The biggest nonprofit on Wall Street
My dual undergraduate degree in Philosophy and Russian was not the post-college income magnet I thought it would be in 1991. I worked two jobs to pay the rent and slowly realized that my experience fixing computers (acquired largely in the pursuit of video games) was my most marketable skill. I joined the Information Technology job force and by 1997, at the age of 28, I finally reached my first salary (~$45,000 a year) where I could save some money for retirement.
1998 was a scary year for an investor. There was a mini-bear market (-17%), Russia defaulted on its debt and the highly leveraged hedge fund Long-Term Capital Management needed a bail out orchestrated by the Federal Reserve. Cruising the world wide web on my new 56k modem, I ended up on the message boards of the mutual fund data company Morningstar and found a rapidly growing virtual community called Vanguard Diehards.
There I learned about the maverick mutual fund company Vanguard and its founder John “Jack” Bogle. Bogle’s index funds with the new discount brokerages like Schwab and a little thing called the internet were big parts of a new epoch in capital markets.
Bogle is revered for the index fund--a way to cheaply buy all the stocks in a market in a formulaic proportion that requires no stock picking. He rightly pointed out that accepting the market’s long-term average return for a low fee was a better (and easier) strategy than perpetually finding the next expensive “market-beating” investment or mutual fund manager.
It was wildly successful. Index funds now own as much as 17% of US equity markets and have expanded to the point that some even fear their power. Jack’s followers, who renamed themselves “Bogleheads”, fervently refer to him as Saint Jack. In 2007 they created their own small nonprofit dedicated to maintaining a web site open to consumers everywhere and free of advertising. The Wall Street Journal called the Bogleheads, “a cross between a religious revival and an M.B.A. finance class.” I still participate there, and it is one of the best sources of consumer investing information on the web.
Average mutual fund fees in 1998 were about 1.35%. Today, you can get the entire large cap US stock market for a hundredth of that in the cheapest index fund, the JPMorgan Betabuilders. If you invest $10,000 a year for 30 years at .02%, you’ll have almost $400,000 more when you retire than if you had paid the old 1.35% fees (assuming 9% returns.) That’s a lot of money Jack saved you!
And the benefits are not enjoyed only by Vanguard investors. By offering a competitive, cheaper product, he brought down all retail investor mutual fund costs, which, by some estimates, engineered a wealth transfer of a trillion dollars from Wall Street to main street.
Two recent books about the birth of Vanguard--Trillions and The Bogle Effect--point out that the real innovation wasn’t the index fund, but the nonprofit-like structure of The Vanguard Group, Inc. Index funds are already very cheap to manage, but Jack went a step further and eliminated the incentive for corporate profit by making Vanguard owned by shareholders and using company profits to lower costs. It’s not a 501(c)3 type exempt organization, but it essentially functions the same way.
Jack’s stature as a Wall Street maverick continues to grow even after his death in 2019. He built a massive company in an enormous industry not known for charitable intent. By operating without a profit motive, he changed retail investing forever. The contribution to society is almost unfathomable. Thanks, Jack!
