Father of index funds
JOHN Bogle may not rank among the Buffetts and the Soros in the investment world today but he is well respected around the world for being the father of index funds and founder of one of the two largest mutual fund organisations in the world. He started the Vanguard Group in 1974.
He has since retired from the company but is still active in the financial world as the president of Vanguard's Bogle Financial Markets Research Center where he continues to write and lecture about investment issues. While at the helm of Vanguard, he started the world's first index fund, Vanguard 500 Index Fund in 1975, and oversaw more than 100 mutual funds with current assets totalling over US$550 billion.
Born in Montclair, New Jersey in 1929, Mr Bogle studied the mechanics of mutual funds in college and laid the foundation of index mutual funds in his thesis report. Being the pioneer of no-load mutual fund and a champion of low cost index investing, he sees himself as an advocate for the retail investors. Bogle is always seen putting the interest of the investors first and constructively criticising the mutual fund industry - the very industry that he created.
He feels that mutual funds today are overly profit-motivated and charging investors too hefty a fee. And today, he is still seen championing the cause for individual investors by setting forth to tackle the rampant mutual fund marketing problem of excessively promoting performance and charging.
Below we'll take a look at some of the main rules of Bogle's investing philosophy.
INDEX FUNDS ARE THE WAY TO BEAT THE PROS
Mr Bogle has always been a strong advocate of index funds, the financial instrument that he himself created and therefore understands so well. An index fund is, as he explains, 'simply a basket (portfolio) that holds many, many eggs (stocks) designed to mimic the overall performance of any financial market or market sector.' That is to say, the effective returns of the investor will be equivalent to that of the market return less a relatively low fee of 0.1-0.3 per cent.
He believes that the low cost and low turnover nature of index funds will allow investors to earn better returns as compared to allowing investment professionals out there manage their money in an actively managed fund. Such professionals charge substantially high commission fees of between one and three per cent.
Simply put, Mr Bogle believes that in the long run, the passively managed index fund investment will outperform the actively managed fund, taking into account the fee most active managers charge in aggregate.
Looking at the 36-year period from 1970-2006, he found that only three out of 355 funds beat the index consistently, a clear indication that the investor with a multi-decade horizon should choose the index fund.
Mr Bogle also recommends putting nearly all of the US portion of an investor's stock portfolio into the S&P 500 as it is considered as the quintessential index to track the performance of companies in the US.
His style of buying the haystack rather than trying to find the needle (in the market) strikes a chord with investing great Warren Buffett who commented that the know nothing investor can actually outperform most investment professionals by investing in an index fund. Thus it seems that such an investing style will provide a perfect way for new investors to get started investing in the market and yet outperform professionally managed funds.
TIME IS YOUR FRIEND, IMPULSE YOUR ENEMY
Mr Bogle's style encompasses a long term horizon for all his investments. He discourages investors from letting transitory changes in stock prices alter their investment programmes. He once said: 'There is a lot of noise in the daily volatility of the stock market, which too often is 'a tale told by an idiot, full of sound and fury, but signifying nothing'.'
Stocks can remain overvalued or undervalued over the years. But with time on the investor's side, he should exercise patience and enter into these stocks at the right time (when they are undervalued) and wait for them to realise their true value over the years.
Time is indeed an investor's friend if he is able to utilise this time to his advantage by doing his own research into his watchlist of stocks and waiting for the most opportune time to get invested in some of them when they are undervalued. When the investor is able to do that, he will almost definitely be getting a bargain for his buck and also effectively decreasing his risk-reward ratio.
Mr Bogle also once said that the greatest sin of investing is 'to be captured by the siren song of the market, luring one into buying stocks when they are soaring and selling when they are plunging.' Impulse, therefore, is an investor's worst enemy because emotions will come into play leading to irrational decisions. Moreover, it is simply impossible to time the market, especially during a period of market volatility.
PURSUE THE RIGHT FORM OF RETURNS - EAT THE BAGEL NOT THE DOUGHNUT
Mr Bogle also has a sense of humour when it comes to dealing with serious stuff like investing. He uses two different kinds of baked goods - bagel and doughnuts - to symbolise two distinctively different elements of stock market returns.
Investment return - dividend yields and earnings growth - is the bagel of the stock market: nutritious, crusty and hard-boiled. By the same token, speculative return - the change in prices that investors are willing to pay for each dollar of earnings - is the doughnut of the market: reflecting changing public opinion about stock valuations, from the soft sweetness of optimism to the acid sourness of pessimism. He urged investors to enjoy the bagel's healthy nutrients but don't count on the doughnuts' sweetness. Investors should have realistic expectations of the returns that they will gain and avoid relentlessly speculating in the market to gain extraordinary returns.
Owning the entire stock market through an index fund might be a winning philosophy for some investors mainly due to an index fund's cost efficiency, tax-efficiency and assurance of earning for them the market's return. But only if one follows one of the most important rules for successful investing: Stay the course and do not be deterred by investment losses. In the long run, the true investor will eventually win given that he has time on his side, is well-researched in identifying undervalued stocks and is not tempted to eat the sweet tasting doughnuts!
