By Josh Katzowitz, WCI Content Director

If you’ve followed The White Coat Investor for any length of time, you know that this site has certain philosophies that it extolls. We’ve written over and over about living like a resident until your student loans are paid off and to stay the course and to follow the teachings of Jack Bogle and to, basically, be boring with your portfolio.

Yes, sometimes, we write about buying a Tesla or we ponder the idea of cryptocurrency investing—drawing the ire of some who say, “THIS ISN’T WHAT WCI IS ABOUT!!!”—but long-time readers oftentimes know what to expect when they read us. And one of WCI’s biggest philosophies is to invest in low-cost index funds.

Why is that?

Broadly diversified low-cost index funds outperform individual stock picking, they have lower costs than actively managed portfolios, they have more tax efficiency, and they take up much less of your time.

WCI has only been around since 2011, but if Dr. Jim Dahle had founded this site four decades earlier, he’d likely say the same thing as he does now: “If you build a reasonable portfolio, fund it adequately, and control your behavior, you are highly likely to reach your financial goals. But for whatever portion of your portfolio you invest in stocks and bonds, do yourself a favor and use an index fund.”

For all of this, we can thank Jack Bogle, who brought the index fund into the world on August 31, 1976 (happy 46th anniversary, index fund! You don’t look a day over 45!). That’s the standard thinking, anyway.

Bogle, the man who founded Vanguard, was the pioneer who allowed any investor to take part in an index fund. Most of that is true. But was Bogle the one who actually invented the idea of the index fund? Spoiler: He was not.


Who Invented the Index Fund?

J.D Roth of Get Rich Slowly did a deep dive into this question. As he writes, “Bogle did not invent index funds. In fact, for a long time he was opposed to the very idea of them!”

Here’s what happened.

In 1960, Edward Renshaw and Paul Feldstein wrote in the Financial Analysts Journal that since there were hundreds of mutual fund companies, it was too “painstaking and time-consuming” for individual investors to try to wade through the information overload that so many choices represented. They also mentioned that it would be swell if investors could eliminate the costs of an actively managed mutual fund account. They wrote,

“While investing in the Dow Jones Industrial average, for instance, would mean foregoing the possibility of doing better than average, it would also mean that the investor would be assured of never doing significantly worse . . .  The evidence presented in this paper supports the view that the average investors in investment companies would be better off if a representative market average were followed. The perplexing question that must be raised is why has the unmanaged investment company not come into being?”

This is where Jack Bogle came to the rescue! Except, not really.

jack bogle invent index funds

Jack Bogle during a 2013 interview with Forbes.

Instead, as noted by Stephen Mihm in Investment News, a mechanical engineer named John Andrew McQuown led a group of Wells Fargo employees in 1964 to study whether science could be applied to investing and whether it was possible for a portfolio manager to beat the S&P on a regular basis. The answers to those questions turned out to be: “yes” and “absolutely not,” respectively.

As one colleague said to McQuown, “This cannot possibly be right. We spend all this money on analysts and all this fancy stuff and you’re saying that all we really need to do is buy the S&P 500?”

By 1971, the Wells Fargo team had tried and failed to create a fund that would track the New York Stock Exchange, but it found success with a fund tracking the S&P 500 instead. Soon after, major companies like AT&T, Ford, and Exxon began using index funds that they built themselves for their employees’ pension plans.

As Mihm writes, one securities analyst was not pleased with the index fund infancy in 1975, saying, “I hope the damn things fail, because if they don’t, it’s going to mean the jobs of a lot of good analysts and portfolio men.”

Regular investors didn’t have access to those index funds until Bogle opened Vanguard’s first index fund 46 years ago.

More information here:

FSKAX vs. VTSAX: What Is the Best Total Stock Market Index Fund?


Bogle Creates Vanguard’s First Index Fund

Before founding Vanguard, Bogle had found both success and failure in the investing game. As the CEO of Wellington Management, his goal was to make large profits through the use of active trading and by outperforming the market. Bogle took over as CEO in 1970, but four years later, he was fired by the company’s board of directors when his aggressive growth stocks strategy began to fail.

Bogle was allowed to create Vanguard, which was only set to do administrative tasks for Wellington. As part of their agreement, Vanguard was not allowed to manage mutual funds. But Rick Ferri, in a 2014 Forbes article, wrote that Bogle, perhaps looking for revenge against those who had pushed him out of his CEO position, realized that active funds were underperforming the S&P by an average pre-tax margin of 1.5%. That’s when he revisited his ideas about passive investing via index funds.

