Recently, the man dubbed the ‘father of indexing’ passed away at the age of 89.
His name – Jack Bogle.
You probably have never heard of him and most people outside the investing world haven’t, but one of the most successful investors of all time, Mr Warren Buffett once said, “Jack did more for American investors as a whole than any other individual I’ve known”.
Following his passing I felt compelled to write about Jack Bogle and to try and explain just a tiny amount of how he massively improved your chances of investment success.
Jack Bogle founded investment management company Vanguard in 1974. It has since gone on to manage $5 trillion of investor funds.
What made Vanguard different was the launch of the first index fund (also known as a passive fund).
Before this, only actively managed funds were available. Active managers will attempt to beat the market whilst index managers will only capture the market return.
When we say ‘market’ we mean a stock market index like the FTSE 100. This is an index that measures the 100 largest companies in the UK.
To capture the market return, an index fund will buy and sell shares in the same proportion as the index it is following. Pure and simple.
An active manager will attempt to beat the index by making judgement calls on which shares it thinks will perform best. So will buy more of one and less of another.
As an active manager, needs to spend more time researching the market it operates in to look for opportunities, they will charge more for their service than a index fund that just needs to copy the market.
The difference in costs between an active and index fund can be huge when compounded over the long term.
The secret to investment success
You may think that if an active manager is beating the market then it’s worth paying the costs. You would be right to think this BUT beating the market is very hard to do. Some active managers will do it but very few do it on a consistent basis and even then you need to be able to predict who is going to beat the market in advance!
In fact the average active investor MUST underperform the average index or passive investor.
If you take all the active and passive investors together you get the market return. So before costs, the returns of the average active investor will equal the returns of the average passive investor.
After costs, the return for an average active investor will be less than the average passive investor because they charge a higher fee.
This is a quote from Jack Bogle himself:
“Assume the market gives a 7% return over 50 years. If you get 7%, each $1 goes up to $30. If you get 5% (7% less the industry’s typical 2% all-in costs), you get $10. So $10 versus $30. You put up 100% of the capital, took 100% of the risk, and got 33% of the return!”
This is just one of the core principles with which are our own investment proposition is built on. We deliver the market return for the level of risk you are willing to take.
By switching your investment portfolio into low cost index funds you will already give yourself a much better chance on average of achieving your investment goals.
If you would like an assessment of your current investment portfolio, looking at charges, performance and tax efficiency then please give us a call, we would be delighted to save you money thanks to Jack – a real investment superhero.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.