Excerpted from Common Sense on Mutual Funds by John C. Bogle, pages 109-111
Way back in 1978, in the third annual report of Vanguard Index Trust, the first index fund, I used a quotation from English lexicographer Samuel Johnson to make a point: "It was the triumph of hope over experience." With his inimitable wit, Dr. Johnson was speaking of a man who married for the second time; I was speaking of a poll of pension managers taken by Institutional Investor. Just 17 percent of these money management professionals, the magazine reported, had outpaced the Standard & Poor's 500 Index during the previous decade, but fully 95 percent expected to outpace the Index in the coming decade.
In the years that followed, what we witnessed was quite the reverse: "the triumph of experience over hope." The hope of beating the Index was dashed; the hard experience that had characterized so many professional managers before 1978 has repeated itself over and over. The Index has outpaced 79 percent of all managers of equity mutual funds that survived the 20 years since then. As 1995 began, I had the temerity to publish a booklet entitled The Triumph of Indexing, describing both the relative performance of the Standard & Poor's 500 Index and the growing acceptance of index mutual funds by the investing public, a trend that I had awaited for so long.
The timing of the booklet, as it turned out, was auspicious. Since its publication, the word "triumph" has hardly done justice to the colossal success that index funds have enjoyed. On the performance front, the Standard & Poor's 500 Index, given its bias toward stocks with large market capitalizations, has outpaced a stunning 96 percent of all actively managed equity funds. The more representative all-market Wilshire 5000 Equity Index has outpaced 86 percent of those funds, also an imposing performance. On the acceptance front, assets of index mutual funds have risen more than sixfold, from $30 billion to some $200 billion.
Index mutual funds, which accounted for only 3 percent of equity fund assets in 1995, represented 6.4 percent just three years later. With estimated cash inflow of $50 billion in 1998, index fund flows were equal to 25 percent - fully one-fourth - of total equity fund cash flow. Index funds have become the fastest growing segment of the entire mutual fund industry.
