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The man who gave us everything

Imagine you’re ill. You’ve been getting headaches, or perhaps you’ve found a suspicious lump on your back.

The health service swings into action and the diagnosis is serious.

The good news is you can be treated. The bad news is there’s a long waiting list.

You could be seen next week if you went private, but the fees for the best practitioners are astronomical. You just can’t afford it.

But then your spouse arrives home with a beaming face and a solution.

Their parents have decided there would be no better use for their life savings than your treatment. Your spouse put up a half-hearted fight for form’s sake, but they insisted.

The best doctors in the world are now a phone call away.

However there’s a snag – in the unlikely form of your own parents.

When you call them to tell them the happy news, they brush it off and urge you to reconsider the solution they’ve been ranting about for weeks.

They insist you needn’t spend a lot to get the best treatment. See, there’s an old lady in a booth behind the seafood stall at the market. She isn’t guaranteed to cure you, but nor are the professionals and her hit rate is as high as modern science. They read so in the Evening Gazette.

All that is bonkers enough, but their last claim takes their ravings into outer space.

She will treat you for just a tenner – and a pound in the pot next to her cat as a tip.

You sigh, ask about their dahlias, hang up, and get yourself booked into Harley Street.

Financial genius, going cheap

How many of us faced with a life-threatening illness would spurn cutting-edged medicine for a session with a palm reader?

Vanishingly few.

Now with that image in your mind, transport yourself to North America, 1976, and to another serious matter.

You know it’s time to start saving for retirement – those flying cars and robot maids of the future won’t buy themselves – and you’ve collected literature from a dozen banks, fund houses, and financial advisers explaining how they will make you rich.

The images tell the story. Smart young men with sideburns pour over new-fangled computer printouts, divining the future while old men with beards promise to use their experience to keep your money out of fads. There’s even a photo of a fund manager golfing with famous company executives. He’s an insider’s insider, with a hotline to every business leader that matters and first dibs on the hot deals that cross the market.

You’ll have to pay for the best investing brains on the planet, of course, but you’ll be rewarded as your retirement account goes gangbusters.

Actually, thinking about it, exactly what you’ll pay hasn’t been made clear. But then you remember talk of a few percentage points here and there. Peanuts!

And that’s exactly what you’re still thinking when you come to the final flimsy leaflet that your spouse left on your briefcase – a friend’s recommendation, apparently.

You can’t make much sense of it, but as best you can follow this new fund claims you don’t need any of those hot fund managers to look after your money.

Instead its ‘index fund’ just buys a bit of every company going. And that’s about that. It doesn’t put money into better companies, or dump duds. It just let’s them get on with it.

This smacks you as a dereliction of duty, and the statistics in small print claiming this approach would have beaten a majority of fund managers over the past 30 years sounds about as convincing as betting on horses with names that rhyme with those of your kids.

Most people must feel the same, because the fund stresses its hands-off approach keeps costs low – clearly a last-ditch attempt to get credulous punters in!

It doesn’t work on you. You’re happy to pay for the best fund managers working to make you richer.

Still crazy after all of these years

Why these thought experiments?

It’s because John Bogle, the inventor of the index fund and founder of fund behemoth Vanguard, died last month. He was 89.

The financial media lit up at the passing of this investing legend.

We heard how Bogle’s index fund had revolutionized money management by exploiting the fact that due to higher costs the typical actively managed fund does much worst than its equivalent cheap ‘know nothing’ index fund. Most of those highly paid professionals worshipped on Wall Street and in the City of London are surplus to requirements if your aim is getting your fair share of the long-term returns from shares. Use a tracker.

We also heard how the mutual company structure of Vanguard, which he founded, means it’s ultimately owned by its customers, which also keep costs down – and which kept Bogle from becoming the billionaire you might expect given it manages $5 trillion.

But one thing these articles didn’t stress – and I’ve tried to above – was just how odd index fund investing sounded in the beginning.

Most professionals thought Bogle would fail. His idea was dubbed ‘Buffet’s Folly’. As Bill Mann of The Motley Fool US told our Marketfoolery podcast, even the index provider S&P didn’t see the value. It signed away the right to use its index to Bogle for a pittance.

You can see why it seemed so crazy. Nobody would hunt out the cheapest brain surgeon they could find. Nobody wants a bargain basement lawyer. Nobody expects a goalkeeper from the local pub team to keep a shot from Lionel Messi out of the net.

Yet even the likes of Warren Buffet now tell us that in investing we should choose cheap index funds for their lower costs ahead of costly active funds run by veteran managers.

Investing is different to most things in life because – counter-intuitively – you don’t get what you pay for.

Or as Bogle put it: “If we pay for nothing, we get everything.

True, only a couple of funds in the US have so far as to abolish fees altogether for index funds, but the trend is clear.

Forty-three years after Bogle launched the first index fund, the cheapest trackers charge you less than 0.1% a year to deliver the returns of an entire stock market.

Before Bogle you’d have sounded crazy to imagine investing in anything like that.

After him, you’d be crazy not to.

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