Author Topic: Discussion on possible weakness of index funds? Public vs. Private corporations  (Read 2528 times)

Monocog

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I am a fan of index fund for the many reasons that everyone else here is: low cost of ownership and broad diversification.

When we talk about how diversified VTSAX is, people seem to think that it is the ENTIRE economy, however, it is just publicly traded companies. It does not privately held companies. Index funds are very broad, but they miss a large portion of the economy, and potential gains.

My questions regarding this and a potential weakness of index funds is this: What if a trend of companies "Going Private" happens? It is unlikely, but possible. With wealth being more centralized with fewer people, there could be a shift away from highly regulated and transparent public companies toward more easily administered private companies. There would be less of a need for ease of trading and more of a need for opaqueness and easier administration. I work at a privately held corp and see the advantages.  If this were to happen, index funds would be less diverse, and potentially weaker.

I realize that this is a little out there, but it is just about the only downside to Vanguard that I have come up with.

I tried googling this and didn't find any good articles. Any opinions on the matter are appreciated.

BTW, I am still all in on Index funds for the near to mid term, as in 10+ years.

Retire-Canada

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I realize that this is a little out there, but it is just about the only downside to Vanguard that I have come up with.

I tried googling this and didn't find any good articles. Any opinions on the matter are appreciated.

When you have to look that hard for a problem I think it's time to stop worrying about the situation. Unless you enjoy worrying?

matchewed

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Generally privately held companies have a harder time with raising capital. So I don't anticipate a sudden rush to privatizing of public companies.

Also given they are privately held and you can't invest in them anyway... so what?

Jack

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Even if it were something to be concerned about, what's the action item? What would you do about it? Since you can't buy shares of private corporations in the market (by definition), it seems to me there's no better alternative than an index of whatever publicly-traded companies were left anyway.

Beaker

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Even if it were something to be concerned about, what's the action item? What would you do about it?

You could probably get exposure to private companies indirectly via private equity funds. There are some funds that normal investors can get into, and I think even some private equity ETFs, but they tend to have really high fees. Not something I would personally do, but if you were dying to get exposure to private companies that would be one route.

brooklynguy

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I tried googling this and didn't find any good articles. Any opinions on the matter are appreciated.

There was a pretty thoughtful discussion of this topic in a recent thread, starting with this post:

http://forum.mrmoneymustache.com/investor-alley/is-it-theoretically-possible-for-the-market-to-not-go-up-long-term/msg871018/#msg871018

matchewed

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Even if it were something to be concerned about, what's the action item? What would you do about it?

You could probably get exposure to private companies indirectly via private equity funds. There are some funds that normal investors can get into, and I think even some private equity ETFs, but they tend to have really high fees. Not something I would personally do, but if you were dying to get exposure to private companies that would be one route.

You already mentioned it but how much of a haircut would you be taking in gains just for "exposure"?

protostache

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Another way to get exposure to private companies is to start your own. Use the cash they throw off to invest in public companies.

Kaspian

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My questions regarding this and a potential weakness of index funds is this: What if a trend of companies "Going Private" happens? It is unlikely, but possible.
...
I tried googling this and didn't find any good articles. Any opinions on the matter are appreciated.

You would base an investment strategy around an "unlikely" what-if scenario that you came up with yourself?  Note to self:  I will not base my strategy around Star Trek food replicators becoming a reality or somebody inventing a time machine.  (There are honestly more "good articles" written about those two things than what you were searching for.  Does that make them more probable?)