Macau Matters | Rest in Peace Jack Bogle

Richard Whitfield

Jack Bogle, the founder of the Vanguard Group, died in January 2019. Bogle established the Vanguard Group in the 1970’s and it has since grown to be one of the largest listed and unlisted Index Fund managers in the world, with over USD5.1 trillion under management. He also designed Vanguard so that its fund investors effectively owned it to eliminate the large conflict of interest that is inherent in most investment management businesses, ie they exist to make profits for their investors but can only survive if they make profits from their investors.

Traditionally, highly paid Active Fund managers choose specific stocks to include in their funds that they believe will grow and improve in value in the future, but even the best active manager sometimes makes poor stock picks. By contrast, Index Funds invest in stock markets by buying all the equities in a market index in proportion to their capital weighting in the index. As the price of individual shares rise and fall the Index Fund buys and sells shares to maintain its correlation with the index. A stock market index effectively summarizes all the active managers views on the quality of the businesses underlying the stocks bought and sold in the market, eg a falling stock price indicates that “on average” active managers believe that the underlying business is going downhill and will be worth less in the future.

Thus, Index Funds effectively “follow the herd” to cheaply and efficiently get average returns. By contrast, few active managers can consistently “beat the market” and nearly all under-perform their benchmark index in the long run, after taking transaction costs and their management fees into consideration. With no active management fees, Index Funds are much cheaper to operate than conventional Active Funds. It is estimated that Index Funds now own about 20% of all global equities, up from nothing in the 1970s (when equities were nearly all owned by Active Funds).

Warren Buffett and others have said that, for most people, the best long-term investment they can make is to buy and hold a selection of Index Funds. Most employee defined contribution superannuation funds around the world offer both Index and Active Funds as investment options, and the Index Funds generally perform significantly better than the Active Funds because their management fees are much lower.

All this is increasingly important because people need to plan for their eventual retirement from working life.

Historically, governments and employers provided pensions, but as the world ages this has become unsustainable and superannuation systems that put part of the responsibility for retirement on the individual are emerging. Hong Kong’s Provident Fund is a good example. These trends will continue, so if you want a comfortable retirement you had better learn to save and invest part of your income. Moreover, compound interest (where the return on your initial investment also makes a return) means that you had better start your retirement investing when you are young.

When talking to university students, I am always alarmed at how little they understand about the need to save for their retirement and how little they understand about different kinds of investments and their potential returns.

For the most part, government and employer pensions in Macau and nearby regions are not adequate, and so young people need a good private superannuation scheme that gives good returns and compounds for 30+ years if they want a reasonable retirement. Unfortunately, most of my advice in this regard seems to fall on deaf ears. It is an issue that must be addressed through more intensive financial education for young people in the home, while they are in school and university, and even when they commence employment.