Jack Bogle will be remembered for two of the most important innovations in investing history: founding Vanguard Group and creating the index fund. With those two creations, he made it feasible for everyday people to have a realistic shot of saving, investing, and eventually becoming a millionaire.
With index funds, Bogle both lowered the cost of investing and made it possible for ordinary people to pocket better returns than they'd get by investing with the vast majority of professional fund managers. By creating Vanguard and populating it heavily with index funds, he also showed it was possible to run a mutual fund company successfully despite the substantially lower fees index funds collected. Bogle died Wednesday at age 89.
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Why Bogle's investing style is so powerful
What Bogle's approach made perfectly clear to generations of investors is that it's what you keep that determines your ultimate investing results. And Bogle set up his funds so that investors kept all that much more of their returns. By indexing, he took most of the buy and sell decisions out of the hands of professional fund managers. That left the funds' returns up to the market (and the fundamental strength of the underlying companies), but it also substantially lowered the costs of running the funds.
In addition to lowering the operating costs of the funds, index funds can operate with substantially lower churn costs as well. With fewer buys and sells, the fund itself pays less in commissions and loses less to bid/ask spreads. In addition, with fewer transactions, index fund investors are far less exposed to the risk of facing large surprise capital gains taxes while they remain holders of the funds.
Bogle and Vanguard passed on the savings from all of that efficiency to fund holders, leading to fund expense ratios that, in some cases, even dipped below 0.05%. Those low fees meant nearly all the returns went to investors, and the lower churn costs meant investors were better positioned to keep those returns as well.
How lower fees translate to more everyday millionaires
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Over the long run, the S&P 500 has delivered returns at around a 9.5% compound annualized rate. In a Vanguard-like fund with no costs to buy and a 0.1% expense ratio, investors would have received around a 9.4% return rate.
Contrast that with an actively managed fund that would have performed similarly had it not been for losing 2% to fees and bid/ask spreads on frequent trades. An investor in that fund would only see a 7.5% annualized return rate. Add a 5% sales load to the overall cost structure, and it simply takes all that much more out of pocket before your investments actually provide real returns.
The table below showcases just how much those fees and costs can eat into your ability to generate wealth from your investing. It shows how much you need to invest each month to wind up with a million dollars, depending on how long you have to invest, what rate of return you really see, and whether you face those sales loads.
|
Time to Invest |
9.4% Annual Returns |
7.5% Annual Returns |
7.5% Annual Returns, 5% Sales Load |
|---|---|---|---|
|
40 years |
$189.56 |
$330.71 |
$348.11 |
|
35 years |
$307.18 |
$492.43 |
$518.34 |
|
30 years |
$502.35 |
$742.15 |
$781.21 |
|
25 years |
$834.22 |
$1,139.91 |
$1,199.91 |
|
20 years |
$1,422.77 |
$1,805.93 |
$1,900.98 |
Data source: Author's calculations.
The later in your career you start investing, the less time you have to save, and the larger the investment it takes each month to reach millionaire status. Yet look how much more expensive it gets when you add higher annual fees and sales loads into the mix. In many cases, it's as if you have to save for five additional years -- or even more -- to reach the same spot.
Bogle's revolution: unlocking time and money for investors
When Jack Bogle created index funds and made them available through Vanguard, he launched a revolution in the financial markets. By making low-cost investing readily available to everyday people, he knocked years off the time and substantial dollars off the costs it took to become a millionaire by investing. That made it much more feasible for everyday people to reach that incredible milestone.
With Bogle's passing, the world lost an amazing person who enabled a positive financial transformation for millions of people. Fortunately for all of us, the low-cost index revolution he pioneered has spread well beyond Vanguard. As a result, we can be sure his legacy will live on, and future generations will have the opportunity to build their wealth more effectively and efficiently thanks to what he has left behind.
