What would happen if the entire stock market used Bogle's principles?

[nun]

So if absolutely everyone used John Bogle's AA and investing principles would we all die of boredom and yearn for the casino aspect of the stock market again.

 

[Ken11]

Ive thought about this.
At first is seems there should be some way to "play" such a situation.
If I know what everyone else will do doesn't that give me an info advantage I don't have today?
The primary effect might be reduced volatility.
You could take some straddle positions that reward you if the market does NOT gyrate wildly.
However, thats a bit of a stretch.
I don't really see any big opportunities to profit from this.

 

[Fermion]

What would happen is bonds would drop to nothing, because everyone would move to the stock market which pays more. If you take out hedge funds and day traders, there would be a lot lower volatility and investing in bonds would just not make sense at these low rates.

 

[Tadpole]

This could be totally wrong since I just pictured the cash flow in my head as a fleeting thought but picture this: Everyone has the appropriate age allocation between asset classes AND everyone exactly the same age has the same portfolio. (Think target funds, for example). So everyone buys and sells at the same time for a given age. Young buyers need to absorb old buyer permanent sold higher risk assets. So does it mean that the number of young entering the workforce needs to exceed the number of old leaving the workforce to keep the money (prices) increasing? Is this picture the extreme of the OP's?

 

[Midpack]

90% of brokerages would disappear. You can decide if that would be good or bad overall...

 

[NW-Bound]

What if there were only index investing?

If the entire market only invested in the S&P 500 as a group, then only those 500 large-cap companies in that index would exist. All the mid and small caps would perish!

You would then think that the S&P committee that decided which companies to be included in the S&P index would wield immense power, because it got to decide which company would survive and which would not, but that's not true! As there would be only those 500 companies and no more, there would not be new ones to join the index, nor could existing ones be kicked out. Do we want S&P499, then S&P498, etc...? Remember that a newly formed company would not be able to exist, due to lack of investors. The S&P organization would then be disbanded, as the index got frozen.

It would no longer matter how well or poor a company's performance is, because its price would now be fixed with respect to others. The employees would just sit around all day while collecting pay check, with no immediate impact to the stock price.

The operation of all stock exchanges, brokerages, news media such as CNBC and Reuters would now center around pricing of this single conglomerate S&P equity with respect to other assets. Yes, there are still other things to invest in besides the stock index, such as rare stamps, precious jewelry, Louis XV furniture, etc... This is the only thing left for investors to do, to decide what the S&P is worth with respect to commodities, bonds, etc... However, it is difficult to price the S&P500, because they could not price one of the S&P companies relative to another (you have to buy/sell the entire group, remember?). How do you price an ensemble if you are not allowed to evaluate its individual constituents? The S&P index - the only stock price, and of the whole group - would gyrate wildly with respect to other assets, such as gold, real estate, bonds, what have you, depending on the rumor of the day.

However, it would not take long for the index to dribble down to zero, as people realized that these companies were not producing anything anyway. Remember that a company's production would give it no price advantage with respect to other companies so why would they do it?

The entire world would then collapse back into the prehistoric age.

 

[target2019]

So if absolutely everyone used John Bogle's AA and investing principles would we all die of boredom and yearn for the casino aspect of the stock market again.

Where would I find JB's AA and investing principles? Does he recommend one size for all?

 

[easysurfer]

It would be like if everyone drove the speed limit.

Good or bad is a matter of perception

 

[Midpack]

Where would I find JB's AA and investing principles? Does he recommend one size for all?

He does not recommend the same AA for everyone, but he does prefer low expense, broad passive/index funds to fill out the appropriate AA for each individual (once determined). He's written several books, or you can Google and find lots of info. Here's just one summary:

Bogleheads® investment philosophy - Bogleheads

In summary, a Bogle investor tends to (1) save a lot, (2) select an asset allocation containing both stock and bond asset classes, (3) buy low cost, widely diversified funds, (4) allocate funds tax-efficiently, and (5) stay the course. One of the wonderful things about Bogle investing is that it generally only requires a part of a day to set up, and then about an hour a year of effort to rebalance. Beyond that, there is no need to watch the markets or follow financial news. Even better, it works.

 

[ducky911]

I am assuming that you mean total stock market and total bond.....not just sp500.

I think that the stock would not go up at all ...but only pay dividends.

 

[samclem]

It would be like if everyone drove the speed limit.

If everyone drove the speed limit, road traffic would still move along just fine. If everybody indexed, indexing would fail (because no bargain hunters would be out there keeping prices in line).

With indexing, it's more like "What if everyone was a doctor?" It's fine to be a doctor if other folks are choosing a wide variety of other careers, but it's not good if everybody does it.

 

[Which Roger]

If everyone indexed, stock prices would not move, even if there was good reason for the price of a stock to change. This would result in an inefficient market, with clear opportunities to make money, and arbitrage would take care of adjusting the prices.

 

[target2019]

He does not recommend the same AA for everyone, but he does prefer low expense, broad passive/index funds to fill out the appropriate AA for each individual (once determined). He's written several books, or you can Google and find lots of info. Here's just one summary:

Bogleheads® investment philosophy - Bogleheads

I've read a lot, and thanks for the link. My question was about JB philosophy, not Bogleheads interpretation of same. I understand that they closely follow JB, but they do ignore certain JB maxims, like including SS as part of your AA.

I don't think JB intends that all investors go with one or two or three funds.

 

[Midpack]

I've read a lot, and thanks for the link. My question was about JB philosophy, not Bogleheads interpretation of same. I understand that they closely follow JB, but they do ignore certain JB maxims, like including SS as part of your AA.

