Jack Bogle warning on index fund investing

[Ready]

Interesting article about Bogle and index funds. The essence of the article is that for index funds to be a good investment, we need at least some part of the market to be involved in actively managed funds. If the entire market switches to indexing, it causes the advantage of indexing to erode. And with more and more investors switching to indexing, we may be getting there.

John Bogle has a warning for index fund investors - MarketWatch

 

[Ronstar]

Interesting - makes sense. Thanks for posting

 

[audreyh1]

I'm not too worried yet as we are nowhere near 75% :

Bogle stressed that there is a long way to go before indexing reaches a level at which market stability begins to crumble. About one-quarter of U.S. stock ownership is done through indexing, he told Yahoo. According to investment researcher Morningstar, 46.7% of assets invested in U.S. stocks via exchange-traded funds or mutual funds was indexed in April, compared with 36.3% three years earlier.

Thanks for the link, it was very interesting to read.

 

[Koolau]

I only skimmed the article. Was there any "advice" about what one should do if we approach 75% penetration of indexing? Go to the "dark side?"

My gut tells me that the power of advertising the latest winning fund will save our bacon in the long run. Folks just can't stay away from the latest tip, the hottest ticket, the newest fund, etc. I think human nature will save all us indexers in the long run. YMMV

 

[cooch96]

How confident is he on that 75% ratio? He can't possibly have a reliable model or empirical data, can he? Perhaps it is closer to 90% or even 95%.

I can't get myself to worry. If we ever seem to reach the ratio, I'll try to learn myself how to read those prospectuses and make my own portfolio.

 

[UnrealizedPotential]

Well, I only have about 13% in index funds so it really isn't much of an issue for me. One thing the index funds have going for them is the low costs of the index fund itself. That right there gives the index fund a tremendous advantage and is very hard to beat in any given year, let alone over a longer time frame of say 10, 15, or 20 years or more.

 

[Texas Proud]

One of the other things that come into this is that there are now a large number of indexes....

Many years ago it was basically the S&P 500..... now look how many ETFs you can buy....

 

[Blue Collar Guy]

great there goes my investment plan. im indexed to the hilt. im sure ill get crushed one day. thanks for the depressing news.

 

[Bestwifeever]

Pssst Wellesley (not an index fund)....

 

[donheff]

This doesn't make much sense to me. As Bogle says, as indexing increases opportunities for active trading advantages actually increase. It seems like the closer you get to instability due to indexing, the greater the opportunity and thus the more active trading. At some point the cost advantages to indexing won't beat the research advantages of traders and some sort of new equilibrium would emerge. Indexers could still capture the underlying market growth of capitalism while activists could chase alpha. It will still be a Panglossian investing world for our grandkids. I'm sticking with indexes.

 

[pb4uski]

There will always be people chasing alpha, just like there will always be people who refuse to save for retirement.

 

[audreyh1]

How confident is he on that 75% ratio? He can't possibly have a reliable model or empirical data, can he? Perhaps it is closer to 90% or even 95%.

I can't get myself to worry. If we ever seem to reach the ratio, I'll try to learn myself how to read those prospectuses and make my own portfolio.

Yeah me too. Seems like you only need a small number of traders on the margin to affect stock prices. I don't think hedge funds are going away any time soon. And then there are the activist investors and Berkshire Hathaway.

 

[audreyh1]

This doesn't make much sense to me. As Bogle says, as indexing increases opportunities for active trading advantages actually increase. It seems like the closer you get to instability due to indexing, the greater the opportunity and thus the more active trading. At some point the cost advantages to indexing won't beat the research advantages of traders and some sort of new equilibrium would emerge. Indexers could still capture the underlying market growth of capitalism while activists could chase alpha. It will still be a Panglossian investing world for our grandkids. I'm sticking with indexes.

Yep.

 

[Markola]

The last sentence is the kicker advocating timing: "When the stock market turns down again, index fund owners will have to become their own active manager and make sure they’re well diversified, with limited exposure to risk, chaos, and catastrophe."

 

[ERD50]

This doesn't make much sense to me. As Bogle says, as indexing increases opportunities for active trading advantages actually increase. It seems like the closer you get to instability due to indexing, the greater the opportunity and thus the more active trading. At some point the cost advantages to indexing won't beat the research advantages of traders and some sort of new equilibrium would emerge. Indexers could still capture the underlying market growth of capitalism while activists could chase alpha. It will still be a Panglossian investing world for our grandkids. I'm sticking with indexes.

