Quote of the Day: John Bogle on the Mutual Fund Industry
Well, it’s more of a rant than a quote–The Former Vanguard Chairman, who is never at a loss for words, rips the mutual fund industry:
The problems created by this new and conflicted world of financial intermediation are hardly trivial. Excessive return projections for pension plans have played a major role in creating the current shortfall of $600 billion in private pension plan liabilities relative to plan assets. The shortfall in public plans has been estimated at $1.2 trillion, bringing the total deficit to $1.8 trillion, and rising. Individual retirement savings are also at dangerously low levels. Only 22% of workers participate in 401(k) savings plans and only 10% in IRAs (9% have both). Despite having had a quarter-century-plus to build assets in these tax-sheltered plans, investors have accumulated balances of but $33,600 and $26,900 per participant respectively, a trivial fraction of what would be required for a decent retirement.
With today’s agency society arrogating to itself far too large a share of market returns, the outlook for future individual retirement savings is dire. A citizen entering the work force today has an investment horizon of at least 60 years. If the stock market were to earn an average nominal return of 8% per year, $1,000 invested today would then be worth $101,000 — the magic of compounding returns. But if our financial system consumes 2.5 percentage points annually of that total return — a conservative estimate of today’s reality — that $1,000, growing now at 5.5% net, would be worth just $25,000, a minuscule 25% of the accumulation that could have been obtained simply by owning the stock market itself. The magic of compounding returns, it turns out, is simply overwhelmed by the tyranny of compounding costs at today’s exorbitant levels.
The serious shortfalls in retirement reserves that represent the backbone of the nation’s savings have arisen importantly because our manager-agents have placed their own interests ahead of the interests of the investor-principals they are duty-bound to serve. Our financial institutions have failed to exercise the rights and responsibilities of corporate citizenship; to adequately fund pension reserves; and to deliver to fund shareholders their fair share of the returns generated by the financial markets themselves.
He could have shortened his message to five words: Buy and hold index funds.
A full explanation and discussion of the historical advantages of index funds is here.
____________________
October 2 Outside the Beltway Jammer.
