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This has been answered a thousand times. Everyone will never invest in index funds. What will happen is more and more people will invest in index funds until
by mrep 9y ago
This has been answered a thousand times. Everyone will never invest in index funds. What will happen is more and more people will invest in index funds until there are so little people actively investing in the stock market that the ones that do are able to beat it. However, them beating it will only net (after their fees) the same returns as index funds thus striking a balance where index funds match the performance of active investors.
If either index funds or active investors (after fees) make more money, capital will move to the one that pays more until they balance again. We have had way too many active investors for a long time which is why index funds have constantly outperformed active investors but eventually they will balance as more and more people move their money to index funds.
- Jabbles 9y agoYou can't assume that we'll reach equilibrium in a different future situation given that we're not in equilibrium at the moment.
- ThrustVectoring 9y agoHow does the active part of the market beat the rest of the active part of the market? Like, I could see the net fees of the active funds being equal to the underperformance of "dumb money" retail investors mis-picking stocks.
- mrep 9y agoI'm not exactly sure what you are saying. Are you asking how active investors in aggregate can beat index funds despite their fees?
- ThrustVectoring 9y agoSorry. I'm asserting that active investors in aggregate own the exact same stocks in the same proportion as the fund that indexes the stocks they're picking from. So if one active investor outperforms the index, there has to be an active investor on the other side of their trades that has to underperform the index. In other words, since the average active investor sets the average that passive indices track, how do they beat the average?
- goialoq 9y agoYou are missing the point. Once almost everyone invests in index funds, what will determine the price of stocks?
- icelancer 9y ago>>what will determine the price of stocks? Do you think active investors determine the price of stocks now?
- mrep 9y agoThe active investors who are left of course.
- sigstoat 9y ago> Once almost everyone invests in index funds, what will determine the price of stocks? there are hundreds or thousands of index funds, all investing in different subsets of the market. money flowing back and forth between those funds will shift the relative value of their underlying sets. also all the other answers, such as, that's unlikely to happen.
- misnamed 9y agoTrue with a caveat: they will never balance completely because of taxes and fees - active traders and funds will always underperform in aggregate.
- imtringued 9y agoI propose an ETF that invests in ETFs and active investors...
- fallingfrog 9y agoOR, since index funds are constantly getting 401(k) money dumped into them and therefore establish a reputation for a type of asset that has guaranteed returns with no risk, will develop into a massive asset bubble that will eventually go kablammo and take the retirement savings of half of the world down with them. You have way too much faith in people making well informed decisions.