I don't think JB intends that all investors go with one or two or three funds.

Evidently you've read one or more of Jack Bogle's books, so I guess I didn't pick up on what you were asking. Sounds like you already have your own answer...cheers.

 

[nun]

If everyone drove the speed limit, road traffic would still move along just fine. If everybody indexed, indexing would fail (because no bargain hunters would be out there keeping prices in line).

With indexing, it's more like "What if everyone was a doctor?" It's fine to be a doctor if other folks are choosing a wide variety of other careers, but it's not good if everybody does it.

Interesting, so indexers need the stock pickers to be successful. Maybe indexers should be a little less evangelical and should encourage the market timers and stock pickers in their own self interest.

 

[mathjak107]

one thing is certain and that would be the underlying stocks in these indexes would become so over valued as to be in a bubble. the real value would then become in the stocks outside the indexes and i think stock pickers would surpass those indexes.
you can't have the majority only buying the same stocks.

 

[plex]

Well, of course the question is like asking what would happen if the sky was always red and ocean was always purple. It just doesn't work that way.

Like others have pointed out, it would result in the market going flat, with huge disparities in valuations, in other words, if just one person decided to arbitrage or exploit the mispricing, they would be an astronomically large fortune.

But, it can never come even close to happening in reality, because people constantly are seeking ways to make money, and any easy arbitrage or mispricing opportunity is generally snapped up very quickly, often within quite literally a fraction of a second.

 

[eta2020]

one thing is certain and that would be the underlying stocks in these indexes would become so over valued as to be in a bubble. the real value would then become in the stocks outside the indexes and i think stock pickers would surpass those indexes.
you can't have the majority only buying the same stocks.

Bogleheads principles are not saying to buy S&P 500 only. You can buy VTI, VXUS and BDN and cover nearly all possible equities and bonds with 3 Index Funds.

IMO those principles work great for majority of people, but you can do better if you are smart like Warren Buffet. Not many of us are.......

I agree with with Midpack that you would have less useless brokers and mutual fund managers who on the long run can not beat inexpensive index.

 

[Ken11]

If everyone is passive and invested in passive funds then the function of the market intended to reward or punish business performance would be eliminated. This is bad.

Several reasons listed for why this wont ever happen seem real. Another is that the market for capital for new enterprises doesn't fit into this question/scenario- that's not real.

So,The above is a theoretical question.

The practical question is " When might these effects become large enough that a passive/index approach is sub-optimal?? The answer is" when alternative strategies reliably beat the index".

Eventually, with an efficient market you get back into the issue of not being able to reliably pick winners. The random walk rules in the end. Good luck with that.

 

[eta2020]

If everyone is passive and invested in passive funds then the function of the market intended to reward or punish business performance would be eliminated. This is bad.


Eventually, with an efficient market you get back into the issue of not being able to reliably pick winners. The random walk rules in the end. Good luck with that.

I think you will not break Bogleheads investing strategy if you buy excellent index funds like VIG or SCHD. Those index funds select what to buy based on things like earnings growth, competitive advantage etc etc. And they sport annual fees of 0.10 and 0.07 percent.

The above mentioned index funds will drive prices of their holdings. They are not passive.

 

[Ken11]

I think you will not break Bogleheads investing strategy if you buy excellent index funds like VIG or SCHD. Those index funds select what to buy based on things like earnings growth, competitive advantage etc etc. And they sport annual fees of 0.10 and 0.07 percent.

The above mentioned index funds will drive prices of their holdings. They are not passive.

I agree.
However, is active investing really a part of Bogle's investing principles?
Just cause Vanguard has a variety of funds doesn't mean they all align with the central Bogle strategy.
To me Bogles key points are to focus on very broad diversification, low costs and buy/hold.
That's not active investing.

 

[eta2020]

I agree.
However, is active investing really a part of Bogle's investing principles?
Just cause Vanguard has a variety of funds doesn't mean they all align with the central Bogle strategy.
To me Bogles key points are to focus on very broad diversification, low costs and buy/hold.
That's not active investing.

It is not active in terms of person driving decisions. Index drives what to purchase. This is why you have such a low fees. IMO it follows Bogle's investing principle.

 

[ChiliPepr]

Interesting, so indexers need the stock pickers to be successful. Maybe indexers should be a little less evangelical and should encourage the market timers and stock pickers in their own self interest.

Exactly... Basically, any index is the top XX of the YYY market (the top 500 of the US market is the S&P500). The top securities are determined by the active investors. People who invest in Indices are saying that they think that the collective average knowledge of the active investors is better than what they could do year over year. Without active investors you would never know who belongs at the top.

 

[mathjak107]

indexing is not as passive as you think. someone is making decisions about what stays ,what goes and how long failing companies stay in the indexes.

think about the fact if poor decisions were not made about certain failing companies being in the index so long the returns would have been better.

the point is someone at the top is making decisions and picking stocks.

each fund does not buy every stock in an index, rather the fund family picks and chooses which stocks to own in their particular representation of an index.

with indexing the "stock pickers " are just not fund managers deciding what to buy and sell but there certainly is someone or someones in the chain doing that as the indexes are maintained. and altered.

look at how long the indexes sat with big failing companies before they were swapped out. bad decsion ..

finally when you assemble a portfolio you have to make a decision about which indexes to include.

 

[Ken11]

I agree its a matter of degree.

To me trading as necessary to maintain correlation to an index is much less active than I consider "active investing" to be. The low fees tend to support that.

In any case, how much of such "index correlation chasing" do you think goes on in the V total stock fund? Perhaps decoupling an equity fund from a given index has some performance advantages??