Author Topic: Your love of index funds is terrible for our economy  (Read 2374 times)

SubL stache

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Your love of index funds is terrible for our economy
« on: December 11, 2018, 10:56:00 AM »
https://www.marketwatch.com/story/your-love-of-index-funds-is-terrible-for-our-economy-2018-12-10

Can some of you smart people here tear this article apart for me please?

dandarc

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Re: Your love of index funds is terrible for our economy
« Reply #1 on: December 11, 2018, 11:10:42 AM »

jacoavluha

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Re: Your love of index funds is terrible for our economy
« Reply #2 on: December 11, 2018, 11:17:18 AM »
Noise. Data does not support the alternative - active management over indexing.

fattest_foot

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Re: Your love of index funds is terrible for our economy
« Reply #3 on: December 11, 2018, 11:19:27 AM »
Index funds contribute to market melt-ups and meltdowns
I don't see how this works. At least not explained by the article. Index funds aren't selling often, so how exactly is "selling begetting selling" with index funds?

Index funds reduce the quality of stock analysis
This one seems to just be saying, "active managers still can't compete." Uh, sorry? If anything, as more people get pushed into index funds because they perform better, it should open active managers to be able to find pockets of performance. That they still can't do so isn't the fault of index funds, it's just an indictment of how hard it is to "analyze" stocks and pick winners.

Index funds contribute to poor corporate governance
This one has been covered a lot lately, but the idea that somehow active fund managers have better interests for us than index fund managers is laughable. Heck, why do we believe corporate governance is somehow a net positive by stock holder opinions anyway? Do I, as an individual investor, really know better than the people on the board?

The investing angle
This one didn't even have a negative. In fact, it kind of disputes the point above about stock analysis. Index funds should allow for arbitrage. It seems like in this case it worked out, but somehow in the examples above it's a negative?

The ultra-contrarian angle
This just seems to be trying to appeal to emotion that we're somehow harming active managers and we should pity them? Good luck with that.

All in all, this just seems like another garbage article. Active fund managers don't like that index funds are not only cheaper, but out perform them. So of course we'll start seeing articles about how index investing is just the worst. I see it as similar to the amount of articles we're seeing lately that "FIRE isn't reasonable." It's a threat to people's livelihoods, so of course they're going to try to downplay them.

dandarc

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Re: Your love of index funds is terrible for our economy
« Reply #4 on: December 11, 2018, 11:28:32 AM »
The market also has a tendency to solve these things. Rampant poor stock analysis? Opportunities to make money by doing good stock analysis. People acting on those opportunities push the under-priced stocks up and the over-priced stocks down.

These articles are just marketing for active managers, who as a whole perform very poorly relative to their fees. Gotta try to keep that gravy train flowing.

Blueberries

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Re: Your love of index funds is terrible for our economy
« Reply #5 on: December 11, 2018, 12:03:31 PM »
Some valid points, some of which have been raised by Bogle himself.  Until or unless it no longer works, it is still the best method for passive investors.


Badass by 41

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Re: Your love of index funds is terrible for our economy
« Reply #6 on: December 11, 2018, 01:13:20 PM »
These articles are just marketing for active managers, who as a whole perform very poorly relative to their fees. Gotta try to keep that gravy train flowing.

Great point! In fact, I thought the article did a decent job calling this out.

Quote
The discounts in these stocks seem like a disconnect because asset managers have solid margins and great cash flow. "Even in tough times they are extremely profitable, says Lapey. That means they can return cash to shareholders via dividends and buybacks.

Their fees == cashflow, which could be your dividend if you invested in Active Management firms rather than Index Funds.  Weee!

robartsd

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Re: Your love of index funds is terrible for our economy
« Reply #7 on: December 11, 2018, 02:24:58 PM »
There is no way that a buy and hold index investor contributes to market meltups or meltdowns (but active managers can). Market meltdowns could be influenced by panicking index fund investors selling - but buy and hold strategy has been emphasized everywhere I've heard index investing promoted (active managers like to talk about how they limit losses).

CCCA

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Re: Your love of index funds is terrible for our economy
« Reply #8 on: December 11, 2018, 02:29:13 PM »
I don't know how much of a problem it actually is, nor do I think you or I can do anything to change it if it were an issue (i.e. you not investing in index funds won't change anything). 

However, from a theoretical perspective, it makes some sense, though again, I'm not sure how much of an issue it is at current levels of index investing.  However, if you take it to the extreme and say 99% of stock market buyers are index investors and only 1% of stock owners are actively choosing things, then it only takes a small # of people to move a stock.  Since 99% of the market is indifferent to actual fundamentals of the companies and doesn't ever make choices about what to buy or sell, the actual "market" only consists of 1% of the normal market.  One person (or a few people) can make up a sizeable fraction of the total "tradeable" shares and thus they have market power to change the stock price. 

If one person who owns 10% of the "tradable" shares wants to sell his shares, and none of the other 10 buyers want to purchase it, then the market clearing price (i.e. stock price) might fall very significantly before one of those other buyers would be inclined to buy it.   

