Jack Bogle’s counter-intuitive lesson on American excellence

The index fund’s truest sign of success may be that it so riled Wall Street power brokers that at their worst they have taken to calling it “un-American”, even “worse than marxism.”

It is not hard to understand why the reaction can verge on the hysterical: Bogle’s insight strikes at the heart of the Wall Street belief that human beings can produce the financial genius to triumph over the average. But the Bogle success template is not wholly unique. When compared to other major American success stories, in fact, it is far from radical. It is part of a trend. Many of the most successful companies in the past half century of American capitalism were founded on delivering an average product to a consumer at a price point that was reasonable: think Amazon, Walmart or McDonald’s, which many of those active stock pickers on Wall Street have sung the praises of time and time again. If Walmart and Amazon and McDonald’s are “American,” why not Vanguard, or are they all “un-American?”

There are major downsides to these examples of accepting less as the key to excellence. To name just a few: low worker wages, traditional industries being wiped off the American map, and declining health standards. It may even be fair to ask whether successes like Walmart and McDonald’s are leading indicators of American decline rather than capitalism’s ability to transcend it. There is a way to look at the index fund’s domination that considers decline. It may be no coincidence that the index fund rose at the time it did.

Over the 20 years from 1980 to 1999, the S&P 500 compounded at an annual rate of 17.7 percent, according to markets analysis firm DataTrek Research. Over the 20 years from 1999 to 2018, the S&P only compounded at an annual rate of 5.6 percent. Paying an active manager 1 percent to 2 percent a year over the past two decade would have cut returns by 18 percent to 36 percent, DataTrek Research noted this week in a note analyzing Bogle’s impact.

“The upshot here is that indexing didn’t damage the active management business (as critics often claim) as much as structurally lower US equity returns pushed asset owners to lower cost solutions like index funds. Mr. Bogle and other indexers caught this wave beautifully, but they did not create it,” DataTrek wrote.

Vanguard Group has been among the most vocal asset managers telling investors in recent years to expect a world of low returns.

The big returns have left the public stock market for the world of private equity, where they are available only to the largest institutions. During this same period, housing has become more unaffordable for many Americans, rising college costs have led student loans to become the second-largest source of debt in the country, and health care costs are among the reasons that retirees are told to downsize and live on less if they want to have a “successful” retirement.

The defined benefit pension plans that guaranteed an income in retirement and were once a standard part of worker benefits in the private sector are virtually extinct. You can now make an argument that the most important innovation in the history of retirement investing wasn’t even the index fund, but automatic enrollment in employer 401(k) plans rather than leaving it up the individual. Most Americans are now on their own when it comes to long-term investing.

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