Jack Bogle, the founder of Vanguard who died this week at the age of 89, was a pioneer. He sowed the seeds of today’s huge passive investment industry with the simple, and still controversial, view that most investors fail to beat the market and should therefore not try to.
He believed that what matters in investment is being in the game, for the long run and at the lowest possible cost. His philosophy challenges the active stock-picker’s creed that hard work and intelligent insight can give an investor a sustainable edge that more than makes up for the necessarily higher cost of research-led stock-picking.
The investment industry has been split down the middle over this question for half a century and is unlikely to agree on the answer. As long as some fund managers deliver massively better performance than the market as a whole, active management will retain its adherents. And as long as many investors fail to beat the market consistently, so too will passive’s champions.
Arguably it doesn’t really matter whether Bogle was right or wrong. His achievement, similar to that of the Johnson family that controls Fidelity, was to bring investment to the ordinary investor. Both companies have helped millions of families in America and around the world achieve financial freedom. That’s something to be proud of.
Bogle was born in 1929 to a wealthy New Jersey family that was brought low by the stock market crash in the year of his birth and the Depression that dominated his childhood. He gained a scholarship to Princeton and concluded in his thesis on investment that ‘funds can make no claim to superiority over the market averages.’
That, and the belief that funds should instead be operated in the most ‘efficient, honest and economical way possible’, was to be the philosophy that informed Vanguard’s mission to bring passive investing to the masses.
It is a timely coincidence that Bogle should have passed away in the same week that we have launched Select ETF, our newest guidance list and a complement to the Select 50 list of our favourite active funds that we introduced in 2016.
Select ETF is a concentrated list of 18 exchange traded funds, which our ETF experts have settled on after trawling through the literally thousands of similar funds on the market today. The selection criteria we used focused on ensuring that the ETFs on our list can deliver on their objectives: tracking as closely as possible their chosen index as cheaply as possible and with acceptable risk.
To help investors manage the asset allocation of their portfolios, we have listed Select ETF funds in the same categories that we use for the Select 50 list of actively-managed funds: US, UK, Europe, Japan, Asia Pacific Global, Bonds and Alternatives.
Why, you might ask, would Fidelity have both a passive and an active list of preferred funds? The reason is simple. We believe the debate between the two investment styles is a false one. There is a place for both approaches in a well-balanced portfolio.
The reasons for investing passively are legitimate. If you simply want exposure to a market that you believe has the potential to rise in value, then it obviously makes sense to get this as cheaply as possible and not to risk missing out on the best-performing shares as a result of poor stock selection.
If, however, you have strong conviction that a fund manager has the experience, skill and temperament to consistently pick winners and avoid losers, then history shows that the best of this kind can massively outperform the index.
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There are arguments for using active and passive approaches at different stages of the stock market cycle too. If markets have been oversold during a period of negative sentiment, then you might simply wish to gain exposure to the expected rebound quickly and without taking the time to investigate individual opportunities. On the other hand, at the top of the cycle, or if you expect a market to move sideways, an active approach might help you to a better return.
We believe the choice should lie with you, the investor, but we also know that too much choice can be overwhelming. That is why we launched both Select 50 and Select ETF. The first should help you find the best active managers to increase the odds of beating the market; the second will point you towards the ETFs we believe are most likely to deliver their simple goal of matching it.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Please note that the Select 50 and Select ETF are not personal recommendations to buy funds or ETFs. Equally, if a fund or ETF you already own is not on the lists, we’re not recommending you sell it. You must ensure that any investment you choose to invest in is suitable for your own personal circumstances. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.