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For Vanguard Group Inc., whose trillions of dollars in low-cost and index-tracking funds are both credited and blamed for the current market mood—because so man

For Vanguard Group Inc., whose trillions of dollars in low-cost and index-tracking funds are both credited and blamed for the current market mood—because so many retail investors have decided just to buy a diversified fund and forget about it—the new mindset is a sign of a job well done. I had wondered if they would bring this up. It's my understanding that an unprecedented percent of the market is plain old passive index funds.

Clubber 9y ago
Most of the time, it's the best way to invest. Fund managers are so wealthy, often not because they make great picks, but they use manipulative tactics to get people to invest with them. Most of them can't beat the market.
- jryan49 9y ago
  What happens when everyone is in an index fund though? The efficient market hypothesis goes right out the window in that case. I can imagine a crash happening because of that maybe. It feels the same with the last thing that caused the crash. Everything thought house flipping was "easy money" so everyone did it. The second everyone does it, it's not valuable anymore.
  - surfmike 9y ago
    Prices happen at the margin though. You only need a small percentage of traders to be active investors to create an efficient market. https://amp.businessinsider.com/passive-investing-makes-markets-more-efficient-2016-5 https://amp.businessinsider.com/passive-investing-makes-mark...
  - mabbo 9y ago
    You may be right, but I think we aren't there yet. We've got too many active trading firms delivering little value. As more money moves into index funds and ETFs, only the best active traders will survive. As well, I've also been lead to believe that many hedge funds aren't simply trying to make the most money, but are trying to ensure a safety net. They are promising they won't lose more than X% no matter how crazy things get. There's value in that.
    - erikpukinskis 9y ago
      > As more money moves into index funds and ETFs, only the best active traders will survive. That’s probably fine. I don’t see why active traders should get any money at all from outside sources other than venture capital here and there when they have a proven opportunity to scale that’s bigger than their market cap can fund. And those opportunities should be an easy sell to almost anyone with restless cash. Why should good traders be rewarded with sales? Good traders can make their own money. The only traders who need sales to survive are bad/exploitative ones.
  - nostrademons 9y ago
    When everyone is in an index fund, the market becomes less efficient and several profitable opportunities are overlooked (and conversely, failing companies take longer to be recognized as failing). That means bigger returns for active investors who are both confident and right. Eventually the market equilibrates as people start realizing certain active investors are consistently beating the market and shift cash from index funds into their funds. It's unlikely to result in a crash, though, rather a period of sustained underperformance and a few people getting fantastically wealthy. You could argue that the tech-billionaire phenomena is the primary capital markets example of this: there's a widespread belief that founding a new business is foolhardy and you're better off working for an established company, so people who buck this belief and are right end up making a lot of money off it, which draws a lot of people away from employment and into entrepreneurship, which drives down average returns to entrepreneurship as most of the new startups wash out and fail to beat the market.
    - AstralStorm 9y ago
      Well, it can be foolhardy depending on how much you gamble and how competitive and with how high barriers of entry the market you want to compete in is. Also how local. Real economics are never quite as easy as a single equation. A more proper model would be similar to weather modelling.
dade_ 9y ago
Vanguard also has actively managed low fee ETFs, such as their Value factor funds which are picked based on metrics similar to those recommended in the book Intelligent Investor. The idea is to simply automate time tested stock picking of fundamentally undervalued stocks vs a completely blind index. With management fees well below .5%, they have my attention.
indubitable 9y ago
This is, arguably, evidence that people are becoming more intelligent about investing. In particular they're realizing that they (and others) are nowhere near the brilliant investors that they think or present themselves to be. I think the most clear evidence of this was the bet between Warren Buffet Ted Seides, investment author and managing partner of a private investment firm. Buffet bet $500k that an S&P 500 index fund would beat the average of any collection of five managed funds (such as hedge funds) chosen by Seides. That bet started in 2007 and Buffet won, trivially. The S&P index was up 85% in that time. And the managed funds were up 55%. Perhaps more importantly, that excludes management fees. Managed funds often demand quite ridiculous fees with hedge fund managers often taking a large percent of all profits just for themselves. When accounting for the fees of the funds Seides chose, the return for an investor in his managed funds would have seen just 22% versus the 85% for an index fund. As time goes on people are beginning to understand variance. Take 'x' hot managed funds and in any given year some percent of them are going to outperform the market as a whole by a ridiculously large amount. And the next year some small percent of those that did this last year will again do the same the next year. And so on. The problem is that it seems as we extend to the time frame onward, the number of individuals or organizations that can genuinely beat the market approaches 0 -- and becomes a pretty good proxy for illegal behavior such as insider knowledge. The only thing that masks this is that each year as we lose 100 'underperforming' managed funds they're replaced by 110 new hot, amazing funds being managed by the next big thing.