As Bogle told Ferri, “[Vanguard was] limited by our charter, as it were, to providing only administrative services to the [Wellington] funds. So I gambled that the obvious negative reaction of the Board to our providing investment services to our funds could only be overcome by offering a fund that required, well, no management! When I proposed that we offer the first index mutual fund, I assured the board of directors that ‘this fund is not managed . . .'

Further, the creation of that first index mutual fund was inextricably linked to the creation of our unique, truly mutual, low-cost structure for Vanguard. In an index fund, low costs are the only factor that substantially differentiates one all-market index fund from another. So we had, in essence, a ‘lock’ on winning the game. While every fund firm had the opportunity to create the first index fund, only Vanguard had the motive.”

And thus, Bogle’s legend and legacy grew. As Warren Buffett once mentioned, “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.”

But let’s not forget one pundit’s reaction to what Renshaw and Feldstein wrote in that initial Financial Analysts Journal piece touting the idea and creation of a passive index-type fund. A few months after that article was published, a writer named John B. Armstrong penned a response, titled “The Case for Mutual Fund Management,” in the same journal. Armstrong wholeheartedly disagreed with the idea of an unmanaged fund, saying passive investing was a bad strategy and that active managers of mutual funds were really the ones who could lead investors to a land of riches.

John B. Armstrong wasn’t the author’s real name. It was only a pseudonym. The actual author of that piece ripping the idea of index funds and passive investing? His name was Jack Bogle.


What I’m Reading This Week


Celebrities and Crypto

How could you not want to read a piece titled The Disastrous Record of Celebrity Crypto Endorsements? That’s what Bloomberg’s headline writer is counting on, and the article doesn’t disappoint. The lede is also pretty great.

“Matt Damon started touting crypto investing when Bitcoin was worth twice as much as it is now. Mike Tyson’s NFTs have plunged more than 90% since he introduced his collection. And investors who allege they lost millions on a pump-and-dump scheme are suing Paul Pierce.

Months into a rout for crypto assets, the full extent of the financial pain suffered by millions of everyday Americans is still being calculated. What's clear, though, is that scores of celebrities touted the life-changing power of crypto investing at the worst possible time—just as the speculative mania was approaching its peak.”

Yikes. And here’s yet another reminder to be careful with your crypto and your NFTs.


It Could Happen to You

Scary stuff out of Missouri where a hospital staff—including physicians and nurses—unknowingly lost their health insurance. Unbeknownst to them, their life insurance benefits also had suddenly stopped. And yes, the hospital group was still allegedly taking money out of its employees’ paychecks to supposedly pay for those benefits.

The St. Louis Post Dispatch described Noble Health, the hospital group running those facilities, as “a private equity-backed startup whose managers had never run a hospital.”

Noble is now facing at least two federal investigations.


Money Song of the Week

In my previous column, I wrote about the song 96,000 from the musical In the Heights and how the characters were fantasizing about what they would do if they won the lottery. Staying on that subject matter, here’s a catchy tune from Camper Van Beethoven, released in 1989, focused on the same issue (although this song is more political and slightly more anti-military).

It’s called, appropriately enough, When I Win the Lottery, and David Lowery, who went on to bigger fame in the 1990s when he fronted the band Cracker, sings . . .

“When I win the lottery gonna buy all girls on my block/A color TV and a bottle of French perfume/When I win the lottery gonna donate half my money to the city/So they have to name a street or a school or a park after me/When I win the lottery.”

But Lowery also mentions this aspect, which is sort of analogous to the line that hearses don’t come with trailer hitches.

“When the end comes to this old world/The righteous will cry and the rest will curl up/And God won't take the time to sort your ashes from mine.”

There are plenty of themes that can be taken from this song: the morality of patriotism, how lotteries inherently take advantage of the lower class, and the privilege of a higher earner.

Or maybe it’s just a song about a tow driver Lowery once encountered who, as he later wrote, “confessed to a series of small felonies and a profound contempt for virtually every aspect of our society. [The] most striking was his contempt for religion and patriotism. He was out of his mind but totally fascinating.”

Maybe, in reality, we’ve won the lottery because we didn’t end up becoming that tow truck driver.


Tweet of the Week

This was an amazing tweet thread with a good lesson for those who have lots of money. Treat people kindly, and pay off your debts.

Even if he didn't invent the index fund (and, in fact, originally opposed it), do you still think Jack Bogle is one of the most important financial figures in American history? Why or why not? Has a celebrity ever influenced you to buy crypto? Comment below!

[Editor's Note: For comments, complaints, suggestions, or plaudits, email Josh Katzowitz at [email protected].]