 https://joi.iijournals.com/content/27/supplement/21
7. Janet Lorin, Tiny Wisconsin College Using Index Funds Trounces Endowment Rivals, August 7, 2018 https://www.bloomberg.com/news/articles/2018-08-07/wisconsin-college-using-index-funds-trounces-endowment-rivals
8. Julie Segal, "Bad Manager Picks Have Sunk Pensions’ Bet on Alts," Institutional Investor, February 05, 2019 http://www.institutionalinvestor.com/article/b1d0dhchpqj5bs/Bad-Manager-Picks-Have-Sunk-Pensions-Bet-on-Alts
9. https://www.hedgeweek.com/2019/10/24/279835/hedge-fund-industry-sees-6th-consecutive-quarter-outflows
https://www.institutionalinvestor.com/article/b1h6vxhxq2jrjq/Woe-Betide-the-Hedge-Fund-Marketer
10. https://www.pionline.com/article/20181105/ONLINE/181109949 November 5, 2018
11. https://www.ft.com/content/715fda20-d6ff-11e8-a854-33d6f82e62f8
12. https://www.bostonglobe.com/metro/2018/11/08/look-harvard-largest-gifts/753L6Fkxy1aBS9rgwbKeiK/story.html
13. Michael McDonald, Harvard Piles Into Hedge Funds as New Chief Overhauls Endowment, May 6, 2019 https://www.bloomberg.com/news/articles/2019-05-06/harvard-piles-into-hedge-funds-as-new-chief-overhauls-endowment
14. Derek Horstmeyer, Double Whammy: High-Fee Mutual Funds Do Worse, January 4, 2019 https://www.wsj.com/articles/double-whammy-high-fee-mutual-funds-do-worse-11546630477
15. https://www.ft.com/content/2b24568a-ea7e-11e7-bd17-521324c81e23
16. https://en.wikipedia.org/wiki/Agriculture_in_the_United_States
http://www.bls.gov/emp/ep_table_201.htm
http://www.csrees.usda.gov/qlinks/extension.html
17. https://en.wikipedia.org/wiki/Financial_services
18. See https://graphics.wsj.com/how-the-world-has-changed-since-2008-financial-crisis/
19. https://www.marketwatch.com/story/etfs-shattered-their-growth-records-in-2017-2017-12-11
20. https://www.schwabfunds.com/public/csim/nn/etf-insights/follow-the-money-what-we-learned-from-2018-etf-flows.html
https://www.investmentnews.com/article/20190117/FREE/190119930/morningstar-says-investors-rushed-the-exits-in-2018
21. Joanne M. Hill, The Evolution and Success of Index Strategies in ETFs Financial Analysts Journal, September/Ocotober 2016 https://www.ft.com/content/f406d50c-bbcf-11e6-8b45-b8b81dd5d080
22. John C. Bogle. "The Index Mutual Fund: 40 Years of Growth, Change, and Challenge," Financial Analysts Journal, January/February 2016
23. http://www.investorhome.com/bogle-tributes.htm
24. See for instance, Cheapest Index Fund Providers via riabiz.com https://riabiz.com/a/2018/12/13/vanguards-asset-machine-wobbles-under-abby-johnsons-withering-pricing-assault-but-fidelitys-new-cost-cutting-front-aimed-at-advisors-is-proving-more-lethal-for-blackrock
25. https://www.advisorperspectives.com/articles/2018/01/22/uneasy-lies-the-head-that-wears-a-crown-a-conversation-with-jack-bogle
26. https://www.financial-planning.com/opinion/vanguard-founder-father-of-index-investing-jack-bogles-impact-on-finance
27. https://investornews.vanguard/a-look-back-at-the-life-of-vanguards-founder/
28. https://www.consumerreports.org/cro/investment-companies/buying-guide/index.htm
29. https://www.philly.com/philly/business/vanguard-loses-top-spot-in-customer-satisfaction-after-website-issues-20181113.html
30. https://theroboreport.com/robo-rankings/
31. https://www.thinkadvisor.com/2018/11/27/john-bogle-rias-are-the-future-trading-is-investor/
32. https://investornews.vanguard/vanguard-receives-exemplary-stewardship-award-from-morningstar/
https://www.prnewswire.com/news-releases/winners-announced-for-2019-us-morningstar-awards-for-investing-excellence-300847535.html
33. https://investornews.vanguard/performance-report-vanguard-funds-outperformed-over-long-run/
& 3Q2018 https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/NewsPerformanceReport3Q2018
