Author Topic: Will there be too much Index Fund investors in 2020?  (Read 1649 times)

RiddleMB

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Will there be too much Index Fund investors in 2020?
« on: June 08, 2019, 06:52:23 AM »
I'v been reading a few articles lately, dooming the index funds in the near future.

The claim that index funds are yielding lower percentages and can crash more easily due to the increasing amount of people who put their money in low-cost index funds.

I'm very reluctant to believe anything I read on the net, but I'm new to investing and have no reliable sources of information.
I tried searching in "BogelHeads" but they discuss there only the extreme scenario in which EVERYONE is investing only in index funds.

I'll link the articles below, and would like to know your opinions about them. I saved a good amount of money, which I plan to put into index funds, and would like to know if all those claims have any real ground.
On the same note, can anyone recommend a real good source for such issues?

https://www.forbes.com/sites/greatspeculations/2018/09/19/are-we-headed-for-a-passive-index-meltdown/#12597e62413e
https://awealthofcommonsense.com/2018/08/could-index-funds-become-too-popular/
https://www.marketwatch.com/story/index-fund-investors-will-fail-in-a-bear-market-if-they-cant-pass-this-test-2018-08-17
https://www.lynalden.com/index-funds/

Your help is much appreciated,
Cheers!

Murse

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Re: Will there be too much Index Fund investors in 2020?
« Reply #1 on: June 08, 2019, 06:58:51 AM »
An index fund is just a basket of stocks and trades just like the basket of stocks. Letís say you are in a index fund and for simplicity letís say it has Microsoft, apple, google and amazon in it. The only way the index will go down is if the stocks in the basket go down based on weighting- meaning the only way this would happen is if the stocks Microsoft, apple, google and amazon went down, in which case anybody owning those stocks would be hurt as well.

Sibley

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Re: Will there be too much Index Fund investors in 2020?
« Reply #2 on: June 08, 2019, 11:54:43 AM »
Since you're new to investing, go read J Collin's stock series. Then, you can read the financial news, but really I'd suggest you pass.

cloudsail

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Re: Will there be too much Index Fund investors in 2020?
« Reply #3 on: June 08, 2019, 12:27:41 PM »
Quote
Grahamís comment puts index funds in an entirely different light. Their desirability becomes less a statistical one of whether buying and holding such funds will outperform those who engage in active management. That statistical question was long ago resolved, of course, with index funds winning hands down.

But buying and holding an index fund comes up short if few investors are willing to stick with the strategy through thick and thin. And, indeed, it appears that few actually are.

On the contrary, most who say they believe in a long-term buy-and-hold strategy end up discovering ó at or near the bottom of the bear market ó that they donít have what it takes. That means they suffer most or all of the bear-marketís losses and benefit from only a portion of the marketís subsequent rebound.

So.... nothing we didn't already know.

The first article is interesting though, in that it points out some stocks, like Apple, are over-represented in indices. But I don't think this is going to be any different if you invest with actively managed funds, unless you solely invest with an active manager who only goes around looking for under-represented "deals," which sounds incredibly risky. If you are concerned about this you can also invest in index funds that focus on small cap, mid cap, etc.

BicycleB

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Re: Will there be too much Index Fund investors in 2020?
« Reply #4 on: June 08, 2019, 01:29:49 PM »
You want my opinion, you say? Here it is. You're better off investing in index funds than looking for some other tactic, and despite the headlines, these articles contain evidence FOR investing via index fund.

Details:

The first article states that the biggest person offering concern, indexing saint John (Jack) Bogle, didn't think it would be a problem any time soon. He and the article also gave perfectly good reasons why. In the fine print, they noted that small companies might have a slight edge if all this is true. Your actionable conclusion should be to possibly buy a little more small-company index (Russell 2000 index) fund, and a similarly little bit less big company index (S&P 500).

