The investor that created index funds

John Bogle believed most investors were paying too much in fees for what they were getting. In 1974 he founded Vanguard and launched the first public index fund with a focus on matching the market instead of trying to beat it, an idea so unpopular at the time, it was called “Bogle’s Folly.” Over time it became one of the most widely used investment vehicles in the world.

This week we look at how he built Vanguard, why he thought most investors were being overcharged, and how his unpopular strategy ended up changing Wall Street:

• 🏛️ Starting Vanguard After Getting Fired

• 🔢 Launching the First Index Fund

• 📊 Facing Criticism and Proving Them Wrong

— Investor Briefcase Team

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John Bogle began his career at Wellington Management Company after graduating from Princeton in 1951. He quickly rose from entry-level researcher to becoming the CEO by the 1960s. But in 1974, a failed merger with a high-growth firm cost him his position. At age 45, he was fired. Rather than retire, Bogle used the setback to start over.

In 1974, he launched The Vanguard Group, a mutual fund company that would operate at cost. Unlike traditional firms, Vanguard would be owned by its funds, and its funds would be owned by the investors. There would be no outside shareholders, no incentive to maximize profits at the expense of clients, and no hidden fees.

This model was virtually unheard of at the time. Most firms saw investors as clients. Bogle made them owners.

Vanguard focused on cost-cutting, transparency, and long-term thinking. Bogle believed that minimizing fees and removing conflicts of interest would quietly outperform the industry’s high-cost competitors over time.

It was the opposite of Wall Street. That’s exactly why it worked.

In 1976, Vanguard introduced the First Index Investment Trust, a mutual fund designed to track the S&P 500. It was the first time ordinary investors could buy into a fund that aimed to just match the market instead of trying to beat it.

The idea came from decades of research showing that most active fund managers failed to outperform the market over long periods, especially after accounting for fees and turnover. Bogle believed that investors would be better off accepting average market returns at minimal cost than trying to chase alpha.

The concept was simple. The fund would buy and hold all 500 companies in the index, charge a fraction of the fees typical in the industry, and pass the savings back to investors. It didn’t rely on stock picking, market timing, or forecasts. Just broad exposure and time. But it didn’t come without its criticisms.

When Bogle launched the index fund in 1976, it faced plenty of backlash. The fund was mocked as “Bogle’s Folly” by competitors who saw it as a gimmick, and many investors were turned off by the idea of accepting average returns. Critics argued that indexing lacked skill and would never gain traction.

Vanguard’s first index fund raised just $11 million, far short of its $150 million target. It even faced skepticism within the firm. Most believed investors would never embrace a fund that promised nothing more than matching the market.

But Bogle was convinced that patience and math were on his side. Active managers might win in a given year, but over time, fees and underperformance would eat away at returns. Indexing, he argued, would quietly outperform.

It took years for the strategy to gain mainstream acceptance. But as data accumulated, Bogle’s argument became harder to ignore. Studies showed that over the long run, few active funds beat their benchmarks and index funds began to grow rapidly.

By the 1990s, other firms started launching their own index products. What began as a fringe idea became one of the fastest-growing segments in asset management. Index funds now hold over $10 trillion in assets. Vanguard manages more than $8 trillion. Fees across the industry have noticeably fallen. And active managers are still struggling to outperform.

Bogle didn’t get rich from any of it. Unlike most finance founders, he never took equity in Vanguard. He built the company, then handed the value back to investors.

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Other finance figures who favored index investing

> Burton Malkiel: Provided the academic foundation for index investing with A Random Walk Down Wall Street. His efficient market hypothesis gave intellectual weight to Bogle’s practical implementation.

> Paul Samuelson: As a Nobel laureate, he gave early and public support for index funds, urging institutions to adopt them before they were mainstream. His endorsement brought legitimacy to a then-controversial idea.

> Rick Ferri: A former Wall Street adviser turned advocate for passive investing, Ferri has authored several books and built a reputation as a leading voice in educating retail investors on the benefits of index funds and low-fee investments.

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