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The Clash of the Cultures: Investment vs. Speculation by Arthur Levitt Jr., John C. Bogle

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Chapter 6

The Index Fund

The Rise of the Fortress of Long-Term Investing and Its Challenge from Short-Term Speculation

The stone that the builders rejected became the chief cornerstone.

Psalm 118

Part I

A Brief History of the First Index Mutual Fund: The Paradigm of Long-Term Investment

On August 31, 1976, the world’s first index mutual fund came into formal existence. Named First Index Investment Trust, it was sponsored by The Vanguard Group of Investment Companies, the new mutual fund complex that itself had begun operations only 16 months earlier. While the index fund began with a tiny asset base, its creation recently was hailed, in Morningstar’s words, “as a seminal event in investing . . . a steady revolution that continues today.” Almost 36 years have rolled by since its formation, and what I considered the paradigm of long-term investment has now become the largest pool of equity in the world. Now named the Vanguard 500 Index Fund, today’s six series of that original index mutual fund have assets exceeding $205 billion.

On Wall Street, the index fund was not a popular idea. The implicit claim that passive management would outpace active management was criticized and ridiculed. Until then, the mutual fund industry’s universal strategy was active management and the first index mutual fund was referred to as “Bogle’s Folly.” Index funds were described as “un-American.” Yet today, indexing has earned incredibly broad, if still begrudging, acceptance. Assets of index mutual ...

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