The second article gives evidence suggesting that the index-funds-will-collapse idea is wildly unlikely, because the gains that index funds rely on are largely based on aspects of human nature that measurably do not appear to be changing. Your actionable insight is to invest with confidence, ignoring the fear-inducing headlines that get attached to even the most mundane of articles in our clickbait media sea.

The third article is designed to suggest paying an investment advisor to invest for you. The ideas presented are weak in supporting the article's thesis. They assume that investors will sell at the bottom a bear market, but leave their money in an advisor's hands. I think that most people who would sell after big losses would do so whether or not an advisor is involved. They also assume that the advisor will stay calm in crisis. That's far from guaranteed, but the advisor's fees ARE guaranteed. My guess is that you're better off picking index funds instead of managed funds, or instead of buying various funds through an advisor. In any case, the article has little to do with any hypothetical collapse of index funds; it really just discusses investor behavior during market plunges. Market plunges are inevitable, outsized collapse of index funds is not. Your actionable plan should be hold on to stock during downtowns... presumably stock held in index funds.

The fourth article has a section title that appears to address the index question directly. But the body of the article doesn't. It's not about indexing at all. It's just a long standard article saying that future returns are likely to be moderate rather than high if prices return to their long term historical averages. This is probably true, but irrelevant to whether index funds are a good vehicle for any stock investing that you choose to do. The author herself stated that her main investments are a set of index funds and/or ETFs. For purposes of your question, ETFs are a variant of index funds. Based on the article, your actionable moves should be to invest in index funds, include a large-ish % of stock funds rather than bond ones, and don't give up just because you experience a dip for a few years, or a decade where your profits are small (say 20%) instead of large (doubled your money).


« Last Edit: June 08, 2019, 02:38:48 PM by BicycleB »

RedmondStash

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Re: Will there be too much Index Fund investors in 2020?
« Reply #5 on: June 08, 2019, 08:08:19 PM »
The third article is designed to suggest paying an investment advisor to invest for you.

This is arguably the most important point. There are so many articles about investing, and so many predictions (often inaccurate), by so many websites. Generally their intent is to get you to click their links, buy their products, or hire their people -- in other words, to contribute to their bottom line. A financial article is not impartial journalism; it is unlikely to have your best interests at heart.

Another thing to keep in mind is that it is unlikely that most people will end up in index funds, because the human tendency to believe they can beat the market -- or find advisors who can -- is hard to overcome. Not to mention that most people are too intimidated by finances and investing to invest at all, unless they hire someone to manage their money for them. I fell prey to this for too many years before educating myself and taking the reins myself. And you can bet that a financial advisor won't just buy and hold index funds for you; they'll feel the need to be seen doing lots of things on your behalf, or else why would you need them? (You don't.)

I second the idea of reading the JL Collins stock series. It's useful.

It's normal to be nervous about investing when you're new to it, and it's normal to second-guess yourself. I can't guarantee that you'll get the best possible results with low-cost, broad-market index funds. But based on my own research and experience, they're as good a bet as any, and far better than most. And few enough people believe that that it's highly unlikely that somehow, magically, within the next 7 months, there's going to be a huge glut of people buying index funds, and that will somehow negatively affect their value.

To me, index funds just make sense.

flipboard

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Re: Will there be too much Index Fund investors in 2020?
« Reply #6 on: June 09, 2019, 12:42:22 AM »
Even with index funds, people aren't actually passive investors.

Index funds probably are leading to an overweighting of S&P 500, or tech indices, or things like that. That's not an issue if you're well diversified.

ctuser1

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Re: Will there be too much Index Fund investors in 2020?
« Reply #7 on: June 09, 2019, 05:49:07 AM »
Index funds suppress beta in the very short term.
All stocks in the basket move together when they are bought/sold as a basket, hence the stocks in this basket have reduced Ďuncorrelated returní.

This will, in theory, lead to market inefficiencies that will be exploited by other players. If ďother playersĒ donít correct the inefficiencies, the over time the stock may remain ridiculously cheap, ridiculously expensive, or adjust gradually.