Clubber 9y ago

Most of the time, it's the best way to invest. Fund managers are so wealthy, often not because they make great picks, but they use manipulative tactics to get people to invest with them. Most of them can't beat the market.

jryan49 9y ago
What happens when everyone is in an index fund though? The efficient market hypothesis goes right out the window in that case. I can imagine a crash happening because of that maybe. It feels the same with the last thing that caused the crash. Everything thought house flipping was "easy money" so everyone did it. The second everyone does it, it's not valuable anymore.
- surfmike 9y ago
  Prices happen at the margin though. You only need a small percentage of traders to be active investors to create an efficient market. https://amp.businessinsider.com/passive-investing-makes-markets-more-efficient-2016-5 https://amp.businessinsider.com/passive-investing-makes-mark...
- mabbo 9y ago
  You may be right, but I think we aren't there yet. We've got too many active trading firms delivering little value. As more money moves into index funds and ETFs, only the best active traders will survive. As well, I've also been lead to believe that many hedge funds aren't simply trying to make the most money, but are trying to ensure a safety net. They are promising they won't lose more than X% no matter how crazy things get. There's value in that.
  - erikpukinskis 9y ago
    > As more money moves into index funds and ETFs, only the best active traders will survive. That’s probably fine. I don’t see why active traders should get any money at all from outside sources other than venture capital here and there when they have a proven opportunity to scale that’s bigger than their market cap can fund. And those opportunities should be an easy sell to almost anyone with restless cash. Why should good traders be rewarded with sales? Good traders can make their own money. The only traders who need sales to survive are bad/exploitative ones.
- nostrademons 9y ago
  When everyone is in an index fund, the market becomes less efficient and several profitable opportunities are overlooked (and conversely, failing companies take longer to be recognized as failing). That means bigger returns for active investors who are both confident and right. Eventually the market equilibrates as people start realizing certain active investors are consistently beating the market and shift cash from index funds into their funds. It's unlikely to result in a crash, though, rather a period of sustained underperformance and a few people getting fantastically wealthy. You could argue that the tech-billionaire phenomena is the primary capital markets example of this: there's a widespread belief that founding a new business is foolhardy and you're better off working for an established company, so people who buck this belief and are right end up making a lot of money off it, which draws a lot of people away from employment and into entrepreneurship, which drives down average returns to entrepreneurship as most of the new startups wash out and fail to beat the market.
  - AstralStorm 9y ago
    Well, it can be foolhardy depending on how much you gamble and how competitive and with how high barriers of entry the market you want to compete in is. Also how local. Real economics are never quite as easy as a single equation. A more proper model would be similar to weather modelling.

dade_ 9y ago

Vanguard also has actively managed low fee ETFs, such as their Value factor funds which are picked based on metrics similar to those recommended in the book Intelligent Investor. The idea is to simply automate time tested stock picking of fundamentally undervalued stocks vs a completely blind index. With management fees well below .5%, they have my attention.

indubitable 9y ago

This is, arguably, evidence that people are becoming more intelligent about investing. In particular they're realizing that they (and others) are nowhere near the brilliant investors that they think or present themselves to be. I think the most clear evidence of this was the bet between Warren Buffet Ted Seides, investment author and managing partner of a private investment firm. Buffet bet $500k that an S&P 500 index fund would beat the average of any collection of five managed funds (such as hedge funds) chosen by Seides. That bet started in 2007 and Buffet won, trivially. The S&P index was up 85% in that time. And the managed funds were up 55%. Perhaps more importantly, that excludes management fees. Managed funds often demand quite ridiculous fees with hedge fund managers often taking a large percent of all profits just for themselves. When accounting for the fees of the funds Seides chose, the return for an investor in his managed funds would have seen just 22% versus the 85% for an index fund. As time goes on people are beginning to understand variance. Take 'x' hot managed funds and in any given year some percent of them are going to outperform the market as a whole by a ridiculously large amount. And the next year some small percent of those that did this last year will again do the same the next year. And so on. The problem is that it seems as we extend to the time frame onward, the number of individuals or organizations that can genuinely beat the market approaches 0 -- and becomes a pretty good proxy for illegal behavior such as insider knowledge. The only thing that masks this is that each year as we lose 100 'underperforming' managed funds they're replaced by 110 new hot, amazing funds being managed by the next big thing.