Selling the Sizzle by Jonathan Clements

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AUTHOR: Jonathan Clements on 7/04/2024

“I can’t believe that the great mass of investors are going to be satisfied with an ultimate goal of just achieving average returns.” That’s what Fidelity Investments Chairman Edward C. Johnson III told The Boston Globe in 1976, the year Jack Bogle helped launch the index-fund revolution by opening Vanguard Group’s S&P 500 fund to investors.

Since then, of course, indexing has enjoyed stupendous growth, and today investors have more money in index mutual funds than in actively managed funds. But I’d argue that index funds deserve even greater popularity.

Forget Ned Johnson’s snarky comment to The Boston Globe, which clearly hasn’t aged well. In 2024, how do we sell “average returns” to everyday investors? Here are three suggested marketing slogans.

“Proven to beat 90% of competitors.” Among the nine U.S. stock fund “style box” categories, 90% of more of actively managed funds have failed to beat their benchmark index over the past 20 years, according to S&P Global. How’s that for being average?

“Save more than 90% off similar funds.” According to the Investment Company Institute, stock mutual funds—both active and index—charged an average 1.11% in annual expenses in 2023, equal to $1.11 a year for every $100 invested. Meanwhile, you can index the entire global stock market with Vanguard’s Total World Stock Index mutual fund (symbol: VTWAX) for a mere 0.1% a year, and the fund’s exchange-traded version is even cheaper (VT).

“Forget the rest and buy the best.” In touting Vanguard Total World Stock Fund, I’m revealing my fondness for that particular fund. But there’s a variety of ways that folks can build a great globally diversified portfolio using just one, two or three index funds.

The upshot: Today, prudent investors can safely ignore the endless array of stocks, funds and other investments on offer—and instead save themselves time and simplify their financial life by building a dirt-cheap, high-performing portfolio using just a couple of broad market index funds.

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