Investing Lessons From Vanguard's Bogleheads

They call him by his first name: Jack. He isn't in the room and has never met most of them. Yet on a recent Sunday afternoon, a group of his devotees has gathered at a public library in Ar­lington, Va. They've come to discuss such things as the stock market's wild swings and what to do with their retirement accounts. Jack's presence is felt, infusing the conversation and advice that's being doled out ("don't time the market" is a common refrain). At the end of the session, a retiree named Lydia Segal sums up her affection for him: "Jack Bogle is responsible for my financial happiness."

If the fund world has a patron saint, it would likely be John "Jack" Bogle. The founder of fund giant Vanguard Group and the mastermind behind the index fund for individual investors, Bogle may be the only person in the business with a fan club of thousands, many of whom view his investing wisdom as gospel. "A Boglehead is someone who follows the advice and path set up by Jack Bogle," says Mel Lindauer, coauthor of The Bogleheads' Guide to Investing, a book that details the group’s thinking and has a Bogle bobblehead on its cover.

How they got started. Originally called the "Vanguard Diehards," the Bogleheads got their start on Morningstar's Web site in 1998 as a forum to discuss Vanguard and its index funds. The forum, now called Bogleheads Unite, became one of the most popular on Morningstar, with more than 627,000 posts so far. In 2007, the group launched its own Web site, Bogleheads.org, which now has 47,000 members, an average of 70,000 daily visitors and up to 4 million hits a day, making it one of the most active online investing communities.

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Offering advice on all types of financial matters, the site now hums with tips on everything from retirement planning to how to pay for college. Many members use the forum to tap the wisdom of a like-minded crowd. A recent post by "Codemaster" asked whether it was a good time to buy shares of scandal-tarred Volkswagen, eliciting more than 150 replies. (One answer: "Take the money and go to Vegas . . . same result, more fun.") Other Bogleheads raise more esoteric questions. A 22-year-old named "bigguy8437" wondered if a prenuptial agreement would “make things weird in a relationship." (Answer: It depends.)

Over the years, more than 60 Boglehead chapters have sprung up, including groups in Taiwan and the United Arab Emirates. The groups typically meet every few months, discussing everything from Social Security benefits to market trends. Once a year, there’s a national gathering at which a lucky few who sign up early and pass a security screening converge for a few days of presentations and face time with the 86-year-old Bogle himself.

At the latest annual meeting, a three-day confab at a Philadelphia-area hotel in mid October, Bogle held a half-hour "fireside chat" with William Bernstein, a retired neurologist and veteran Boglehead. Bogle, who had a heart transplant in 1996, then patiently met with about 200 fans, posing for pictures, signing books and chatting with his admirers. The next day, the group boarded shuttle buses to Vanguard's campus in nearby Malvern, Pa., for an afternoon of hobnobbing with the firm's executives.

To Vanguard, Bogleheads are a vocal constituency that can’t be ignored. The group openly rebelled against Vanguard when the firm asked Bogle to give up his post as chairman in 1999 at the mandatory retirement age of 70. Bogle didn't want to go, prompting the Bogleheads to launch an online campaign to keep him at the helm. Though Vanguard offered to let Bogle stay, he decided to retire with a deal that included money to help him launch the Bogle Financial Markets Research Center, which is independent of Vanguard but situated on its campus. "Our posts created such a ruckus that Vanguard realized it had a problem and worked to resolve it," says Lindauer, 77.

At Vanguard headquarters, the firm rolled out the red carpet for the Bogleheads, who wore nametags with a photo of Jack. Vanguard executives greeted them at a reception that featured light snacks (pulled pork sandwiches, cookies and soft drinks), a raffle of Vanguard-branded trinkets (golf balls, mugs) and canvas gift bags for every Boglehead. A panel of Vanguard execs discussed the markets and addressed their questions. And Vanguard sent a message that Boglehead opinions matter. Joel Dickson, senior investment strategist, told the group that he always checks the Boglehead forum the day Vanguard launches a new product. "I'm interested in the reaction," he told the crowd, eliciting nods of approval. "They're fanatic, but fanatic in a good way," says Francis Kinniry, a principal in Vanguard's investment strategy group.

Jack meets the king. For his part, Bogle hasn’t missed the yearly meeting of his disciples since he showed up at the first gathering of Bogleheads in 2000. That year, 21 of them met in the Miami condo of a Vanguard investor named Taylor Larimore, a World War II veteran who launched the group and went on to earn the title "King of the Bogleheads." Over the years, Larimore has posted more than 22,000 notes on the Boglehead Web site. (At 91, he didn’t attend this year’s event, but he remains an active poster on the forum.)

