Technology Changed Mutual Funds. Did It Help Investors?
Common Sense on Mutual Funds | John C. Bogle | ISBN: 9780470597484
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Bogle opens Chapter 17 with a story that still feels uncomfortably current. A guy in 1996 sits at his computer, reads about a hot emerging growth fund up 60% in its first year, and clicks a few keys to move $10,000 from a money market fund into it. Two months later the market dips and his new fund is down 22%. By year-end the S&P 500 is up 11% since his purchase date. His fund is still down more than 20%.
He waits. The market keeps climbing. His fund keeps falling. By March 1997 he is down 35% while the market is up 18% from his entry point. So he switches again, this time into an S&P 500 index fund because index funds are suddenly hot too.
The fund was the Van Wagoner Emerging Growth Fund. Over the next decade it became one of the worst equity funds in the industry. Investors in the Van Wagoner group lost roughly $3 billion before the firm folded into another company in 2008.
Bogle’s point is not that this investor was uniquely dumb. The point is that technology made this behavior easy, fast, and normal.
To what avail?
Computers gave the fund industry three big gifts:
- Investment technology: derivatives, global currency markets, index funds, massive trading volumes
- Information technology: Morningstar databases that can print 37 pages of stats on a single balanced fund
- Transaction technology: instant online trading, no-transaction-fee fund supermarkets, hourly redemption windows
All impressive. But Bogle keeps asking: to what avail?
The number of equity funds exploded from 300 in the 1970s to 3,300 by the late 1990s. There were more equity funds than individual stocks listed on the NYSE. Funds stopped being long-term savings vehicles and started being traded like stocks. Bogle marks March 19, 1995 as a symbolic turning point: the New York Times moved mutual fund listings ahead of stock exchange prices for the first time.
Information is not wisdom
Morningstar gave investors more data than portfolio managers could explain. Bogle admits a fund manager might score a “gentleman’s C” against a Principia printout. But investors mostly used that mountain of information to chase star ratings.
In 1997, 85% of the $160 billion flowing into equity funds went to four- and five-star funds. Another $60 billion went to untested hot funds with no rating yet. Bogle’s blunt verdict: Morningstar is priceless for understanding a fund’s style and portfolio, but virtually worthless for picking future winners.
Information got an A+. Wisdom got a D or an E.
The fund casino
Shareholder turnover in equity funds tripled from the 1960s to the 1990s. Average holding periods dropped from 11 years to about three. No-transaction-fee marketplaces let investors swap funds with a mouse click while hidden costs hit everyone in the fund, not just the traders.
Bogle’s report card is brutal:
- Investment technology: innovative instruments A+, manager behavior D
- Information technology: data availability A+, intelligent fund selection D
- Transaction technology: ease of trading A+, benefit to shareholders F
Good grades for the tools. Bad grades for the users.
Ten years later: ETFs proved him right
In the 2009 update, Bogle notes ETF turnover hit 3,000% annually while NYSE stock turnover was 155%. Index funds, built for buy-and-hold investors, became the most aggressively traded products on the market.
ETF investors earned -4.2% per year over five years while the ETFs themselves returned 0%. That is a 20% cumulative gap from trading.
His prescription is not to ban technology. It is to stop treating funds like individual stocks, limit exchange frequency, and penalize short holding periods. He even suggests a small per-share transaction tax to slow casino trading.
What I take from this
This chapter aged well. We have more apps, more data, more one-click trading than Bogle could have imagined. The behavioral pattern is the same: chase heat, switch on fear, pay taxes and spreads, end up behind a simple index fund held for decades.
Technology lowered unit costs. But lower trading costs plus tripled turnover means higher total costs. And those costs still come out of shareholder returns.
The tools are not the problem. We are.
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