All of these happen due to many reasons in the market!! Beta suppression due to correlated index basket movements is probably not the biggest source of inefficiency.

The only thing catastrophic index funds do is to the sales commissions of financial advisors.


ender

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Re: Will there be too much Index Fund investors in 2020?
« Reply #8 on: June 09, 2019, 06:35:25 AM »
There will always be active investors.

The more passive investors there are, the more opportunity exists for folks who are active investors to hit it big. Some will, more won't.  But that opportunity still exists. For those that do it "right" it can be even more profitable which will (in my opinion at least) lead to a balance of active vs passive in the market. What that balance ends up being I have no idea...

Telecaster

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Re: Will there be too much Index Fund investors in 2020?
« Reply #9 on: June 09, 2019, 12:04:20 PM »
There will always be active investors.

The more passive investors there are, the more opportunity exists for folks who are active investors to hit it big. Some will, more won't.  But that opportunity still exists. For those that do it "right" it can be even more profitable which will (in my opinion at least) lead to a balance of active vs passive in the market. What that balance ends up being I have no idea...

Or simply diversify away from large-cap indices by stirring in some small-cap or mid-cap.    Which most people should consider doing anyway.

js82

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Re: Will there be too much Index Fund investors in 2020?
« Reply #10 on: June 10, 2019, 05:35:36 PM »
There will always be active investors.

The more passive investors there are, the more opportunity exists for folks who are active investors to hit it big. Some will, more won't.  But that opportunity still exists. For those that do it "right" it can be even more profitable which will (in my opinion at least) lead to a balance of active vs passive in the market. What that balance ends up being I have no idea...

Or simply diversify away from large-cap indices by stirring in some small-cap or mid-cap.    Which most people should consider doing anyway.

If anything, small-cap and mid-cap indices probably have greater risk of distortion from index investing than large-cap.  If you look at the fraction of total market capitalization that comes from large-cap stocks versus small-cap, it's a pretty heavy skew - the total capitalization of small-cap companies is quite low relative to the market as a whole.  If everyone throws 20-25% of their portfolio towards small-cap that represents a massive influx of cash to that sector, and will distort the market to a much greater extent than is likely from index investing in large-cap or a market-weighted strategy.

As far as active investing/stock picking goes, in my opinion your best bet is to go after really small-cap stocks that aren't targeted by ETF's or institutional investors due to their size(and resulting lack of liquidity for larger trades that these institutions want).  Outside of that, thinking you can outsmart the quants at the big trading firms is usually a fool's errand.
« Last Edit: June 10, 2019, 05:40:54 PM by js82 »

Telecaster

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Re: Will there be too much Index Fund investors in 2020?
« Reply #11 on: June 10, 2019, 06:35:35 PM »
If anything, small-cap and mid-cap indices probably have greater risk of distortion from index investing than large-cap.  If you look at the fraction of total market capitalization that comes from large-cap stocks versus small-cap, it's a pretty heavy skew - the total capitalization of small-cap companies is quite low relative to the market as a whole.  If everyone throws 20-25% of their portfolio towards small-cap that represents a massive influx of cash to that sector, and will distort the market to a much greater extent than is likely from index investing in large-cap or a market-weighted strategy.

If everyone did, then sure.  But all of the largest index funds and ETFs are large cap, like VTSAX and SPY.    IIRC, only about 30% of funds are index funds.  So we've got a long way to go before small cap funds are more than just curiosity for most people.   


RiddleMB

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Re: Will there be too much Index Fund investors in 2020?
« Reply #12 on: June 11, 2019, 09:46:51 AM »
I see. So basically all those articles I mentioned are rubbish and speculation.
I guess I should ignore them in the same way I igrore my local news.

Sibley, that is an awesome suggetion! I heard MMM mentioning his book, but didn't know he has a blog. I started today reading his series.

So basically I need to keep with the usual strategy: low-cost world index fund investing for the long term, and ignore any news.

Thanks everyone! You literally save my freedom!