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The flows to Vanguard are largely driven by retail investors and I think you are grossly overestimating the pricing value that "active" retail investors provide

The flows to Vanguard are largely driven by retail investors and I think you are grossly overestimating the pricing value that "active" retail investors provide. Retail investors don't act as a rational pricing mechanism. 99% of them don't discount future cash flows, examine balance sheets, or evaluate growth prospects. In fact they statistically buy high and sell low which only serves to make boom and bust cycles more severe. They are the greater fools in the Greater Fool Theory. Turning "dumb" retail money into passive index fund flows can only serve to make markets more efficient and stable. That said, if I had to guess the massive flows to index funds will come to a grinding halt as soon as the next market correction. While indexing has historically been the best strategy over the long run, the low interest rate environment has made it appear to be the best strategy even in the short term. This is not normal and is due to the high correlation still lingering after the effects of QE. Once interest rates rise enough to make alternatives more appealing this will balance itself out since investors chase returns.

hyperpape 10y ago
What makes indexing worse in the short term?
- random_comment 10y ago
  Volatility, i.e. greater dispersion of returns in the short term. http://www.investopedia.com/terms/v/volatility.asp http://www.investopedia.com/terms/v/volatility.asp
- milesvp 10y ago
  To expand on random_comments mention of volatility. Volatility is a big deal. Stock markets can be expected to beat inflation by several percentage points over the "long run", but "long run" is often defined in economics as "greater than your life expectancy". So there's a chance that you'll have to pull money out before it has a chance to grow, or worse, after it's lost a lot of value. Generally you should avoid putting money into stock markets with anything less than a 10 year window unless you love risk. And you should never put your emergency fund in the stock market since stock market crashes and needing said emergency fund tend to be highly correlated, which means when you pull your money out, you are all but guaranteed to be selling low.
  - hyperpape 10y ago
    Hah, had my blinders on. I was trying to figure out how there was an argument for active investing in the stock market in the short term, not comparing against bonds and whatnot.

hyperpape 10y ago

What makes indexing worse in the short term?

random_comment 10y ago
Volatility, i.e. greater dispersion of returns in the short term. http://www.investopedia.com/terms/v/volatility.asp http://www.investopedia.com/terms/v/volatility.asp
milesvp 10y ago
To expand on random_comments mention of volatility. Volatility is a big deal. Stock markets can be expected to beat inflation by several percentage points over the "long run", but "long run" is often defined in economics as "greater than your life expectancy". So there's a chance that you'll have to pull money out before it has a chance to grow, or worse, after it's lost a lot of value. Generally you should avoid putting money into stock markets with anything less than a 10 year window unless you love risk. And you should never put your emergency fund in the stock market since stock market crashes and needing said emergency fund tend to be highly correlated, which means when you pull your money out, you are all but guaranteed to be selling low.
- hyperpape 10y ago
  Hah, had my blinders on. I was trying to figure out how there was an argument for active investing in the stock market in the short term, not comparing against bonds and whatnot.