But you agree with the premise that there is *less* efficiency when a greater share of the market is held in index funds, right?
I get that there's still a ton of active $ left to pick stocks even at 80% passive. But the fact that there's less should correlate to less efficiency, right?
First a little demonstration - let's say a fund does nothing with 80% of it's assets. What is it's annual turnover?
Well it's not 20%, because if the fund turns over that 20% every month, that's 240% turnover. Or if it crazily turns over every week, that exceeds 1000% turnover per year. And here's my point: the stock market trades 5 days a week at millisecond speeds. There's plenty of room for trading in that remaining 20% of assets, because it matters how fast they change hands rather than the $ amount.
An active fund has lots of people working for it: the portfolio manager, researchers, traders. I claim some funds aren't finding anything before the market does. They are not providing any additional return. Maybe investors liked their marketing, and are still doing better than a savings account, or are ignoring their accounts. Active funds can persist even when they don't find anything valuable in the stock market. I claim there are a lot of these people, and the market is saturated with people trying to exploit news and opportunities. Losing some of these people doesn't reduce market efficiency - it actually just weeds out weak competition.
The real inefficiency of mutual funds, in my opinion, is all the people who are poorly informed. They allow inefficient mutual funds to stay around. I think the market is saturated with them, and losing a lot of them won't impact efficiency at all: because they aren't helping the market remain efficient.
Take SPIVA's data on how often large-cap active funds beat the S&P 500. They haven't put out full 2018 data yet, so here's the mid-2018 data for active vs S&P 500:
past 1 year, S&P 500 beats 63.46% of active funds
past 3 years, S&P 500 beats 78.64% of active funds
past 5 years, S&P 500 beats 76.49% of active funds
past 10 years, S&P 500 beats 89.15% of active funds
past 15 years, S&P 500 beats 92.43% of active funds
https://us.spindices.com/documents/spiva/spiva-us-mid-year-2018.pdfIf you're worried about a crash, the 10 year data includes the aftermath of the 2008 crisis, and the 15 year performance includes the 2008 crisis.
We're not in the same financial world anymore, so I'm not willing to take these platitudes for granted anymore.
If you don't take the time to think about why your strategy works now and why it will work in the future, you don't have a good plan.
Several books I've read say "This time it's different" are the most dangerous words in investing.