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Who invented the index fund? A brief (true) history of index funds

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Pop quiz! If I asked you, “Who invented the index fund?” what would your answer be? I’ll bet most of you don’t know and don’t care. But those who do care would probably answer, “John Bogle, founder of The Vanguard Group.” And that’s what I would have answered too until a few weeks ago.

But, it turns out, this answer is false.

Yes, Bogle founded the first publicly-available index fund. And yes, Bogle is responsible for popularizing and promoting index funds as the “common sense” investment answer for the average person. For this, he deserves much praise.

But Bogle did not invent index funds. In fact, for a long time he was opposed to the very idea of them!

Recently, while writing the investing lesson for my upcoming Audible course about the basics of financial independence, I found myself deep down a rabbit hole. What started as a simple Google search to verify that Bogle was indeed the creator of index funds led me to a “secret history” of which I’d been completely unaware.

In this article, I’ve done my best to assemble the bits and pieces I discovered while tracking down the origins of index funds. I’m sure I’ve made some mistakes here. (If you spot an error or know of additional info that should be included, drop me a line.)

Here then, is a brief history of index funds.

What are index funds? An index fund is a low-cost, low-maintenance mutual fund designed to follow the price fluctuations of a stock-market index, such as the S&P 500. They’re an excellent choice for the average investor.

The Case for an Unmanaged Investment Company

In the January 1960 issue of the Financial Analysts Journal, Edward Renshaw and Paul Feldstein published an article entitled, “The Case for an Unmanaged Investment Company.”

The case for an unmanaged investment company

Here’s how the paper began:

“The problem of choice and supervision which originally created a need for investment companies has so mushroomed these institutions that today a case can be made for creating a new investment institution, what we have chosen to call an “unmanaged investment company” — in other words a company dedicated to the task of following a representative average.”

The fundamental problem facing individual investors in 1960 was that there were too many mutual-fund companies: over 250 of them. “Given so much choice,” the authors wrote, “it does not seem likely that the inexperienced investor or the person who lacks time and information to supervise his own portfolio will be any better able to choose a better than average portfolio of investment company stocks.”

Mutual funds (or “investment companies”) were created to make things easier for average people like you and me. They provided easy diversification, simplifying the entire investment process. Individual investors no longer had to build a portfolio of stocks. They could buy mutual fund shares instead, and the mutual-fund manager would take care of everything else. So convenient!

But with 250 funds to choose from in 1960, the paradox of choice was rearing its head once more. How could the average person know which fund to buy?

When this paper was published in 1960, there were approximately 250 mutual funds for investors to choose from. Today, there are nearly 10,000.

The solution suggested in this paper was an “unmanaged investment company”, one that didn’t try to beat the market but only tried to match it. “While investing in the Dow Jones Industrial average, for instance, would mean foregoing the possibility of doing better than average,” the authors wrote, “it would also mean tha the investor would be assured of never doing significantly worse.”

The paper also pointed out that an unmanaged fund would offer other benefits, including lower costs and psychological comfort.

The authors’ conclusion will sound familiar to anyone who has ever read an article or book praising the virtues of index funds.

“The evidence presented in this paper supports the view that the average investors in investment companies would be better off if a representative market average were followed. The perplexing question that must be raised is why has the unmanaged investment company not come into being?”

The Case for Mutual Fund Management

With the benefit of hindsight, we know that Renshaw and Feldstein were prescient. They were on to something. At the time, though, their idea seemed far-fetched. Rebuttals weren’t long in coming.

The May 1960 issue of the Financial Analysts Journal included a counter-point from John B. Armstrong, “the pen-name of a man who has spent many years in the security field and in the study and analysis of mutual funds.” Armstrong’s article — entitled “The Case for Mutual Fund Management” argued vehemently against the notion of unmanaged investment companies.

The case for mutual fund management

“Market averages can be a dangerous instrument for evaluating investment management results,” Armstrong wrote.

What’s more, he said, even if we were to grant the premise of the earlier paper — which he wasn’t prepared to do — “this argument appears to be fallacious on practical grounds.” The bookkeeping and logistics for maintaining an unmanaged mutual fund would be a nightmare. The costs would be high. And besides, the technology (in 1960) to run such a fund didn’t exist.

And besides, Armstrong said, “the idea of an ‘unmanaged fund’ has been tried before, and found unsuccessful.” In the early 1930s, a type of proto-index fund was popular for a short time (accounting for 80% of all mutual fund investments in 1931!) before being abandoned as “undesirable”.

