In today’s Wall Street Journal, Jason Zweig discussed the fortieth anniversary of index mutual funds—the Vanguard 500 Index Fund.
The initial public offering, $11.3 million, was a major disappointment to Vanguard’s founder, John C. Bogle, and its investment banks. The later wanted to give investors their money back. Thank goodness Bogle said: “Hell no!”
Today, the Vanguard 500 Index fund holds more than $252 billion and exchange-traded funds invest nearly $500 trillion in combined assets.
Index funds which own essentially all the stocks or bonds in a benchmark like the S&P 500 or Barclays U.S. Aggregate-Bond Average, seek only to match the market rather than beat it. They cost almost nothing to run and “outperform most of the highly paid active managers who try to do better.”
Nobel Prize winning-economist, Paul Samuelson, was an inspiration to Vanguard who argued that trying to select superior stock pickers was a futile endeavor. Bogle in an interview remains grateful to Samuelson for his advice and encouragement.
The index funds grew slowly during the 1970s when the markets were sluggish. However, during the bull market from 1982-2000 when the market returned 18% and “the index funds gave you a fair share of the markets, did the public begin to appreciate index funds.
When I took over the management of most of my assets in 2008 after my investment manager failed miserably to deal with the Great Recession I tried to choose large capitalized stocks which were less volatile than the market. While this approach was superior to my managers, in hindsight I picked a number of underperforming equities. Over time I recognized that supplementing my individual decisions with ETFs was superior.
For a taxable account, ETFs offer significant advantages over individual equities. For example, let us say you select the Vanguard Technology Fund, VGT, instead of choosing individual stocks in that sector. Over time, the underperforming equities in VGT will get underweighted. Instead of paying taxes on your capital gains to dispense with a “loser” you can keep the ETF. As Warren Buffett points out the best way to avoid taxes is to focus on very long term capital holdings—with perpetuity being ideal. Thus, overtime for my children’s trusts which are taxed at the highest bracket, ETFs are preferable. In these trusts, I own a wide variety of ETFs-Dividend Aristocrat stocks, consumer staples, energy stocks, technology stocks, health care stocks, etc.
In conclusion, I would like to thank John Bogle for his contributions. His company, Vanguard, has led the way in providing many wonderful alternatives at very low costs for those of us who are not investment professionals.
Originally published in the Sarasota Herald-Tribune
