Last week, I went to a security analysts’ luncheon featuring John Bogle, the retired founder of the mutual fund company Vanguard Group. Bogle didn’t have nice things to say about his colleagues. He said that too many mutual fund companies charge high fees and manage funds for their own short-term benefit rather than what is best for investors over the long haul. In an efficient market, it’s very difficult for a money manager to outperform the market indexes. Vanguard made its mark selling index mutual funds, which look like the market indexes. They perform no better and no worse than the stock market as a whole, and that’s okay.

The people in the audience were professional investors: analysts and portfolio managers for banks, insurance companies, mutual funds, and pension funds throughout Chicago. They came out in force for Bogle, even though they knew that he wasn’t going to flatter them.

Bogle gave an overview of history which shows that this current market mess should not have been a surprise to anyone. He cites one major destabilizing trend: the movement away from individual stock ownership to institutional ownership. Most institutions have an individual as a beneficiary; they include pension funds, mutual fund companies, trust accounts, and charitable endowments. These funds view investments as tradeoffs between risk and return, nothing more. Bogle says that they changed the nature of the game, but the underlying rules were not adjusted.

Because most of us now have the risk of investing for our own retirements, usually through mutual funds, these rules matter. (more…)