Tags: Bogle | financial | index | funds

Vanguard's Bogle: Financial System of Future Will Be Much Smaller

By    |   Thursday, 10 July 2014 10:01 AM

As investors seek to lower their costs, the financial system will shrink says John Bogle, founder of The Vanguard Group.

"Investors will increasingly see the light and choose low-cost, low-turnover, middle-of-the-road strategies, buying and holding their investment portfolios for the long term," Bogle writes in The Wall Street Journal.

"The reality is that hyperactive trading strategies offer incomprehensible complexity that ultimately destroys value."

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So investors themselves will ultimately "demand a smaller and less-costly financial system," Bogle explains.

The financial system accounted for 10 percent of GDP last year, or $1.6 trillion, up from 4 percent in 1950.

"The wealth generated for the system's insiders — senior financial executives, mutual-fund managers, hedge-fund operators, entrepreneurs and financial buccaneers — has grown to epic levels," Bogle notes.

"The wealth arrogated to itself by our bloated financial system will be rejected by the largest set of participants in finance — our investors."

He's a strong advocate of index investing and believes investors will continue to move from actively managed funds to index funds. Index funds account for 34 percent of U.S. equity mutual fund assets.

"The financial system will shrink in relative importance; much of today's short-term speculation will gradually be displaced by long-term investment; index funds will rise and active management will fall; and public opinion and public policy will together demand that the managers of Other People's Money act as good corporate citizens," Bogle concludes.

Financial author Robert Berger lists five expenses that will eat up your assets in a hurry.
  • Advisory fees. "Paying an investment adviser 1 percent or more annually almost guarantees below-market performance," he writes in U.S. News & World Report.
  • Management fees. Actively managed mutual funds can sport expense ratios of more than 1 percent, Berger notes, but they rarely beat the market.
  • Transaction costs. These costs can be significant for actively managed funds.
  • Commissions. If you pay your financial advisor with commissions, they generally total more 5 percent of the amount invested, Berger says.
  • Unnecessary taxes. These often come in actively managed mutual funds, he explains.

Editor's Note:
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Economy
As investors seek to lower their costs, the financial system will shrink says John Bogle, founder of The Vanguard Group.
Bogle, financial, index, funds
362
2014-01-10
Thursday, 10 July 2014 10:01 AM
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