34. https://riabiz.com/a/2019/1/16/mission-accomplished-jack-bogle-dies-at-89-and-its-still-way-too-soon-but-his-legacy-looms-larger-than-ever
35. https://www.advisorperspectives.com/articles/2018/01/22/uneasy-lies-the-head-that-wears-a-crown-a-conversation-with-jack-bogle
36. https://en.wikipedia.org/wiki/John_C._Bogle
37. https://money.cnn.com/magazines/moneymag/moneymag_archive/1995/08/01/205191/index.htm
38. https://advisors.vanguard.com/iwe/pdf/ISGBEL.pdf
39. http://investorhome.com/magicsc.htm
40. http://www.wsj.com/mdc/public/page/2_3023-largstkbal-20190104.html
41. http://www.wsj.com/mdc/public/page/2_3023-largtaxfds-20190104.html
42. https://www.barrons.com/articles/jack-bogles-battle-1526674385
43. https://www.bloomberg.com/news/articles/2019-09-11/passive-u-s-equity-funds-eclipse-active-in-epic-industry-shift
44. https://www.wsj.com/articles/the-case-for-stock-picking-1534508238
45. https://www.bloomberg.com/news/articles/2019-02-12/passive-funds-overtake-stock-pickers-in-u-s-large-cap-market
46. https://www.moodys.com/research/Moodys-Adoption-of-passive-investing-on-track-to-overtake-active--PBC_1165197
http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1165022
47. For instance see Jinfei Sheng, Mikhail Simutin, and Terry Zhang, “Cheaper is Not Better: On the Superior Performance of High-Fee Mutual Funds,” April 14, 2017 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2912511
John Rekenthaler at Morningstar, in a modestly complicated analysis, concludes otherwise. https://www.morningstar.com/articles/904903/the-academic-argument-for-expensive-mutual-funds.html
48. https://www.vanguard.com/bogle_site/sp20050202.htm
49. John West and Amie Ko, The Most Dangerous (and Ubiquitous) Shortcut in Financial Planning, September 2017 https://www.researchaffiliates.com/en_us/publications/articles/634-ignoring-starting-yields-nabbing-this-usual-suspect-in-poor-investment-outcomes.html
50. https://interactive.researchaffiliates.com/asset-allocation/#!/?currency=USD&model=ER&scale=LINEAR&terms=REAL
51. https://www.cnbc.com/2018/12/17/wall-streets-stock-forecasters-see-the-bull-market-stretching-to-one-more-year.html
52. Christine Benz, Experts Forecast Long-Term Stock and Bond Returns: 2019 Edition January 10, 2019
https://www.morningstar.com/articles/907378/experts-forecast-longterm-stock-and-bond-returns-2.html
Christine Benz, Experts Forecast Long-Term Stock and Bond Returns: 2018 Edition January 8, 2018 https://www.morningstar.com/articles/842900/experts-forecast-longterm-stock-and-bond-returns-2.html
Christine Benz, Experts Forecast Long-Term Stock and Bond Returns: 2017 Edition January 12, 2017 http://news.morningstar.com/articlenet/article.aspx?id=787927
http://news.morningstar.com/articlenet/article.aspx?id=842900
53. Pension Funds’ Dilemma: What to Buy When Nothing Is Cheap? 1/1/2018 https://www.wsj.com/articles/pension-funds-dilemma-what-to-buy-when-nothing-is-cheap-1514808000
54. William Sharpe, “The Arithmetic of Active Management” The Financial Analysts' Journal, January/February 1991 https://web.stanford.edu/~wfsharpe/art/active/active.htm
55. http://www.investorhome.com/zeroes.htm
https://www.marketwatch.com/story/final-trading-day-of-2009-opens-with-declines-2009-12-31 (citing William Goetzmann)
56. See http://www.heartsandwallets.com/uploads/7/8/3/2/78321658/advice_and_tech_brochure_2017_-_order_form.pdf and see https://www.plansponsor.com/fewer-people-rely-employer-source-investment-advice/ for data and discussion about where investors get advice and information.
57. See http://www.advisorperspectives.com/articles/2016/01/19/lessons-from-billionaires-who-ve-gone-broke/2 for data on the reasons billionaires go broke.
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