Jack Bogle made millions of Americans richer by offering them a free lunch

the index pioneer
the index pioneer
Image: Reuters/Shannon Stapleton
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Millions of Americans households are richer because of Jack Bogle, who died today at the age of 89. In an industry normally associated with taking people’s money, Bogle offered a rare thing in finance—a genuinely good deal. He was the founder of the Vanguard Group, a mutual fund company that was the first to offer index funds to individuals.

Vanguard was founded in 1975 after Bogle was fired from the Wellington Management Company during a time of rapid innovation in finance. Investors took advantage of new ideas coming out of academia and created the modern financial industry. It had started in the 1950s when economist Harry Markowitz argued that if investors owned enough different stocks, held in the right proportion, they could expect higher returns and fewer losses. He described what investors considered a free lunch, because higher-than-expected returns normally requires taking more risk, which can be costly. The search for that elusive, efficient magical combination of stocks launched the mutual fund industry. Fund managers claimed—and still do—to know the magic formula that promised more returns for less risk, and asked investors to pay as much at 2% of their assets each year for it.

Ever since he was a college student at Princeton, Bogle believed most mutual funds did not actually perform any better than a market index, a fund where stocks are held in proportion to their size in the stock market. With index funds, there is no magic formula, and no need to pay anyone extra for their special stock-picking ability. When Bogle launched Vanguard he was the first to offer index funds to individual investors, at rock-bottom prices. Wells Fargo already offered index funds, but only to institutional investors.

At first the funds were not a big success. It was hard to shake the conventional wisdom that humans could consistently pick the right stocks. But as more Americans directly owned stock through their 401(k)s and more studies proved index funds were a better deal, Vanguard grew and now manages more than $5 trillion, most of it invested in index funds, while charging 0.15% in management fees for some of its funds. Because of passive investing, some investors pay nothing at all.

A few percentage points may not sound like much, but it adds up. If you invested $100,000 in a fund that earned 5% every year while charging a 2% management fee, you’d have $175,000 after 20 years. But if you invested in a fund that charged only 0.15% you’d have $246,000—an extra $71,000. Retirement accounts all over America are thousands of dollars richer today, because of Jack Bogle.