“The careful and prudent Financial Analyst, moreover, realizes full well that investing is an art — not a science,” Armstrong concluded. For this reason — and many others — individual investors should be confident to buy into managed mutual funds.

So, just who was the author of this piece? Who was John B. Armstrong? His real name was John Bogle, and he was an assistant manager for Wellington Management Company. Bogle’s article was nominated for industry awards in 1960. People loved it.

The Secret History of Index Funds

Bogle may not have liked the idea of unmanaged investment companies, but other people did. A handful of visionaries saw the promise — but they couldn’t see how to put that promise into action. In his Investment News article about the secret history of index mutual funds, Stephen Mihm describes how the dream of an unmanaged fund became reality.

In 1964, mechanical engineer John Andrew McQuown took a job with Wells Fargo heading up the “Investment Decision Making Project”, an attempt to apply scientific principles to investing. (Remember: Just four years earlier, Bogle had written that “investing is an art — not a science”.) McQuown and his team — which included a slew of folks now famous in investing circles — spent years trying to puzzle out the science of investing. But they kept reaching dead ends.

After six years of work, the team’s biggest insight was this: Not a single professional portfolio manager could consistently beat the S&P 500.

Mihm writes:

As Mr. McQuown’s team hammered out ways of tracking the index without incurring heavy fees, another University of Chicago professor, Keith Shwayder, approached the team at Wells Fargo in the hopes they could create a portfolio that tracked the entire market. This wasn’t academic: Mr. Shwayder was part of the family that owned Samsonite Luggage, and he wanted to put $6 million of the company’s pension assets in a new index fund.

This was 1971. At first, the team at Wells Fargo crafted a fund that tracked all stocks traded on the New York Stock Exchange. This proved impractical — “a nightmare,” one team member later recalled — and eventually they created a fund that simply tracked the Standard & Poor’s 500. Two other institutional index funds popped up around this time: Batterymarch Financial Management; American National Bank. These other companies helped promote the idea of sampling: holding a selection of representative stocks in a particular index rather than every single stock.

Much to the surprise and dismay of skeptics, these early index funds worked. They did what they were designed to do. Big institutional investors such as Ford, Exxon, and AT&T began shifting pension money to index funds. But despite their promise, these new funds remained inaccessible to the average investor.

In the meantime, John Bogle had become even more enmeshed in the world of active fund management.

In a Forbes article about John Bogle’s epiphany, Rick Ferri writes that during the 1960s, Bogle bought into Go-Go investing, the aggressive pursuit of outsized gains. Eventually, he was promoted to CEO of Wellington Management as he led the company’s quest to make money through active trading.

The boom years soon passed, however, and the market sank into recession. Bogle lost his power and his position. He convinced Wellington Management to form a new company — The Vanguard Group — to handle day-to-day administrative tasks for the larger firm. In the beginning, Vanguard was explicitly not allowed to get into the mutual fund game.

About this time, Bogle dug deeper into unmanaged funds. He started to question his assumptions about the value of active management.

During the fifteen years since he’d argued “the case for mutual fund management”, Bogle had been an ardent, active fund manager. But in the mid-1970s, as he started Vanguard, he was analyzing mutual fund performance, and he came to the realization that “active funds underperformed the S&P 500 index on an average pre-tax margin by 1.5 percent. He also found that this shortfall was virtually identical to the costs incurred by fund investors during that period.”

This was Bogle’s a-ha moment.

Although Vanguard wasn’t allowed to manage its own mutual fund, Bogle found a loophole. He convinced the Wellington board to allow him to create an index fund, one that would be managed by an outside group of firms. On 31 December 1975, paperwork was filed with the S.E.C. to create the Vanguard First Index Investment Trust. Eight months later, on 31 August 1976, the world’s first public index fund was launched.

Bogle’s Folly

At the time, most investment professionals believed index funds were a foolish mistake. In fact, the First Index Investment Trust was derisively called “Bogle’s folly”. Nearly fifty years of history have proven otherwise. Warren Buffett – perhaps the world’s greatest investor – once said, “If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle.”

In reality, Bogle’s folly was ignoring the idea of index funds — even arguing against the idea — for fifteen years. (In another article for Forbes, Rick Ferri interviewed Bogle about what he was thinking back then.)

Now, it’s perfectly possible that this “secret history” isn’t so secret, that it’s well-known among educated investors. Perhaps I’ve simply been blind to this info. It’s certainly true that I haven’t read any of Bogle’s books, so maybe he wrote about this and I simply missed it. But I don’t think so.

