At 87, John Bogle is still going strong. The Vanguard Group founder’s decades-long passion for delivering low-cost, simple investment solutions shows no sign of abating. In fact, it may be partly responsible for Bogle’s youthful zeal. “My life should be ebbing, but I seem to be reaching a new high,” he tells Institutional Investor.
Indeed. Bogle, who launched Vanguard in 1974 to offer index and no-load mutual funds, has seen much of the financial industry come over to his side. Index products, including mutual funds and exchange-traded funds, now account for about 30 percent of the business worldwide, he reports. With $3.5 trillion in assets, Vanguard, where Bogle keeps an office though he stepped down as CEO in 1996, is the world’s largest fund manager.
How is the financial services industry helping investors to save enough for retirement?
I have grown up over 65 years in this industry at a time when the stock market has had a return of about 11.25 percent. We’re not going to get those kinds of returns in the future. So the division of investment returns between Wall Street and Main Street is going to have to be tipped in favor of Main Street.
Think about where returns are generated. They’re generated in corporate America. And these companies are in business to provide good products and services that meet the needs of the public or large corporations or even government entities in the country, and when they do that and they do a good job at it, they start to grow. And they make money, and that money grows. It’s earnings, growth, and dividend yield that make the returns that investors as a group access in the stock market. We have a very, very simple problem on our hands: How do we give the investor a fair shake? And that’s what indexing is about.
How does indexing solve the problem of Wall Street versus Main Street?
Think about it this way. You can access the returns of the total stock market through an index fund at five basis points a year, which is five one-hundredths of 1 percent a year. Or you can access it by going on your own and buying mutual funds, trading stocks yourself, and access that return, and you lose 2 percent a year. You’re paying not only management fees but portfolio turnover costs. You have drag of cash. There are sales loads out there. And 2 percent is probably a conservative number.
We know that investors as a group capture the market return. They can’t do any better as a group. And we know that therefore the market return will be shared by those investors who do it either the smart way and index, or the much less smart way — I might even say the dumb way — of being part of a mass of people who are, by their vast numbers, indexed. In other words, as a group these active investors also own the stock market in the aggregate, but their gross returns are overwhelmed by excessive costs, leading to much smaller net returns.
What needs to happen to rationalize asset management?
Let me tell you how it’s worked so far. Believe it or not, since 2007 — that’s a long period of time — through September 2016, equity mutual fund investors have put $1.6 trillion into index funds and taken out $700 billion from actively managed funds. That is a $2.3 trillion swing in investor preferences. So it’s happening.
And it’s going to happen even more when we get the Department of Labor rule, the DoL fiduciary standard [which requires stockbrokers, insurance salespeople, and other financial advisers to act in their clients’ best interest]. You see a lot of firms aren’t selling load funds anymore. The implications are wide, and they all point to giving the investor a higher share of the market’s return. That’s good for investors, and it’s bad for Wall Street.
This is going to grow. Investors are satisfied with what they’ve done in indexing and dissatisfied with active management. And part of it is that a given actively managed fund has never been able to sustain above-average returns over a long period of time.
What is your view on the financial services industry’s argument that the DoL’s new fiduciary rule will keep small investors from getting advice?
First of all, I’m not sure it’s true. I think what’s going to happen is the small investors are going to get a better shake. There’s also huge potential growth, some of which has existed right up until now, in investor financial self-education. How much help do they really need? Picking stock funds doesn’t do it; we know that. Small investors don’t necessarily need a lot of education. If they’re doing indexing, they’re not into picking funds. They’re not into evaluating past performance. They don’t have to worry about costs so long as they know their index fund is low-cost. They’re not paying any sales load.
They’re offered too darn many choices, no question about that. There’s no evidence at all that the large number of choices improves your return. And when you’re asked or anybody else is asked, “Which fund should I use?” [in a defined contribution plan menu], if you don’t say index fund, you’re betting that that fund will do better than the market over an extended period of time. And that happens to be a terrible bet.
Can the U.S. design a national retirement plan that would work with Social Security?
I think the idea of some integrated plan of Social Security and individual savings is a good idea. It’s a sketchy idea because there are thousands of ways to do it, but we certainly can improve the entire retirement system. Pension fund funding, defined benefit plan funding is way behind where it has to be. That’s going to be the next crisis. And we have to sharpen up the IRA program, at least have a type of IRA that is much more mandatory, which is what we ought to do with the 401(k) too.
What would Social Security be like if you could make hardship withdrawals? The 30 million families who depend solely on Social Security are going to want to make withdrawals from time to time, and we can’t have that. So we need to redefine the whole system — some integration of federal, defined benefit, and defined contribution plans. I like the idea. Just don’t ask me to implement it, because I’m too old to.