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Wednesday, October 6, 2010

"Bogle's Folly"

In the mid-70s, John Bogle, founder of Vanguard, started the first index fund which was derisively called "Bogle's Folly" by Wall Street. People questioned why anyone would want to capture the average performance of the market. The answer turned out actually to be pretty simple. Wall Street charges so much for active fund management that only 2 out 10 active funds, at most, beat their benchmarks over the long term.
Furthermore, individual investors do much worse because they are severely whipsawed by their emotions and end up up consistently buying high and selling low.

"Bogle's Folly," which grew to be the largest fund in the world, has now been copied by every major fund provider in the industry. Today, individuals as well as the largest pension funds in the country put money into index funds. The participation of pension funds along with other institutional investors is telling, for the simple reason that they have staffs of well-paid analysts that should be able to pick the best and the brightest of the market timers, stock pickers and technicians.

What does this history tell you about Wall Street?


  1. Wall Street is more worried about making a buck for themselves than their clients.

  2. I would also add that there are some big egos involved. They can't for a moment accept that their fees are outrageous and that they might cause them to under-perform.

  3. Given the growth of wall street since then, one has to wonder if the lesson hasn't been lost somewhere... how are these high fees still justified?

  4. re Kevin: I look at a lot of small company 401ks and you would be aghast at the number who use load funds that are high fee. I would say that there are a lot of people apparently without a conscience who are willing to prey on the unwilling. Was it Bob Dylan (via Woodie Guthrie) who said something to the effect that more robberies take place with a pen than with a gun?