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Indexing Triumphant

Greg Spears, 1:54 am ET

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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Randy Starks
Randy Starks
15 days ago

RIP Jack. Vanguard is no longer a disciple of Bogle’s philosophy IMO. Their customer service and web services are atrocious and their employees act like they don’t care about the customers. Just doing a job and not at work I must say. Most phone help is remote, with uninterested employees or contractors. Jack would not be happy with Vanguard today. There are better firms to deal with such as TD Ameritrade, Schwab and Fidelity that have good customer service, good customer friendly websites, a host investment alternatives and/or the in-house index funds or the ability to buy low cost index funds from a host of providers.

Ormode
Ormode
18 days ago

Yes, if a particular type of investing becomes popular, it is highly likely to be successful. As more and more people put more and money into the S&P 500, it is very likely the S&P 500 stocks will go up, and out-perform everything else. But once everyone is all in, what happens then?

Philip Stein
Philip Stein
14 days ago
Reply to  Ormode

Charles Ellis has pointed out that most trading volume on the major stock exchanges is by institutional investors trying to earn above-market returns. You seldom hear of institutions indexing.

Hedge funds, which collectively manage billions, would never index because there would be no basis for charging high fees.

All this trading means institutional investors are the major force setting stock prices. Individual index investors just ride on their coattails.

It’s hard to imagine a world where everyone indexed.

Nate Allen
Nate Allen
18 days ago
Reply to  Ormode

I am all in on index funds. However, there is an argument to be made that as indexing becomes too dominant, it hurts overall markets. Things like price discovery can get crowded out.

Here is an article from last year that outlines a few of the points: https://www.theatlantic.com/ideas/archive/2021/04/the-autopilot-economy/618497/

Again, I think indexing provides the best bet for individual investing because of the “free lunch” that comes via diversification. However, the arguments about the overall market could prove accurate.

John Daniels
John Daniels
18 days ago
Reply to  Ormode

I believe what happens next is total market funds, and they have been happening for quite a while.

Jonathan Clements
Admin
Jonathan Clements
18 days ago
Reply to  Ormode

I remember folks expressing that fear in the 1990s — and yet indexing continues to prove its mettle.

David Powell
David Powell
18 days ago

Admiral Bogle would be pleased. I’m grateful for his vision, generosity, and persistence. Thanks Greg.

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