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> it surely must lose it's efficacy because it is no longer efficient, will indexing then not underperform Well, it's just a question of competitive advantages

by tomp 9y ago

> it surely must lose it's efficacy because it is no longer efficient, will indexing then not underperform Well, it's just a question of competitive advantages. In a world where so many people are trying to outperform the market, it's really hard to outperform the market and index funds essentially piggy-back to the aggregated wisdom of the best investors. In a world when the majority of investment and trading (the price is set by the marginal investor, not by the average investor) is index funds, outperforming the market will be easier. In reality, you get a sensible balance.

nostrademons 9y ago
Index funds don't have to do the majority of trading as long as they cannibalize the trading that would have occurred. Say that the majority of investable dollars is held in index funds that rebalance once/year, only trading then. The effect on liquidity & prices is that fewer trades are made and relevant information on the stock's future prospects takes longer to get reflected in the price. This opens up profitable investment opportunities for active fund managers to move in and buy up underpriced assets before the passive investments get in there, which then corrects the pricing imbalance (but not before the active fund managers have made a good profit).