I do know this, however: On blogs and in the mass media, Bogle is usually touted as the “inventor” of index funds, and that simply isn’t true. That’s too bad. I think the facts — “Bogle opposed index funds, then became their greatest champion” — are more compelling than the apocryphal stories we keep parroting.

Note: I don’t doubt that I have some errors in this piece — and that I’ve left things out. If you have corrections, please let me know so that I can revise the article accordingly.



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How We Deal With Picky Eaters

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When I talk about cutting your grocery bill, I often will hear from people who will ask, “What do you do about picky eaters?”

As you probably have gathered from our sometimes non-conventional menu plans, we don’t base our menu plans upon picky eating palates. Instead, we based them upon what’s on sale at the store and what we have on hand.

Our kids have learned from a young age that I don’t cater to their whims and wishes when it comes to food. We stick with a budget and we shop the sales and markdowns.

Much of the time, that means I find at least a few great deals each week on some of their favorite foods (and I try to stock up as much as I can when I do!). However, sticking with a budget means that I’ve at least somewhat regularly served things for meals that the kids didn’t think they would like.

When it comes to encouraging our kids to eat foods they either don’t really like (or just haven’t tried and think they won’t like), here’s how we approach it at our house:

1. You have to eat three bites.

I know it might almost sound a little juvenile, but for some reason, limiting it to three bites seems to be very doable for our picky eater(s) and they rarely complain because they know that three bites is all that is required.

Note: The adults need to set the example here. If Mom and Dad are picky, there’s a good chance that it’s going to trickle down to some of your kids, too. Set a good example of gratefully eating food set in front of you and not complaining about food… your kids are watching and picking up on your example more than you know!

2. If you complain, you have to eat three more bites.

It is such a gift to have food to eat and I never want my kids to forget that. Even if you don’t like something, you don’t have to complain about it.

So we’ve instituted the rule that if you complain about something, you have to eat three more bites. This cuts down significantly on any complaining! 🙂

3. Once you’ve eaten three bites, you can make something else for your dinner.

We’ve found that oftentimes, the kids will think they won’t like something at all, but then they’ll change their mind once they’ve eaten three bites and they’ll end up eating a full serving. If they still decide that they don’t like something after three bites, they can eat the sides fixed for dinner and fix something else, as well.

The kids know that they can fix themselves yogurt, oatmeal, cereal, scrambled or fried eggs, oatmeal, or mac and cheese to go along with dinner at any time — so long as they’ve eaten their required three bites.

That’s right, I let them fix it themselves (and they are expected to clean up after themselves, too). This keeps it simple for me, but it still makes sure that they are eating enough at dinner time.

As our kids have gotten older, we’ve found that they’ve become more accustomed to different foods because of this simple system. In fact, these days, it’s rare that they fix something extra for dinner — because the three bites rule really helped them to slowly expand their palate.

They’ve now become quite adventuresome in their eating and will often choose to eat something that they don’t think they’ll like just because they want to try it! I can’t guarantee that what has worked at our house will work at yours, but hey, if you’re struggling with picky eaters, let me know if you give it a try!

An Important Note: I know that some kids genuinely have severe sensory issues when it comes to certain textures of foods or certain other issues that are very legitimate reasons for them having a “picky palate”. I’m not saying you need to or should force a child to eat three bites of something — especially in this case. You know your child and their unique needs and I think each parent should decide what would be best for each child.

How do you deal with picky eaters at your house? I’d love to hear! Tell us in the comments!



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Here Are 6 Ways to Have a Blast at a Drive-In Movie Theater

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Summer is on its way. Wahoo!

That also means it’s time to start planning affordable family nights, now that the kiddos are home and don’t have homework to worry about. But that seems to be getting harder and harder these days, especially in a way that’s safe for everyone.

That’s why you should consider the closest drive-in movie theater.

Drive-ins aren’t merely a relic of the past — you might even have one in your backyard. A family of four can see a movie with snacks and drinks for around $25, at most.

Check out this database from DriveInMovie.com to see if there is a drive-in in your county. Next, here are some hacks to make sure you get the most out of your drive-in theater experience.

Tips to Help You Have a Blast At Your Local Drive-In Movie Theater

I know what you’re thinking: “What could be so difficult about putting a car in park and watching a dang screen?”

Well, it’s not difficult. But if you want to be comfortable and have as much fun as possible, here are eight tips for your first drive-in experience, courtesy of patrons and staff at the Lakeland, Florida-based Silver Moon Drive-In Theater.

