Financial Wisdom and John Bogle

John (Jack) Bogle, is indisputably someone who had a profound impact on how investors participate in the market today.  According to MarketWatch, those who have followed Bogles’ leadership most likely haven’t been “front of the pack” investors but have certainly ended up retaining actual returns that rank in the “top 20% of all investors.”[i]

So, what wisdom or counsel has Bogle been advocating that has allowed his followers to fare so well in the market over the last 40 years?  The answer is really quite profound, though at first it was thought to be folly;[ii] and here it is:  A mutual, low expense indexed fund that tracks the S&P 500 Index, instead of an actively traded mutual-fund that a manager(s) manages.  That’s it in the nutshell.  But for those who want to understand the why behind Bogle’s wisdom, grasp this;

“In recent years, annual trading in stocks — necessarily creating, by reason of the transaction costs involved, negative value for traders — averaged some $33 trillion. But capital formation — that is, directing fresh investment capital to its highest and best uses, such as new businesses, new technology, medical breakthroughs, and modern plant and equipment for existing business — averaged some $250 billion. Put another way, speculation represented about 99.2% of the activities of our equity market system, with capital formation accounting for 0.8%.”[iii]

This means less than 1% of all activity on Wall Street is representative of any real value, while over 99% of that activity is based on emotion.  No wonder Bogle and those who adhere to his sound money advice are in the top 20% of all investors.  Following an index, instead of allowing the emotions of a fund manager and their fees, which are certainly a part of their emotions, allows you to focus on an actual rate of return which is smart money management.  Yet money managers still find ways to get their hands on the money of other people.

Enter, Indexed Universal Life (IUL) products.  Here a viable product, life insurance, is tarnished by those who can’t seem to keep their hands off the money of other people.  This, of course, is a complete censure of what Bogle and all his followers would advocate.   Not only will there be additional fees, but there will be, by the very nature of this hybrid product, the ever-increasing cost of insurance that now must be overcome before any actual profits are retained.

On top of that, there will be capped earnings on the index that the policy is mirroring (typically somewhere between 10 and 12%).  Then, of course, there’s the lack of dividends and the operational expenses that the insurance company passes on to the policy owner.  All said and done, IUL products are good for the insurance company and agents selling them but not so good for the investor investing in them.  As Jack Bogle has said, “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”[iv]

Pathetically, we live in a world where, if someone nets a large enough fee or a high enough commission they can flout any flaw and overlook better solutions. That means you should stick to dividend mutual funds when it comes to trading indexes and mutual companies when it comes to purchasing your life insurance.

Dr. Tomas McFieDr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.