There is no way that a buy and hold index investor contributes to market meltups or meltdowns (but active managers can). Market meltdowns could be influenced by panicking index fund investors selling - but buy and hold strategy has been emphasized everywhere I've heard index investing promoted (active managers like to talk about how they limit losses).

In my example, it's not that they actively contribute to wild market swings, it's that having more index investors means that fewer active buyers exist and their panics move the market more.
« Last Edit: December 11, 2018, 02:32:02 PM by CCCA »

GuitarStv

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Re: Your love of index funds is terrible for our economy
« Reply #9 on: December 11, 2018, 02:33:24 PM »
Since 99% of the market is indifferent to actual fundamentals of the companies and doesn't ever make choices about what to buy or sell, the actual "market" only consists of 1% of the normal market.

It's a mistake to assume that the majority of active investors make choices about what to buy or sell based on actual fundamentals.

CCCA

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Re: Your love of index funds is terrible for our economy
« Reply #10 on: December 11, 2018, 03:18:51 PM »
Since 99% of the market is indifferent to actual fundamentals of the companies and doesn't ever make choices about what to buy or sell, the actual "market" only consists of 1% of the normal market.

It's a mistake to assume that the majority of active investors make choices about what to buy or sell based on actual fundamentals.


Sure, but that really wasn't the point.  The point was that if the pool of active investors is very small, then the swings in share prices are likely to be larger (and definitely less tied to fundamentals).

robartsd

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Re: Your love of index funds is terrible for our economy
« Reply #11 on: December 11, 2018, 04:58:08 PM »
Sure, but that really wasn't the point.  The point was that if the pool of active investors is very small, then the swings in share prices are likely to be larger (and definitely less tied to fundamentals).

The pool of index investors is actually pretty small relative to the entire market. Quote from the article:
Quote
With so much money in index funds (Bogle puts it at 17% of U.S. stock-market value)
Index fund investing is growing and is expected to surpass actively managed mutual fund capital within a few years, but isn't going to be most of the market for the foreseeable future.

aspiringnomad

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Re: Your love of index funds is terrible for our economy
« Reply #12 on: December 11, 2018, 10:16:44 PM »

Mighty-Dollar

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Re: Your love of index funds is terrible for our economy
« Reply #13 on: December 12, 2018, 01:17:56 AM »
Index funds make the stock market more efficient and less volatile.

soccerluvof4

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Re: Your love of index funds is terrible for our economy
« Reply #14 on: December 12, 2018, 03:08:19 AM »
Since 99% of the market is indifferent to actual fundamentals of the companies and doesn't ever make choices about what to buy or sell, the actual "market" only consists of 1% of the normal market.

It's a mistake to assume that the majority of active investors make choices about what to buy or sell based on actual fundamentals.




^ This!

MrOnyx

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Re: Your love of index funds is terrible for our economy
« Reply #15 on: December 12, 2018, 04:08:22 AM »
An article like this that lambasts index funds in the defence of active managers is ringing alarm bells for me. I have no prior knowledge of marketwatch.com or their trustworthiness, but it would strike my cynical mind that this article is just paid propaganda from active managers who are losing business to index investors, whom they are now looking to scapegoat.

From their point of view, it's just a shame that none of them can reliably outperform the index, as that would be the only reason to go for them over index investing, really. None of this is the fault of index investing, or the people that do it, of course. They're just lashing out because their livelihood is at stake.

Frugancial Advisor

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Re: Your love of index funds is terrible for our economy
« Reply #16 on: December 12, 2018, 06:42:02 AM »
I was looking for the disclaimer "this article sponsored by Fidelity Investments - Active Pays Our Bonuses!"

Joking aside, this seems to be good news all around. Index investing is a disruptor to the industry, akin to Netflix taking customers from the big cable companies. There is a huge opening in the market of investment products right now for tenured portfolio managers with excellent track records to come out of the mutual fund industry and into the ETF industry at costs only minimally higher than current passive ETFs.

You look at someone like Peter Lynch who outperformed the S&P500 for 13 years and ask, what is it luck? 5 years may be luck, but after 10 years of significant outperformance, I would be more than happy to pay 0.50% annually to diversify my portfolio with an ETF managed by him. The same can be said for bond ETFs, which really are doing nothing to try and combat the interest rate increases. Come out with an ETF with expense ratio of 0.35% that at least tilts towards floating rate securities and has a chance of outperforming.

Until then, we continue to index and hopefully that incentivizes managers to compete head-to-head on a level playing field, unlike this current absurd 2% fee mutual fund environment.

GuitarStv

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Re: Your love of index funds is terrible for our economy
« Reply #17 on: December 12, 2018, 07:18:09 AM »
Since 99% of the market is indifferent to actual fundamentals of the companies and doesn't ever make choices about what to buy or sell, the actual "market" only consists of 1% of the normal market.

It's a mistake to assume that the majority of active investors make choices about what to buy or sell based on actual fundamentals.


Sure, but that really wasn't the point.  The point was that if the pool of active investors is very small, then the swings in share prices are likely to be larger (and definitely less tied to fundamentals).

But that's what I was pointing out.  If most active investors make decisions based on things other than fundamentals, then there's no guarantee that having a high percentage of index investors would tie the market to fundamentals any less than it currently is.