Jack Bogle on why the financial sector is too big

Jack Bogle is the founder of the Vanguard group of mutual funds and a pioneer of the concept of investing in no-load index funds with low expense ratios rather than trying to outguess the market.

Vanguard has the largest share of fund assets in the industry, and two-thirds of that is in index funds.  I myself have put my retirement savings in Vanguard and T. Rowe  Price funds.

This is from an interview of Jack Bogle in the August issue of Money magazine.

Q: You’re concerned that the financial sector is too big. Why?

Jack Bogle

Jack Bogle

A: The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings. What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It’s a waste of resources.

via Money.com.

Mitch Tuchman of MarketWatch pointed out that $32 trillion is nearly double the size of the U.S. economy.  Merely moving this from one pocket to another during the course of a year is at best useless and at worst destabilizing to the U.S. economy.  Yet a lot of people get rich collecting fees just for moving the money around.

There should be a transaction tax of some fraction of 1 percent.  This wouldn’t affect serious long-term investors, but it would slow down speculators.

LINKS

Jack Bogle Explains How the Index Fund Won With Investors, an interview by Pat Regnier for Money magazine.

Why 99% of trading is pointless by Mitch Tuchman of MarketWatch.

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