But he's not really down in index funds, he's merely saying that the current rate of economic growth is unsustainable and that index funds are not a magic solution to that problem.
His point is that we've grown all we can, and there's going to have to be a flattening out at some point. He may be right or he may not be, new technologies may provide room for growth in areas that previously were completely untouchable.
He only mentions index funds really two times. The first time is implicitly, but I think it's a fair assumption that index funds are what he's talking about:
The reason for the popularity is that the simplifying assumptions behind the concept are easy to understand, which has made it possible for Nobel Prize winners to write academic papers on the subject; investing requires very little effort; and it has given Wall Street a new product to sell to Main Street. Who me, cynic?
Here I think he really is being overly cynical, which he himself admits as a possibility. Just because something is simple does not mean that it is worse than something more complex. And actually Wall Street
hates index funds precisely because they can't make any money at it. The difference between being able to charge 2% / year in fees vs 0.1% / year is enormous. So I see no basis to this objection, merely an overly cynical rant.
Secondly:
The final edge is that the magic of compound interest is especially magical when it benefits the few in such a way that it transfers wealth from consumers to capitalists. If everybody becomes a capitalist this wouldn’t work. For instance, when demand for bonds increase, the interest rate drops because the price goes up. Thus if everybody bought bonds, the interest rate would drop and returns would be less. Similarly, if everybody bought stocks, the price level would increase and reduce further appreciation potential. Blindly buying index funds only ensures that stocks are mispriced in the aggregate — although their will be internally diversified, diversification does NOT eliminate systemic risk, which is exactly the kind of risk that the index fund investing is currently creating (see here for more).
His point here is that even though index funds may diversified across the stock market that does not protect you from systemic risk; ie what if all stocks are over-valued with respect to bonds / gold / real estate / whatever. That's absolutely true, and that's why it's not wise to have an asset allocation of 100% stocks.
But even so, he's not really down on index funds specifically, he's down on everyone investing only in the stock market. Does he say index funds are a bad investment compared to managed funds? No. Does he propose a better system to use instead of index funds? No.
In summary I'd say he's making two points:
1) He thinks that the current rate of economic growth is unsustainable and that if you're relying solely on things continuing the way they have been for the last 100 years you may be in for a bit of a rough patch.
2) He thinks that index funds are not a magic solution to #1, nor are they a magic replacement for having a reasonable asset allocation.
#1 may or may not be true. #2 definitely is. So by all means keep on reading and learning and exploring, and continue basing your investments on rationality not on emotion and as part of that read up on asset allocations and find one that works for you.
