Fifty years ago this month, Jack Bogle launched a fund whose entire pitch was that you could be average. He hoped to raise about $110 million. He raised $11 million. Wall Street nicknamed it “Bogle’s Folly.” Burton Malkiel had already quipped that a blindfolded monkey throwing darts at the financial pages could match the experts, and Bogle built the monkey.
“It took a very long time to recognize that cost mattered,” Vanguard’s chief investment officer told the Journal’s Spencer Jakab this week. It took about fifty years, and then it took everything.
The scoreboard
Over the past fifteen years, only 10% of U.S. mutual-fund managers tracking the S&P 500 have beaten the index, according to S&P Global. Passive strategies now control more than half of U.S. fund assets. The fund that could not raise its minimum is the 800-pound gorilla of global finance.
The reason is not magic. It is subtraction. A manager who charges 1% a year has to beat the market by 1% a year just to tie. Almost nobody can do that reliably, and the ones who can are hard to identify in advance. Bogle’s insight was not that the S&P 500 was special. It was that not paying somebody to lose to it was special.
The part that is now worth worrying about
Here is where Jakab earns his column. Index funds have become so large that a new accusation has surfaced: they cannot help but win, because they are the flow. Every two weeks, 401(k) contributions pour into target-date funds on autopilot and buy stocks without regard to price — only to their index weight. The bigger a company already is, the more of the new money it gets.
That is how an index that is supposed to be a neutral snapshot of the economy became roughly 40% technology. Nobody decided that. The arithmetic did.
Vanguard’s answer, per Jakab, is that if there is a distortion there is also an opportunity — and that there are now more indexes than stocks in the world. Which is true, and also a little like saying the solution to a crowded highway is more exits.
What we take from it
Both halves, held at once.
Bogle was right about cost, and it is not close. The core of every model book we run is low-cost and broad. Paying someone a percent a year to underperform is the single most expensive habit in American retirement, and the fix is free.
The S&P 500 is not the same thing as “the market” anymore. A fund that is 40% technology is a sector bet that happens to be called an index. That is the reason this week’s European piece exists, and the reason a retiree who owns “just the index” may own more artificial-intelligence exposure than they would choose on purpose.
Jakab’s closing line is the one to keep: the magic was the passive advantage, not something special about one particular index. A tenth of a percentage point in extra expense matters less if the benchmark itself has become too popular for its own good.
Happy birthday to the folly. The review question it leaves behind is simple and worth fifteen minutes: do you know what your index fund actually owns right now? Most people have not looked since it was a different fund.