And because it seems like everything can change on a weekly — or daily — basis, we’ve included Pro Tips to help you prepare for social distancing restrictions. But check with your drive-in before you go for location-specific updates. 

1. Get There Early and Grab a Spot Near the Exit

As the only option for big-screen movies in some areas, the drive-in is becoming a lot more popular. The Silver Moon’s website specifically asks you to try to get there early. 

Pro Tip

Many drive-ins currently require you to pre-purchase tickets online and restrict capacity to allow a full space between each car.

One, you won’t have to sit in a long line of cars and burn that precious gas. And two, you can snag a parking space close to the exit so you avoid the slow-moving caravan after the double feature.

2. Bring Your Own Radio and Extra Batteries

A battery-operated radio sits on the dashboard of someone's car.

Here’s the scene: You’re out with the guy of your dreams, who is totally impressed with your choice of a classic date night. But when the movie’s over, you turn the key to start your car and hear that dreaded clicking noise. Your battery is dead.

Don’t let this happen to you; bring a portable radio with extra batteries. You have to stream the movie’s audio through a radio, and using your car radio will drain the battery.

Pro Tip

Some drive-ins will not allow you to leave your car — even for the restroom. Plan accordingly.

Also, if you plan to set up chairs in your pickup bed or behind your vehicle, you’ll need a portable radio to hear the movie anyway.

Alternatively, you can recharge your car battery by turning on your car every half hour or so and letting it run for a few minutes.

3. Bring Bug Spray

Bugs are an annoying part of life in the summertime.

You’ll be outside for a few hours — whether you’re allowed to sit outside on your lawn chairs or even if it’s just with the windows rolled down — so pack that bug spray so you don’t feel like you’re actually in the jungle while watching “Jumanji: Welcome to the Jungle.”

4. Pack Dinner, Snacks and Drinks

A box of pizza with a beer is photographed.

One of the best parts of the drive-in is that you can bring your own food. Why spend $12 on movie-theater nachos when you can bring some chips and dip for less than half that?

Pro Tip

Some drive-ins have had to close concession stands due to social distancing restrictions — and relaxed their rules on outside food. Call before you go to ask if you can bring your own snacks.

Not all drive-ins allow outside food, so check the rules before you arrive. Silver Moon does allow you to bring in food, but its patrons rave about the food. (I recommend glass-bottle Cokes, some popcorn and a Silver Moon pizza.)

5. Wear Comfy Clothes

A little girl plays in the parking lot of a drive-in movie theater.

Here’s another drive-in advantage: Nobody will judge what you’re wearing.

Break out your pajamas for an extra comfy drive-in experience. Or dress up like one of the Avengers. 

6. Bring Cash, Just in Case

A woman buys food at the concession stand at a drive-in movie theater.

Remember when people actually paid for stuff with those green paper thingies?

Drive-ins dredge up feelings of nostalgia for much simpler times. That might mean simpler times for your wallet as well. Bring some cash just in case.

Now that you’re a drive-in expert, all you need is a cherry red 1950s convertible and you’re ready to hit the theater. Just kidding.

Alex Mahadevan is a former data journalist at The Penny Hoarder. 

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.



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Top 10 Best Credit Card Bonus Offers – June 2020 (Updated)

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Updated June 2020. I’m still collecting points and miles and maximizing the value of my credit card spending. Things are quiet as credit card issuers get conservative, but that just means picking up some slightly lesser bonuses that I passed over previously.

That space in your wallet or purse is still valuable, and you should be the one to get that value. Selected banks are offering strong perks and $500+ value for a single card during the first year to encourage you to apply and try it out. These are the top 10 credit card offers that I would personally apply for right now, if I didn’t already have most of them. Notable changes:

  • IHG Hotels 140k/75k – 140k still highest ever, new 75k traveler with no annual fee.
  • Sapphire cards add some short-term benefits.
  • Removed NavyFed, added US Bank Altitude card.

If you pay off your balances every month, then you can join me and many others in funding a huge chunk of your annual travel budget with cash credits, points, and miles. You don’t need to be a “I only fly business class” world traveler. I mostly use my rewards points on domestic economy flights, mid-class hotels, and cheap car rentals. If you have credit card debt, you should focus on paying that off first as the interest charges could offset most of the perks.

This is a companion post to my Top 10 Best Business Card Offers. Small business bonuses are on average even higher than those on consumer cards.

Note: Certain Chase cards have a “5/24 rule” which is an unofficial rule that they will automatically deny approval on new credit cards if you have 5 or more new credit cards from any issuer on your credit report within the past 2 years. This rule applies on a per-person basis, so if you are new, you might want to start with those Chase cards.

