- “Whether the market is efficient or inefficient doesn’t matter as long as you get costs out of the way”
- “As a mathematical matter, having 100% equities is a good idea and being leveraged to some degree at least is a good theoretical idea. But the reality is that we, as human beings, have to live in the moment.”
Charles Rotblut (CR): Since you founded Vanguard, would you explain why you think investors should use index funds?
John Bogle (JB): Let’s start off with the obvious. Imagine a circle representing 100% of the U.S. stock market, with each stock in there by its market weight. Then take out 30% of that circle. Those stocks are owned by people who index directly through index funds. The remaining 70% are owned by people who index collectively. By definition, they own the exact same portfolio as the indexers do in aggregate, so they will capture the same gross return as the direct indexers. But by trading back and forth, trying to beat one another, they will inevitably lose by the amount of their transaction costs, the amount of the advisory fees they pay, and the amount of all those mutual fund management costs they incur: marketing costs, processing, technology investments, everything. When we look at the big picture of the costs of investing, including sales loads as well as expense ratios and cash drag, it is a foregone conclusion that active investors, in aggregate, will underperform index investors. It’s the mathematics.