Index-Fund Investing: Revisiting a Piece of Investment History

In August of 1976, while everyone was dreading the potential epidemic of Legionnaires’ disease, Nobel Laureate Paul A. Samuelson wrote a now famous column in Newsweek titled, “Index-Fund Investing.”¹ Samuelson noted the ascendancy of index funds based on Standard & Poor’s 500 Index but lamented the fact that they were only available to institutional investors.

“As yet there exists no convenient [retail] fund that apes the whole market, requires no load, and that keeps commissions, turnover and management fees to the feasible minimum. I suspect the future will bring such new and convenient instrumentalities.”

Enter John Bogle with the First Index Investment Trust which we know today as the Vanguard 500 Index Fund. Samuelson expressed his elation, “Sooner than I dared expect, my implicit prayer has been answered.”

Unfortunately, the overwhelming majority of the investment industry did not share in Samuelson’s joy. Perhaps viewed as a threat to their livelihoods, they dismissed the first retail index fund with belittling terms like “Bogle’s folly” and “un-American” as seen in the widely circulated poster below enlisting Uncle Sam’s help in the eradication of index funds.²

^{Source: Bogle Financial Markets Research Center.}

Fidelity Investments Chairman Edward Johnson stated point blank that his company had no intention of joining this nascent movement: “I can’t believe that the great mass of investors are going to be satisfied with receiving just average returns. The name of the game is to be the best.” As Samuelson astutely observed, “Money managers [do not] like to be reminded that their over-all record in security selection has been significantly worse than that of a non-managed index fund.” What was true in 1976 is still true today as shown in this write-up of the Standard and Poor’s Index vs. Active Scorecard. Ironically, Fidelity Investments is now one of the leading providers of index funds.

The first institutionally available index funds mentioned by Samuelson hold a special significance for Index Funds Advisors. The fund operated by Wells Fargo Bank for the Samsonite pension plan was designed by David Booth, one of the two founders of Dimensional Fund Advisors, and John A. McQuown who currently serves on DFA’s board of directors. The fund operated by American National Bank of Chicago was pioneered by the other co-founder of DFA, Rex Sinquefield.

With over $1 trillion³ in assets and growing rapidly, the triumph of indexing is now a matter of history rather than hope, but there is still a great deal to be done in terms of investor education. We at Index Funds Advisors will continue to do everything in our power to meet this challenge.

¹Samuelson, Paul A., Index-Fund Investing. Newsweek, August 16, 1976: p. 66.
²Bogle, John. "The First Index Mutual Fund: A History of Vanguard Index Trust and the Vanguard Index Strategy". Bogle Financial Center. http://www.vanguard.com/bogle_site/lib/sp19970401.html.
³2012 Investment Company Fact Book, Investment Company Institute, p. 73.