IHG Rewards Club Premier Card

  • 140,000 IHG Rewards club points after $3,000 in purchases within the first 3 months. See link for details.
  • Free Night after each account anniversary year (valued up to 40,000 IHG points).
  • $89 annual fee.
  • Subject to 5/24 rule.
  • Want something lower risk? The no-annual fee Traveler version is now offering 75,000 IHG points.

Chase Sapphire Preferred Card

  • 60,000 Ultimate Rewards points (worth $750 towards travel) after $4,000 in purchases within the first 3 months. See link for details.
  • Short-term COVID-related benefits including 3X on groceries.
  • 2X points on Travel and Dining at restaurants worldwide.
  • $95 annual fee.
  • Subject to 5/24 rule.
  • Alternative: Chase Sapphire Reserve Card. 3X on Travel and Dining, Priority Pass airport lounge access, $550 annual fee, $300 annual travel credit, 1-year Lyft Pink membership.

Citi / AAdvantage Platinum Mastercard

  • 60,000 American Airlines miles after $3,000 in purchases in the first 3 months. See link for details.
  • First checked bag free on domestic AA flights ($60 value per roundtrip, per person).
  • $0 annual fee for the first year, then $99.

JetBlue Plus Card

  • 60,000 TrueBlue points after $1,000 in purchases within the first 90 days. Limited-time offer. See link for details.
  • Free first checked bag for you and up to 3 companions when you use your JetBlue Plus Card.
  • $99 annual fee.

Barclays AAdvantage Aviator Red World Elite Mastercard

  • 60,000 American Airlines miles after any purchase in the first 90 days and paying the $99 annual fee. See link for details.
  • $99 Companion certificate offer. Earn a certificate good for 1 guest at $99 (plus taxes and fees) after making your first purchase and paying the $99 annual fee in the first 90 days.
  • First checked bag free on domestic AA flights ($60 value per roundtrip, per person).
  • $99 annual fee.

Citi Premier Card

  • 60,000 points (worth $750 towards travel booked at ThankYou.com) after $4,000 in purchases in the first 3 months. See link for details.
  • 3X points for every $1 spent on travel including gas stations.
  • Must not have gotten bonus from or closed a Citi Rewards+, ThankYou Preferred, Premier, or Prestige card in the past 24 months.
  • $95 annual fee.

Bank of America Premium Rewards Card

  • 50,000 points (worth $500 towards travel) after $3,000 in purchases within the first 90 days. See link for details.
  • 2 points for every $1 spent on travel and dining purchases and 1.5 points for every $1 spent on all other purchases.
  • $100 annual Airline Incidental Statement Credit.
  • Up to $100 credit towards TSA PreCheck or Global Entry application fee.
  • $95 annual fee.

Capital One® Venture® Rewards Card

  • 50,000 miles (worth $500 towards travel) after $3,000 in purchases within the first 3 months. See link for details.
  • 2% cash back on ALL purchases. Plus earn 10X miles at Hotels.com through January 2020.
  • Up to $100 credit towards TSA PreCheck or Global Entry application fee.
  • $0 annual fee for the first year, then $95.

Hawaiian Airlines World Elite MasterCard

  • 50,000 Hawaiian miles after $2,000 in purchases within 90 days. See link for details.
  • Free first checked bag for primary cardmember when using your card to purchase eligible tickets directly from Hawaiian Airlines.
  • Receive a one-time 50% off companion discount for roundtrip coach travel between Hawaii and The Mainland on Hawaiian Airlines.
  • $99 annual fee.

U.S. Bank Altitude Reserve Credit Card

  • 50,000 bonus points ($750 value towards airfare) after $4,500 in purchases within 90 days. See link for details.
  • $325 in annual statement credits towards travel per Cardmember year (based on account opening date)
  • Up to $100 statement credit for Global Entry or TSA PreCheck.
  • Priority Pass Select membership for airport lounge access.
  • $400 annual fee. (Bigger bonus, big annual fee.)

Chase World of Hyatt Card

  • Up to 50,000 Hyatt points. 25,000 Bonus Points after $3,000 in purchases in the first 3 months. Plus an additional 25,000 Bonus Points after a total of $6,000 in purchases within the first 6 months. See link for details and rough valuation of points.
  • $95 annual fee, free night award upon card anniversary.
  • Subject to 5/24 rule.



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Top 10 Best Credit Card Bonus Offers – June 2020 (Updated) from My Money Blog.


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