NYT: Jack Bogle Helped Keep Inflation Low

[Fallible]

Jack created Vanguard as a penny-pinching institution owned by its funds’ shareholders. He popularized low-cost index funds and, in the process, radically reduced the expenses incurred by millions of rank-and-file investors.

Now, it turns out, cost savings from various types of index funds, run by Vanguard, BlackRock, Fidelity, Schwab, State Street and others, are having a measurable impact on inflation much as prices for groceries and gasoline do.

https://www.nytimes.com/2019/02/22/busi ... ation.html

[bengal22]

Great news!

[AHTFY]

I bet that expense ratios on mutual funds are not included in the CPI or GDP deflator.

[oldzey]

Thank you, Jack!

[Miriam2]

Jack created Vanguard as a penny-pinching institution owned by its funds’ shareholders. He popularized low-cost index funds and, in the process, radically reduced the expenses incurred by millions of rank-and-file investors.

Now, it turns out, cost savings from various types of index funds, run by Vanguard, BlackRock, Fidelity, Schwab, State Street and others, are having a measurable impact on inflation much as prices for groceries and gasoline do.

https://www.nytimes.com/2019/02/22/busi ... ation.html

Thanks for posting! Interesting article and nice photo of Mr. Bogle.

[RenoJay]

It's nice that Jack lived long enough to witness Vanguard become the leading fund house. I always thought it was sad that Steve Jobs passed before he got to see Apple overtake Microsoft in market cap.

[venkman]

The question is:

Will low investing costs ultimately lead to higher returns for investors, or to a reduced equity risk premium? If investors have historically accepted a 4.5% nominal ERP before costs of 1-2%, will they accept a new nominal ERP of 2.5%-3.5%, even if the return after costs is the same?

[arcticpineapplecorp.]

thanks for sharing. Just passed the article along to some family. I wonder if Jack had envisioned the effect Vanguard would have on keeping inflation low? Does anyone know if he had considered this (positive) unintended consequence?

[alpine_boglehead]

The question is:

Will low investing costs ultimately lead to higher returns for investors, or to a reduced equity risk premium? If investors have historically accepted a 4.5% nominal ERP before costs of 1-2%, will they accept a new nominal ERP of 2.5%-3.5%, even if the return after costs is the same?

It will certainly have an influence. The truth probably lies in the middle. Institutional investors have always had the possibility to invest index-like (but, like retail investors, many were blinded by "advisors"). Individual investors who've held portfolios of single stocks also have already reaped the rewards of low costs.

Bad times for investors who continue to pay the 1-2% costs. I think Jack Bogle himself talked about that with expected returns already being low, high costs (on top of which a hefty tax bill due to active management is often added as insult to injury) get you into negative expected return territory. If the gross ERP falls, that's a good thing because in the long term it should weed out the Edward-Jonesque companies siphoning money from investors. With say 7% annual return, it's an easy game to cheat someone out of 2.5% and still claim that they made money for investors. With 5% it gets harder.

Of course there's those who claim that too much indexing will make the markets inefficient. But I'd suspect that most individual investors never really contributed to market efficiency as they have never had the time nor the information to properly value companies. And I'd argue that the insane amounts of money that just went straight to the pockets of the guys with the yachts wasn't spent on valuing companies either.

[Fallible]

thanks for sharing. Just passed the article along to some family. I wonder if Jack had envisioned the effect Vanguard would have on keeping inflation low? Does anyone know if he had considered this (positive) unintended consequence?

I also wonder this because I don't recall his ever mentioning an inflation effect. The article refers to it as being "unexpected," so maybe not. Whatever, I'm sure he would've been pleased (but not surprised) to learn of it.

[Jiu Jitsu Fighter]

Woah, the New York Times botched an economic concept? No way!