Agreed - the 'problem', if we ever get there, will be self-correcting. Active traders will jump in, and the forces will again be in balance.

There will always be people chasing alpha, ...

Boho to the rescue!

-ERD50

 

[Nightcap]

This disingenuous article is like those movies who clip selected words from the reviews. "HUGE waste of time, money, and TALENT. Keep away from this COLOSSAL flop."

The only way you can get to that headline from what Bogle actually said is by crossing your eyes, putting your finger in your ears, and humming real loud.

 

[marko]

The only way you can get to that headline from what Bogle actually said is by crossing your eyes, putting your finger in your ears, and humming real loud.

Off topic but...

This is true of almost everything of late and one of my current major frustrations.

The click-bait, newspapers and even TV have become so competitive (or slanted) that if you only read the headlines you get an entirely different story than what is actually said.

I've seen interviews with people and then see a headline on Twitter or TV and shake my head "that's not what she/he said!!".

 

[nun]

Is there any academic research on the performance of indexing as it becomes a larger percentage of the market.....it would be interesting to see if there is a dystopian point of inflection where everything collapses.

 

[OldShooter]

We have (depending on when you want to start counting) 100,000 years of evolution that favored greed and optimism. (I use "greed" in a descriptive sense, not a pejorative sense.) The greedy people had the most food and were most likely to survive famines and they had the most wives, so most likely to disproportionately contribute to the gene pool. There is a fascinating genetic study showing this result for Genghis Kahn. (Could You Be Related To Genghis Khan? | IFLScience)

Today, one way this is manifest is in the success of casinos and the lottery. Everyone knows that, on average, the customers lose. Still, there are enough greedy optimists to keep a large industry healthy. Same-o for active investing. Everybody knows it is a loser's game, but there are enough greedy optimists to keep it going. Compounding this, the greed of the industry that serves them just amplifies the effect.

A second factor that is not often discussed is that passive funds don't trade very much. 5-15% per year versus 100% or more for active investors. I have seen funds at 250%(!) This means that most of the market action (aka "price discovery") is driven by active investors trading with one another. Zero sum game to be sure, but liquidity and price discovery nevertheless.

So, I'm not worried. Human nature protects me. YMMV, of course.

 

[easysurfer]

I'm not worried. Difficult for me to believe indexers will ever hit the 75% mark mentioned in the article. Would put all the commissioned financial planners and stock brokers out of business.

Plus, I think there always will be enough folks who think they can beat the market time and time again by active investing.

 

[OldShooter]

Is there any academic research on the performance of indexing as it becomes a larger percentage of the market.....it would be interesting to see if there is a dystopian point of inflection where everything collapses.

Not directly to your point, but the seminal paper on this was written by William Sharpe in 1991: https://web.stanford.edu/~wfsharpe/art/active/active.htm

I don't think it is possible to overemphasize the importance of his simple argument. It takes a little while to "get" the implications or at least it did for me. But once understood, it makes ignoring most of the investment chaff very easy. https://en.wikipedia.org/wiki/Chaff_(countermeasure) (Sorry, I can't make the link work but it will take you someplace close. Alternatively, "Copy link location" into your browser address line and add the mysteriously missing right parenthesis.)

 

[Lsbcal]

There is plenty of trading in index funds and ETFs. I just moved some SP500 to VFWAX (Large cap international) at the end of May. The market didn't blink.

The structural dynamics of these markets is fascinating but I sure don't understand them.

 

[Chuckanut]

If somebody really wants to get individual investors back into the stock market in large amounts, then we need a level playing field for all investors, lower costs in many managed funds, and and end to the 'hucksterism' of many stock brokerages.

 

[Blue Collar Guy]

This disingenuous article is like those movies who clip selected words from the reviews. "HUGE waste of time, money, and TALENT. Keep away from this COLOSSAL flop."

The only way you can get to that headline from what Bogle actually said is by crossing your eyes, putting your finger in your ears, and humming real loud.

, ty i feel better

 

[gerntz]

Interesting article about Bogle and index funds. The essence of the article is that for index funds to be a good investment, we need at least some part of the market to be involved in actively managed funds. If the entire market switches to indexing, it causes the advantage of indexing to erode. And with more and more investors switching to indexing, we may be getting there.

John Bogle has a warning for index fund investors - MarketWatch

Eroding advantage doesn't mean active management has an advantage, just less of a disadvantage.