Bogle has remained active in the group because it spreads his investing gospel. "Indexing works," he tells Kiplinger, "and the Bogleheads have been an important part of passing on that message to other investors." As a show of his dedication, he even phoned into the group’s 2009 reunion from a hospital where he was being treated for a listeria infection. Says Bogle: "You could say what I did was stupid. I was flat on my back and sick. But I talked to them for 15 or 20 minutes."

If reverence for Bogle runs deep, it's because fans see him as a linchpin of their financial success. Lindauer, a retired businessman from Philadelphia, says that for years he "was guilty of chasing hot funds and other non-Boglehead behavior." Eventually he gave up trying to beat the market, "got religion" and stashed almost all his money in Vanguard index funds.

Benefits of membership. Belonging to the Bogleheads helps others avoid self-destructive investing behavior. Victoria Fineberg, 61, a retired engineer in Arlington, Va., discovered the Boglehead path after making a costly mistake in her 401(k) plan. Plowing money into shares of telecom equipment maker Lucent Technologies, her employer at the time, she lost more than $100,000 as the stock crashed during the tech-stock bust at the turn of the century. "I was sophisticated enough to know better but, like in a casino, I couldn’t take myself away from the gambling table," she says. Being part of the community helps her stick with index funds. "I identified my temptation to speculate," she says, "and vowed never to do it again."

Regardless of their reasons for joining, Bogleheads see little point in debating one of the key questions in investing today: whether individual investors can beat the market, either by picking their own stocks or by investing in actively managed funds. The forum topic "Active vs. Passive Investing" has all of 10 posts, the last in 2009. When asked at the October gathering how many Bogleheads use active fund managers, only seven sheepishly raised their hands in a room of 200.

Even with an ace manager at the helm, Bogleheads believe, most actively managed funds have slim chance of beating index funds over the long haul because of their inherently higher costs. Many studies back up their view, along with real-world results: In 2014, for instance, just 21% of actively managed U.S. stock funds beat their benchmarks. And even if you could find a winning fund, it probably wouldn't do you much good. According to research by Morningstar, most investors chase performance, plowing money into a fund after it's had a hot streak. Thereafter, the fund is likely to slump back to the middle of the pack.

None of these ideas is new, of course. Bogle discussed the drawbacks of active management in his senior thesis at Princeton in 1951, and the notion that investors could get a better deal was the reason he invented the index fund for individual investors. Launched in 1975 as the First Index Investment Trust, the fund later became Vanguard 500 Index (symbol VFINX), now one of the largest funds on the market, with more than $200 billion in assets.

Vanguard hasn't done badly either, thanks in good measure to Bogle's belief that investors should keep more of what they earn. He set up Vanguard so that shareholders of its funds technically own the company. Vanguard provides its funds at cost, lowering fees as its own expenses edge down.

That penny-pinching model and focus on indexing has been remarkably successful. Vanguard is now the world’s largest fund company, with more than 20 million investors, 175 U.S.–based funds and $3.2 trillion in assets, equal to 20% of all U.S. fund assets (excluding money market funds). Vanguard controls so much money that it now owns an average of 6% of every publicly listed U.S. stock, more than any other company. It’s also muscling out much of the fund industry. In 2014, new cash coming into Vanguard funds exceeded cash going out of them by $219 billion. According to Morningstar, Vanguard accounted for 45 cents of every dollar of net inflows into mutual funds and exchange-traded funds (the figure excludes money market funds). "Vanguard's impact on investors has been enormous, and so has Jack Bogle's," says Russel Kinnel, director of fund research for Morningstar. "I can't think of anyone who's had a greater impact than he's had."

Despite being long retired from Vanguard, Bogle remains active in the industry, railing against high fees and the growing array of ETFs that aim to beat the market by using enhanced indexes. The business remains filled with "financial buccaneers offering a panoply of silly investment strategies that people may not understand," he says. Much of the industry, he adds, is about "marketing, merchandising, gambling and losing—because gamblers always lose in the end."

For many Bogleheads, being part of the group is all about staying on Jack's righteous path, which boils down to sticking with index funds and avoiding almost everything else. "It takes constant vigilance to stay disciplined," says John Ouzts, a retired psychiatrist from Mount Pleasant, S.C., who attended the annual meeting. "I come back every year to renew my faith in index funds and to keep me from temptation."

How to Be a Boglehead

1. Live frugally and invest regularly, with as much as you can afford.

2. Develop a core mix of stocks and bonds suitable for your age and financial goals.

3. Settle for matching the markets' returns by buying traditional, low-cost index funds for the bulk or all of your portfolio; you'll beat most other investors.

4. Master your emotions; they can be your worst investing enemy.

5. Don't peek at your portfolio too often. Adjust it once or twice a year to keep your investment mix intact.