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If everyone indexed, would it affect us?
Posted: Tue Oct 04, 2011 7:54 pm
by Indices
I think it is very possible that most or virtually all investors will buy into passively managed indexed funds at some point in the future. While I don't think the Permanent Portfolio will ever be that popular, do you think there would be an effect on us if everyone was indexing?
Re: If everyone indexed, would it affect us?
Posted: Wed Oct 05, 2011 8:40 am
by moda0306
Indices,
While I sometimes feel that you're right about so many people in passive indexing, do you really think we're even close to that? Looking at what Wells Fargo Investments & all those other product pushers are selling to clients, as well as 401(k) plans, I don't see trilions of wealth moving into the assumption that indexing is better.
Based on what I see today, indexing and true diversification are seen by so many people as lazy, cheap (in a bad way) investing. It's so hard to articulate uncertainty with confidence, as it's kind of an oxymoron to begin with. It's so much easier to display confidence and a nice haircut saying where you think the market is and what some "really well-managed" funds are and keep someone listening.
Re: If everyone indexed, would it affect us?
Posted: Wed Oct 05, 2011 8:47 am
by Storm
VSTMX is already the largest fund in the world (Vanguard Total Stock Market Index). I think indexing is already popular with most mainstream investors.
Re: If everyone indexed, would it affect us?
Posted: Wed Oct 05, 2011 9:12 am
by Lone Wolf
Index investing works by grabbing a "free ride" on the efficiency of the overall market. The composition of the market is the result of countless man-hours of thought and research that active traders (we'll call them "market makers") do for you. Their motivation for doing all this for you is that if they work hard enough, they can discover some mispriced security and profit handsomely.
If you look at a world where nearly everyone is indexing, opportunities for discovering such mispriced securities would be easy and extremely profitable to discover. Thus, I believe there will always be an incentive for people to take on that "market maker" role. I think this will keep passive indexing humming along just fine.
Re: If everyone indexed, would it affect us?
Posted: Wed Oct 05, 2011 9:16 am
by Indices
moda0306 wrote:
Indices,
While I sometimes feel that you're right about so many people in passive indexing, do you really think we're even close to that? Looking at what Wells Fargo Investments & all those other product pushers are selling to clients, as well as 401(k) plans, I don't see trilions of wealth moving into the assumption that indexing is better.
Based on what I see today, indexing and true diversification are seen by so many people as lazy, cheap (in a bad way) investing. It's so hard to articulate uncertainty with confidence, as it's kind of an oxymoron to begin with. It's so much easier to display confidence and a nice haircut saying where you think the market is and what some "really well-managed" funds are and keep someone listening.
I don't think we're there yet, but the growth rate of Vanguard is just astonishing. That is why this has me worried. I don't see Vanguard shrinking at all anytime soon. If stocks go down, people will just buy Vanguard bond funds and vice versa. Investors understand that they need to be in the market, whether in stocks or bonds, at all times. It's not like it used to be where there was stock picking, and then a panic run to hoarding cash in the home or in a bank.
Re: If everyone indexed, would it affect us?
Posted: Thu Oct 06, 2011 12:44 am
by KevinW
As a counterpoint, Vanguard's FAQ on their decision to eliminate active management from their LifeStrategy funds (
https://personal.vanguard.com/us/insigh ... E-09302011 ) mentioned
In fact, currently, a majority of the mutual fund assets under management at Vanguard are held in actively managed funds, and that's unlikely to change any time soon.
Even at Vanguard, the shining beacon of indexing, most assets are actively managed. If Vanguard is mostly active, then every other fund family is probably overwhelmingly active.
Based on this, I don't see active management disappearing any time soon.