RENEE MONTAGNE, HOST:
We're going to hear next from a man who's been called the founding father of investing for everyday Americans. For 40 years, he has led a revolution of sorts to help people avoid the pitfalls of Wall Street and build some real wealth. And the surprising thing about that revolution, he's winning. As part of our series Your Money and Your Life, NPR's Chris Arnold reports.
CHRIS ARNOLD, BYLINE: The founders of our nation, George Washington, Sam Adams, they were fighting against the tyranny of England. For 40 years, Jack Bogle has been calling for revolution against the tyranny of Wall Street.
JACK BOGLE: Calling for revolution is exactly right. And I think really it is. I mean, it's changing the world of investing for all kind of investors.
ARNOLD: We said Bogle is winning. The company he founded, Vanguard, is now the biggest mutual fund family on the planet. It only charges investors when it costs to run the funds with no profit margin. And as of this week, it now has $3.2 trillion under management.
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ARNOLD: Bogle sat down with us at his vacation cottage, with a nice old wooden screen door overlooking a lake in upstate New York.
Is it OK to leave the dog out or should...
BOGLE: Yeah, he's fine.
Bogle, who's now 86 years old, explained that at the heart of his investing revolution are low costs.
BOGLE: Cost turns out to be everything. That gives us a huge edge and gives our investors a huge edge. And that's just mathematics. I mean, it may come across as bragging, but it's not. It's just what I have often called the relentless rules of humble arithmetic.
ARNOLD: OK, for decades big financial firms have been telling Americans that they need Wall Street. They need to hire money managers to help them invest. Take this Smith Barney ad from 1979. Actor John Houseman is dressed up in a stuffy suit with a bowtie. And he's sitting in an ornate dining room.
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JOHN HOUSEMAN: Good investments don't walk up, bite you on the bottom and say, we're here. Finding them takes good old-fashioned hard work, research.
ARNOLD: It's sort of like Wall Street nobility telling Americans the truth about investing.
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HOUSEMAN: Smith Barney, they make money the old-fashioned way; they earn it.
ARNOLD: But back then, Jack Bogle had just set out to prove that that was a big, fat lie, that those fancy financial firms were not worth the money that they charged in fees and you could do much better another way.
BOGLE: We live in this mythical world where we kind of believe the American way is if you try harder, you will do better, that if you pay a professional to do something, it will pay off. And these things are true, except in investing.
ARNOLD: That was Bogle's insight. When you invest, you should own a mix of stocks and bonds. But paying investment managers to pick stocks, that just doesn't work because he says it's too expensive, and picking winners is very hard. This gets us back to...
BOGLE: The relentless rules of humble arithmetic.
ARNOLD: Here's a little math. But don't worry; it's not too painful. Bogle says over long stretches of time, like when you're saving for retirement, you can expect the stock market to return about 7 percent. That's actually great because at 7 percent, your money doubles every 10 years. So you can make some serious money. But you have to factor in let's say 2 and a half percent inflation.
BOGLE: All of a sudden, the real return is not 7 percent but 4 and a half percent.
ARNOLD: And then you add the fees from the mutual funds, where you're paying those people to pick stocks. Some of those fees you can see. Others are harder to see.
BOGLE: The mutual fund managers take very close to 2 percent. So that 4 and a half percent now drops to 2 and a half percent.
ARNOLD: Then, if you have an investment adviser, that might cost another 1 percent. We're getting down almost to a 0 percent return. So Bogle says the better thing to do is to just buy the entire stock market, and don't pay anybody to pick stocks.
BOGLE: Owning a stock market is the way. It is - it's the way to do it.
ARNOLD: This is not a new concept now. But back in 1975, it was a bold challenge to the industry when Bogle created the world's first index mutual fund. This kind of fund just blindly buys an index, which is a big list of stocks - say, the biggest 500 companies in America - and holds onto them. So for a tiny fraction of the cost, an annual fee of one-twentieth of a percent...
BOGLE: You own corporate America, whether it's the index 500, or you can own the total stock market.
ARNOLD: OK, so you own corporate America. You hang onto it. But that sounds kind of boring, right? I mean, you know...
BOGLE: It is boring. It is the most boring investment strategy ever invented in the history of time.
ARNOLD: But with each year that goes by, more Americans are buying into that boring investment strategy. Index funds now make up 34 percent of the market for stock mutual funds. So the world is changing. But most Americans who invest are still paying those higher fees for stock-picking.
BOGLE: Oh, look at that, a nice one.
ARNOLD: That was a nice one, yeah.
After talking at his house, Jack Bogle and I headed over to the local golf course for lunch. Bogle actually goes to the public course, not some fancy golf club. We're eating pretty simple sandwiches. And it's a good spot to watch the golfers. Many of them, though, keep landing in a sand trap.
So how come everybody hits the trap?
BOGLE: They think they're stronger than they are.
ARNOLD: And, Bogle says, so it is with investing. Our instinct is to swing hard and try to pick hot stocks or mutual funds. But all the time now there are more people giving up on that game and, in effect, joining Jack Bogle's revolution. Chris Arnold, NPR News.
MONTAGNE: And for more on Jack Bogle and our retirement series, go to npr.org.
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