Stocks have soared ever since Donald Trump stunned everyone by winning the presidency, but Trump’s victory was far from a landslide mandate. Hillary Clinton won the popular vote by over 2.6M votes. This marks the fifth time a president has won the electoral college but lost the popular vote—and Trump’s popular vote deficit was much larger than the previous four times this election outcome occurred.
But before Democrats claim a moral victory, they would be wise to examine the congressional tally. According to the Wall Street Journal, Republicans won 3M more House votes than Democrats. That means a staggering 5.5M voters picked Clinton and then voted for a Republican congressional candidate—which not only speaks volumes to Trump’s personal unpopularity, but to the rightward drift of white voters.
Wednesday marked the fortieth birthday of the most investor-friendly idea in stock market history: the index fund. Forty years ago Vanguard introduced the first fund that merely tracked the S&P 500. It has appreciated 6,334 percent since inception, trailing the S&P by a mere .14 percent annually, all of which was the ‘expense ratio’ charged investors. Few, if any other funds have matched or exceeded this annual return.
Today roughly $5 trillion is invested in index funds. Vanguard is the largest index manager, with over $3 trillion in assets under management (AUM). Other money managers now offer index products alongside their traditional, actively managed funds.
Study after academic study shows that index funds outperform most actively managed funds. The reason is simple. Fees. The average expense ratio for actively managed stock funds is around 1.5 percent. It is somewhat less for fixed income funds. As Vanguard founder John Bogle has convincingly shown, a fund with a 1.5 percent annual fee (and the same pre-fee annual return) will produce a much smaller total return over a multi-year period than a fund with a .14 percent annual fee.
Investors have taken notice. According to the Wall Street Journal, they have invested $409 billion in passive index funds in the last year and pulled $310 billion out of actively managed funds over the same period. Roughly 20 percent of all money in stock funds is now indexed, up from zero 40 years ago.
I suspect this trend will accelerate.
We are definitely living through the financial equivalent of the steroids era on Wall Street, with celebrity fund managers jacking up their assets under management and posting (allegedly) too-good-to-be-true returns. But beyond the ego-driven corruption of places like Manhattan and Greenwich, there are hopeful signs that things might be getting better in my industry. Not surprisingly, two of the best examples of this trend come from a place regular readers of this blog know I am quite fond of: Texas.
A million years ago in the 1980s I managed a mutual fund that charged new investors something called a “front end load” fee. Just for the privilege of giving their money to my company, our customers had to pay an obscene 5.75 percent of their investment right off the bat. Thankfully, those kinds of fees are rare nowadays. But mutual funds are still fleecing their investors in a big way.
When I quit the mutual fund racket in 1990, the industry was booming. It had recently found a huge new source of revenue–retirement accounts. The old pension system was dying and everyone was hailing Wall Street’s brilliant new financial invention–the 401(k). Trust me, after four years inside that business, I can say in all confidence that people shouldn’t put a red cent into actively managed mutual funds, let alone their entire life savings. And yet 60 million Americans have now placed their nest eggs in 401(k)’s. That’s a scary thought.