How Paul Samuelson helped inspire index mutual funds

Posted by on December 22, 2009 @ 2:45 pm in Investing

Paul A. Samuelson, who died December 13 at age 94, was rightly remembered as a brilliant educator, as author of the best-selling economics textbook ever, and as the second recipient of the Nobel Prize in Economic Sciences. Professor Samuelson, the Nobel committee wrote, “has done more than any other contemporary economist to raise the level of scientific analysis in economic theory.”

The MIT economics don also had an important Vanguard connection: He helped inspire our founder, John C. Bogle, to create the first index mutual fund for individual investors. That fund was proposed to Vanguard’s directors in 1975 and launched August 31, 1976, as First Index Investment Trust. Its name long ago switched to Vanguard 500 Index Fund.

In his book “Common Sense on Mutual Funds,” Jack Bogle outlines the history of the fund, and credits three articles with serving as “a cri de coeur calling for the creation of index funds.” The first of those, he writes, was a Paul Samuelson article, “Challenge to Judgment,” appearing in the Journal of Portfolio Management’s Fall 1974 edition.

In the article, Professor Samuelson pleaded “that, at the least, some large foundation set up an in-house portfolio that tracks the S&P 500 Index—if only for the purpose of setting up a naïve model against which their in-house gunslingers can measure their prowess.”

Two years later, as the prospectus for First Index Investment Trust circulated, Professor Samuelson wrote in his Newsweek magazine column in August 1976, “my explicit prayer has been answered.”

Nearly 17 years later, in June 1993, Professor Samuelson wrote the foreword to Mr. Bogle’s first book, “Bogle on Mutual Funds,” endorsing Mr. Bogle’s “emphasis upon low-cost, no-load investing.” At that time, Professor Samuelson asserted: “Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios.” He noted that he had no connection to Vanguard other than as a “charter member investor.”

It took many years, but investors eventually came to share Professor Samuelson’s appreciation for low-cost, widely diversified index funds. Time has proven that his confidence in indexing was well founded.


For more information about Vanguard funds, visit, or call 800-871-3879, to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk. Diversification does not ensure a profit or protect against a loss in a declining market.

Vanguard Marketing Corporation, Distributor.


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