John Bogle’s Revolutionary Approach to Investing

John Bogle, who recently passed away at age 89, was a pioneer. Through his innovation and determination, Bogle took a massive bite out of Wall Street’s monopoly on investors and brought affordable investing to average Americans. How? By creating a new way for investors to grow their money – index investing.

This revolutionary approach to investing came about in 1975, when Bogle, the founder of financial giant Vanguard, created the first index fund. His philosophy was that his mutual fund group would truly be mutual; it would be run by the investors in the funds.

Bogle’s new approach shed light on the egregious mutual fund fees being charged at the time. His spotlight helped bring costs down in the industry, which allowed both investors and advisors to invest in a lower-cost, more efficient way. This development was especially transformative for people who previously could not afford to get into the stock market because of high fees.

Today, this novel approach to investing has taken hold – and sparked much debate.

I am a huge believer in using low-cost exchange-traded funds (ETFs). And, if it weren’t for the original index funds, ETFs wouldn’t exist. Bogle was a champion for the power of owning individual stock portfolios. As in, if you can own a basket of 10, 20 or 30 companies that are aligned with your investment goals, then you can essentially create your own mutual fund and strip out many of the layers of fees that still come with traditional mutual funds.

So, because he invented the index fund – an alternative to “active-only” investing – Bogle created the debate of which is better, active or passive investing.

In my opinion, that’s the wrong question. The two methods of investing exist together; most any investment decision is a blend of active and passive.

Most people can’t (and don’t) invest in a purely active or purely passive way. So, the question then isn’t whether active or passive investing is better; it’s which blend of the two is better for you.

I think of active/passive investing as a continuum, with a bell curve. On the far-left side, we have pure passive investing, which is incredibly rare. And on the far right side, there’s pure active investing, which is also rare.

Being purely passive means that you put everything in the S&P 500 index (which is, in a sense, active). You add to it over time, never worry about it and let it ride. Being purely active, on the other hand, is to be completely in the market and then out of the market and then back in again. Here, you’d be buying and selling all the time.

In the middle of our bell curve is a blend of the two, and this is where most of us fall. After all, most of us would have trouble just letting everything ride in one asset class. Similarly, we’re unlikely to be able to weather the emotional turmoil of jumping in and out of the market constantly. It’s human nature, after all, to react emotionally to fluctuation with our hard-earned money.

Most investors are better suited to employ a broad array of low-cost index funds, low-cost active funds, and ETFs that cover several different investment categories while considering their individual tolerance for risk. This approach creates a balanced portfolio somewhere on the passive-active continuum. And for most of us, it’s the right place to be.

Previous ArticleNext Article