Taming the Beast: Wall Street's Imperfect Answers to Making Money

Summary

• John Bogle invented the index mutual fund in 1976, launching Vanguard 500. This fund, copied by others many times since, mirrors the moves of the Standard & Poor’s 500 stock index. Index funds give investors exposure to the broad market, hence they have greater diversification than with actively managed funds, which move in and out of stocks according to managers’ strategies.
• But index funds are passively managed—their holdings are adjusted automatically and periodically to match changes in the underlying index, whether it’s the S&P 500 or some other benchmark. Index funds, says Bogle, follow the market in such a way that they generate lower taxes, lower costs, and lower risk than do active funds.
• The biggest attraction of index funds: they routinely beat active funds; typically 70 percent of active portfolios fail to do better than the S&P. Proponents of active funds say the trick is to find the winners in the 30 percent that do best the market. Otherwise, they say, you never can excel. Consistently landing in that magic 30 percent, though, is very difficult to do, year after year.
• Mutual funds have roots in investment pools created in Europe in the 1700s, many of them to put money into the young and growing United States. Modern funds began in the 1920s, but the Depression wrecked their appeal for many years. With the invention of the 401(k) retirement plan in the 1970s, both actively and passively managed funds attracted torrents of investment dollars.
• Bogle criticizes active ...