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I believe index funds are a good investment strategy, but at the same time we shouldn’t get defensive when people criticize them, and call a thoughtful critique

by lacker 7y ago

I believe index funds are a good investment strategy, but at the same time we shouldn’t get defensive when people criticize them, and call a thoughtful critique “silly”. In fact I would like to hear more intelligent criticism of index funds, and thoughts around preparing for a hypothetical world in which index funds were overrated, not less. How might we notice that index funds were becoming overrated? Perhaps the rise of hedge funds which consistently outperformed index funds? Is that happening? What should we do if index funds became overrated? Move our money into a medium-size number of stocks, like 30 of them, to essentially do our own index selection? Or moving out of stocks entirely? Thinking about questions like this without attacking criticism as “silly” is IMO a better way to minimize risk.

jackcosgrove 7y ago
I found an inconsistency in the article. > We’re just seeing a shift from closet indexing to ETFs and other index funds en masse now that investors have wisened up. So active managers are copying the indexes. > Index fund investors are simply buying what the active investors have laid out for them. But indexes buy what the active managers pick. The author appears to be confused as to who is the tail and who is the dog. Maybe this is resolved by saying some active managers do price discovery, but most are just copycats. It's not clear though. For the record I think index funds are still the best choice for a retail investor, and the article is mostly true. Namely > Many of the worries about indexing really boil down to career risk in the asset management space. Some of the arguments seem to be hasty and not well presented though.
- FabHK 7y ago
  No inconsistency. > > We’re just seeing a shift from closet indexing to ETFs and other index funds en masse now that investors have wisened up. Some active managers used to (clandestinely more or less) copy the indexes, but investors move away from active managers into passive funds. The prices are determined on the margin, by the remaining active investors. That's all consistent. > index funds are still the best choice for a retail investor Yes, index funds or index-linked ETFs. Agreed.
rmah 7y ago
But the original critique was silly. And surprisingly so given the source.

by lacker 7y ago

jackcosgrove 7y ago

I found an inconsistency in the article. > We’re just seeing a shift from closet indexing to ETFs and other index funds en masse now that investors have wisened up. So active managers are copying the indexes. > Index fund investors are simply buying what the active investors have laid out for them. But indexes buy what the active managers pick. The author appears to be confused as to who is the tail and who is the dog. Maybe this is resolved by saying some active managers do price discovery, but most are just copycats. It's not clear though. For the record I think index funds are still the best choice for a retail investor, and the article is mostly true. Namely > Many of the worries about indexing really boil down to career risk in the asset management space. Some of the arguments seem to be hasty and not well presented though.

FabHK 7y ago
No inconsistency. > > We’re just seeing a shift from closet indexing to ETFs and other index funds en masse now that investors have wisened up. Some active managers used to (clandestinely more or less) copy the indexes, but investors move away from active managers into passive funds. The prices are determined on the margin, by the remaining active investors. That's all consistent. > index funds are still the best choice for a retail investor Yes, index funds or index-linked ETFs. Agreed.

rmah 7y ago

But the original critique was silly. And surprisingly so given the source.