John Bogle is a titan in the mutual fund industry.
Bogle, who will shortly turn 85, founded Vanguard Group in
1974. He served as chairman and CEO until 1996 and senior
chairman until 2000.
Since then he's been president of the Bogle Financial Markets
Research Center, created by Vanguard. That gives him a forum for
research, writing and speaking about the markets and the industry
he has impacted so much. Now he is as well known for his
pull-no-punches opinions as for his industry innovations.
Bogle started Vanguard 500 Index Fund in 1975. It was the
first index fund. It was the sixth-largest mutual fund as of
March 27, according to Lipper Inc.
Vanguard's $2.2 trillion in assets under management make it
the largest fund complex.
Bogle talked about industry trends and the markets with IBD
from his office in Malvern, Pa.
You advocate use of index funds because you think it's too hard
to outguess the market with mutual funds. You advise shareholders
that the best defense is to diversify across the entire market in
a low-cost vehicle.
You're not missing anything. What people can't seem to get
through their heads is that to win with active management, you
must succeed as a trader. But somebody else must lose by the same
amount. We all can't outsmart each other, so somebody has to
lose. The real world isn't like (fictitious) Lake Wobegon, where
all the money managers are above average.
That's a reason for diversifying. Fees and costs make it more
difficult to come out ahead, correct?
Right, it costs money to compete, what with brokerage fees,
bid-ask spreads, market impact of trades, manager fees, all of
those marketing costs. So what you as a shareholder do is collect
the market return of your fund, less all of those costs of
intermediation. The math is simple and critical and irrefutable
Let me play devil's advocate. I can list managers who seem to
shred that theory. Over the past 10 years their respective
records not only beat the broad market as measured by the S&P
500, they trounced it. Just some of the names: Dennis Lynch at
Morgan Stanley Focus Growth , Richard Freeman at ClearBridge
Aggressive Growth , Thomas Ognar at Wells Fargo Advantage Growth
and Chris Bonavico at Delaware Select Growth . So clearly, can't
people consistently beat the market with funds?
Yes, we have some icons. And they're good. Warren Buffett is
terrific but his investment record is not that good in recent
years. Instead, he's made a lot of money because of reinsurance
and the bet he made earlier on Geico.
Those people you named -- I'm not saying they won't do well
(going forward). I'm just saying the past is not prologue.
Even if you find one manager who can do it, can you do that
over again? You have an investment horizon of maybe 70 or 80
years in your lifetime because people are living longer. How many
managers will you have? Will they offset each other? Will they be
in business over your entire horizon? Who will their successors
be? Will they be as good?
But why not use consistent outperformers?
If someone has enough money, I wouldn't give them a hard time for
putting maybe 10% into what I call funny money -- active
When you find a consistent outperformer, don't you benefit?
The stock market is not what creates value. Value is created by
corporate America. That's dividend yield plus the earnings growth
that ensues. And that's my formula for investment return.
That 9% annual rate of return long-term for stocks that you
read about? It's because the average long-term yield is 4.5%. The
other half is the growth of 4.5%. Of course, yield isn't anywhere
near 4.5% (on long-term Treasurys) now, which is a warning that
future returns will be lower.
My point is that you hope to capture as much of that average
9% return a year as you can. You do it by minimizing your
Your outlook sounds pessimistic.
Investing and asset allocation may not be the best strategy. But
the number of strategies that are worse is infinite.
You've said offering shareholders ETFs is like handing matches to
an arsonist. Yet ETFs feature low costs. Why don't you like
I don't want that comment to be too generalized. An ETF is an
index fund. The only difference is that you can trade it all day.
That's the problem.
We've gotten way past the idea that they are tax efficient.
They're not, especially if you trade them all day.
Terry Odeon (professor of finance at the University of
California, Berkeley) has done studies that show the more you
trade, the worse you do (due to transaction costs and other
costs). You can't outperform by trading more.
Don't ETFs give an informed investor a shot at specific, rising
Trading is a losing game. You might as well buy regular shares
(directly in individual stocks).
Let's talk about funds, because using a proven individual stock
strategy can be worthwhile. So what about ETFs that target a
market with potential to rise?
Probably 10% of ETFs are all-market funds. The other 90% are
picking slices of the market. Some are very narrow, like that
Nashville (Area)ETF (
). There was the (HealthShares) Emerging Cancer ETF, which has
come and gone. Every year we lose a couple hundred ETFs. An
entrepreneur fills a gap, no one likes it, they get out.
Then there are the fruit-and-nut cake ETFs, like triple
leverage up and down funds. They are total speculation. They have
nothing to do with long-term investing.
And why buy an individual foreign country?
So if we're talking about broad-market ETFs that are traded
with reluctance, ETFs are fine. But those are only 5% to 10% of
the ETF market. The other 90% do too much trading.
Do you still own shares in Vanguard Wellington Fund ? If so,
aren't you a shareholder in an actively managed fund?
First, let me make one point clear. I own a lot because I started
working at Wellington Management in 1951. We had a defined
contribution pension plan, and 15% of my compensation went into
that plan, which is entirely the Wellington Fund. I've been
accumulating it for 60 years and I'm not about to stop.
I've kept the original legacy position for two reasons. One,
that was the fund I was brought up with. Two, its founder, Walter
Morgan, gave me my job at Wellington. I owe it to him.
It's not exactly a gonzo actively managed fund is it?
The typical fund, 85% of its performance is determined by action
of the stock market. In Wellington Fund's case, in the last
decade 97% of its return has been determined by the return of the
index I put together for them in 1978.
It consists 35% of a corporate bond index fund, I think it's
the Barclays Aggregate now. And 65% is the total stock market
index fund. So 3% of its performance is due to active
This is less than traitorous of me (regarding his advocacy of
index investing). Basically, it's close to a balanced index
You also own shares in your son's fund, $241 million Bogle Small
Cap Growth , which is actively managed.
If you have a son, I don't think it would be. ... I'm reasonably
well-to-do. It's not sinful to provide him with some of his
initial capital. He's had good years and bad, like any fund. On
balance, he's been an extremely successful manager. So I have no
apologies. I even brag about it!
Vanguard's founding came about through a defeat, right?
It came about after the merger of Wellington with Thorndike,
Doran, Paine & Lewis. That was my biggest mistake but not my
biggest regret, because if I hadn't done that merger, I wouldn't
have been fired and there would be no Vanguard.
The merger led to the fund managers loading Wellington Fund
with go-go stocks. They turned out to be come and go. The
performance was disastrous, and they fired me. I convinced them
to form a new company. They insisted on keeping the Wellington
name, so I had to come up with another, which turned out to be