I certainly noticed that comment; he's also got a short post on his about.com site about it
http://beginnersinvest.about.com/od/capitalgainstax/a/mutual_fund_tax.htmNaturally, my first thought was "oh no, that's me he's talking about!" I'm certainly plowing tons of money into aftertax mutual funds (VTSAX and VTIAX), and my understanding of the stock market and company valuations is rudimentary. The one thing lacking from throwing me in a further worry though is that he didn't provide any examples of where this has happened. Yes, this rise of giant mutual funds supported by less-sophisticated investors is a relatively new phenomenon, but I began to wonder if this is simply something out of the sphere of my control.
Someone with more knowledge can chime in, but the only fund that I'm aware of that has suffered major outflows in recent years is PIMCO Total Return A (PTTAX) fund, which googling showing went from $293B in April 2013 to less than $100B in September 2015. I don't see reports of major capital gains distributions or other negative effects on investors, but this is a bond fund, so maybe we wouldn't expect as severe of consequences.
So then the question is, what are we to do? Diversifying into alternative but similar funds (substituting Fidelity for Vanguard, or SP500 for Total Stock Market) wouldn't help in the types of scenarios that are envisioned triggering these problems, because every one of these should be facing similar 1) capital gains + 2) records outflows. Individual stocks? Well I'm trying to avoid going down that rabbit hole, I guess my aftertax capital is sufficiently large now that I could try to replicate the SP500, but first I'm going to trigger personal capital gains, and second that will certainly involve a lot more research and work to maintain (I don't think Joshua Kennon would consider that an actual downside). I can't deny that I'm tempted to go in on his new fund that he's creating, but I'd need to liquidate most of my aftertax holdings to meet his minimum, and while he certainly seems like an honest and trustworthy person, I'd be substituting one form of risk for others. At least the potential capital gains bill is a known known, something that I can plan around and attempt to mitigate.
I think my final answer is that his warning won't deter me from continuing the course, but I will have an eye to diversifying my aftertax holdings beyond holding just VTIAX and VTSAX. I already hold a large chunk in DGEIX from my early days using an advisor, and while I have attempted to whittle that down, I think I'll stop and be happy to hold about 1/4 of my aftertax money in that fund, which should be diversified enough (and mostly in the hands of clients with financial advisors who aren't just brokers) from the large Vanguard funds. And maybe at some point, it'll make sense to divert a chunk over to an advisor to maintain a diversified basket of individual stocks.