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Indexing Triumphant

Greg Spears

FOR THE FIRST TIME, retail investors have more money in index funds than actively managed funds. This is based on March 31 figures compiled by Morningstar and reported by columnist Allan Sloan.

Twenty-five years ago, Vanguard Group founder Jack Bogle published his remembrance of the 1970s launch of the first index fund geared to main street investors. As I page through the book again, I’m reminded of how close indexing came to failing.

Bogle recounts going on a 12-city roadshow, hoping to raise somewhere between $50 million and $150 million for the fund’s launch. He returned with $11 million.

Several firms already had tried an indexing approach with institutional clients, including Batterymarch Financial, Wells Fargo and Samsonite’s pension managers. They met with technical problems and little or no commercial interest, as Robin Wigglesworth details in his excellent book Trillions.

Bogle—as determined as they come—plowed ahead anyway. Vanguard opened First Index Investment Trust, as it was called then, on Aug. 31, 1976. It didn’t have enough money for all 500 stocks in the S&P index, so it began with 280 stocks—the 200 largest by market capitalization, and 80 stocks judged representative of the index’s remaining stocks.

The timing was terrible. The U.S. stock market soon entered the doldrums, battered by oil shortages and inflation shocks. In its first seven years, the index fund beat the average return for U.S. stock funds only two times.

“The Trust’s disappointing initial reception was followed by an equally disappointing ongoing acceptance in the marketplace,” Bogle wrote. The fund was dubbed “Bogle’s folly,” and the name stuck.

Bogle always seemed to draw strength from difficulties. He remained a vocal proponent of indexing, sounding certain that its success was inevitable. It isn’t “alchemy,” he wrote in his remembrance. “The secret to indexing is its ability to provide extraordinarily broad diversification at extraordinarily low cost.”

Today, it seems that everyone shares Bogle’s faith in indexing. Or one-half of everyone, to be more accurate. Retail investors had $8.53 trillion in index funds on March 31, compared to $8.34 trillion in actively managed funds, according to Morningstar.

It’s taken 45 years for index funds to become No. 1. And it’s thanks to one incredibly determined person who persevered with the index fund through its difficult birth. That indispensable man was Jack Bogle.

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