Jason Low
Mon, Jul 30, 2007The Business Times
He has since retired from the company but is still active in the financial world as the president of Vanguard's Bogle Financial Markets Research Center where he continues to write and lecture about investment issues. While at the helm of Vanguard, he started the world's first index fund, Vanguard 500 Index Fund in 1975, and oversaw more than 100 mutual funds with current assets totalling over US$550 billion.
Born in Montclair, New Jersey in 1929, Mr Bogle studied the mechanics of mutual funds in college and laid the foundation of index mutual funds in his thesis report. Being the pioneer of no-load mutual fund and a champion of low cost index investing, he sees himself as an advocate for the retail investors. Bogle is always seen putting the interest of the investors first and constructively criticising the mutual fund industry - the very industry that he created.
He feels that mutual funds today are overly profit-motivated and charging investors too hefty a fee. And today, he is still seen championing the cause for individual investors by setting forth to tackle the rampant mutual fund marketing problem of excessively promoting performance and charging.
Below we'll take a look at some of the main rules of Bogle's investing philosophy.
INDEX FUNDS ARE THE WAY TO BEAT THE PROS
Mr Bogle has always been a strong advocate of index funds, the financial instrument that he himself created and therefore understands so well. An index fund is, as he explains, 'simply a basket (portfolio) that holds many, many eggs (stocks) designed to mimic the overall performance of any financial market or market sector.' That is to say, the effective returns of the investor will be equivalent to that of the market return less a relatively low fee of 0.1-0.3 per cent.
He believes that the low cost and low turnover nature of index funds will allow investors to earn better returns as compared to allowing investment professionals out there manage their money in an actively managed fund. Such professionals charge substantially high commission fees of between one and three per cent.
Simply put, Mr Bogle believes that in the long run, the passively managed index fund investment will outperform the actively managed fund, taking into account the fee most active managers charge in aggregate.
Looking at the 36-year period from 1970-2006, he found that only three out of 355 funds beat the index consistently, a clear indication that the investor with a multi-decade horizon should choose the index fund.
Mr Bogle also recommends putting nearly all of the US portion of an investor's stock portfolio into the S&P 500 as it is considered as the quintessential index to track the performance of companies in the US.
His style of buying the haystack rather than trying to find the needle (in the market) strikes a chord with investing great Warren Buffett who commented that the know nothing investor can actually outperform most investment professionals by investing in an index fund. Thus it seems that such an investing style will provide a perfect way for new investors to get started investing in the market and yet outperform professionally managed funds.
TIME IS YOUR FRIEND, IMPULSE YOUR ENEMY
Mr Bogle's style encompasses a long term horizon for all his investments. He discourages investors from letting transitory changes in stock prices alter their investment programmes. He once said: 'There is a lot of noise in the daily volatility of the stock market, which too often is 'a tale told by an idiot, full of sound and fury, but signifying nothing'.'
Stocks can remain overvalued or undervalued over the years. But with time on the investor's side, he should exercise patience and enter into these stocks at the right time (when they are undervalued) and wait for them to realise their true value over the years.
Time is indeed an investor's friend if he is able to utilise this time to his advantage by doing his own research into his watchlist of stocks and waiting for the most opportune time to get invested in some of them when they are undervalued. When the investor is able to do that, he will almost definitely be getting a bargain for his buck and also effectively decreasing his risk-reward ratio.
Mr Bogle also once said that the greatest sin of investing is 'to be captured by the siren song of the market, luring one into buying stocks when they are soaring and selling when they are plunging.' Impulse, therefore, is an investor's worst enemy because emotions will come into play leading to irrational decisions. Moreover, it is simply impossible to time the market, especially during a period of market volatility.
PURSUE THE RIGHT FORM OF RETURNS - EAT THE BAGEL NOT THE DOUGHNUT
Mr Bogle also has a sense of humour when it comes to dealing with serious stuff like investing. He uses two different kinds of baked goods - bagel and doughnuts - to symbolise two distinctively different elements of stock market returns.
Investment return - dividend yields and earnings growth - is the bagel of the stock market: nutritious, crusty and hard-boiled. By the same token, speculative return - the change in prices that investors are willing to pay for each dollar of earnings - is the doughnut of the market: reflecting changing public opinion about stock valuations, from the soft sweetness of optimism to the acid sourness of pessimism. He urged investors to enjoy the bagel's healthy nutrients but don't count on the doughnuts' sweetness. Investors should have realistic expectations of the returns that they will gain and avoid relentlessly speculating in the market to gain extraordinary returns.
Owning the entire stock market through an index fund might be a winning philosophy for some investors mainly due to an index fund's cost efficiency, tax-efficiency and assurance of earning for them the market's return. But only if one follows one of the most important rules for successful investing: Stay the course and do not be deterred by investment losses. In the long run, the true investor will eventually win given that he has time on his side, is well-researched in identifying undervalued stocks and is not tempted to eat the sweet tasting doughnuts!
Jason Low
Mon, Jul 30, 2007The Business Times
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