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> Going with index funds is no more and no less than investing in the entire market I don't think that's entirely true. When most people talk about investing i

> Going with index funds is no more and no less than investing in the entire market I don't think that's entirely true. When most people talk about investing in index funds they're largely talking about funds like eg. $SPY, not total market funds like $VTI. There's certainly a case to be made that increasing passive investing in certain indices (like $SPY) causes companies within the index to be overvalued simply because of the nature of passive investing. You often see companies getting a big boost in their share price simply for joining the S&P, even though reason would dictate that there's nothing fundamentally different about the company. The usual counterargument to this is that we should reach an equilibrium where active managers will then be free to invest in companies that are undervalued simply because they're not a part of an index, but of course that also is making a number of assumptions. Without reading the article too deeply I'm not sure if that's Burry's specific criticism, but it's one that's not uncommon and certainly isn't completely outlandish.

throw0101a 6y ago
> When most people talk about investing in index funds they're largely talking about funds like eg. $SPY, not total market funds like $VTI. You're not wrong, but for most people, most of the time, this quibble is not worth getting into. Too many people are not saving anything, either because they (feel they) don't have enough income, are too scared of headlines, or just are not financially literate enough. If these people manage to get something (anything) going, even if it is into a 'non-optimal' S&P 500 fund, that's getting them from 0 to 80. I would be happy with more people doing 'only' that. If you want to try to try to get them from 80 to 100, be my guest: but IMHO the perfect is the enemy of the good in this case. > The usual counterargument to this is that we should reach an equilibrium where active managers will then be free to invest in companies that are undervalued simply because they're not a part of an index, but of course that also is making a number of assumptions. There will always people who think they can do better, and some of those people will be right (at least some of the time): * https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox
- wgerard 6y ago
  > You're not wrong, but for most people, most of the time, this quibble is not worth getting into. Sure. I assumed we were talking about whether passive investing could potentially cause negative effects at scale, not whether your average person should invest or not. I don't think the latter is much of a discussion (i.e. yes, they should). When people criticize passive investing, they're largely criticizing increased institutional passive investment, not retail investors--retail investors don't generally affect the market much one way or the other. And yes, even many institutional funds invest in indices that aren't just total market indices. If the concern about said passive investing is valid, this of course may end up affecting many average americans down the line, eg. CalSTRS is one of the largest funds in the world.
- SpicyLemonZest 6y ago
  The concern isn't that it's bad on the individual level, but that it might represent a long-term structural problem when everyone's doing it. If we end up in a scenario where the prices of S&P 500 stocks are determined primarily by the number of indexed investors rather than the performance of the underlying companies... well, that's a Ponzi structure, where the performance of index funds depends critically on people continuing to invest in them. Although it appears (https://www.economist.com/business/2020/08/06/joining-the-s-and-p-500-may-not-be-as-big-a-boon-as-often-assumed https://www.economist.com/business/2020/08/06/joining-the-s-...) that we aren't actually heading towards that scenario right now, I think it's a possibility worth some concern.
  - throw0101a 6y ago
    > If we end up in a scenario where the prices of S&P 500 stocks are determined primarily by the number of indexed investors rather than the performance of the underlying companies... The prices of individual equities is determined by buyers and sellers coming to an agreement, not buy-and-holders. As long as there are two people who think they can take advantage of each other, there will be price discovery: * https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox Ben Felix, of PWL Capital in Canada, has good article/video on this: * https://www.pwlcapital.com/there-is-no-such-thing-as-an-index-fund-bubble/ https://www.pwlcapital.com/there-is-no-such-thing-as-an-inde... * https://rationalreminder.ca/blog/2020/1/31/there-is-no-such-thing-as-an-index-fund-bubble https://rationalreminder.ca/blog/2020/1/31/there-is-no-such-... From the article(s), Blackrock estimated that only about 5% of buy and selling is done by index funds, so the vast majority of market activity, where price discovery happens, is still with the active folks. See also the recent financial markets discussion with some of the sub-threads on about the (alleged?) usefulness of HFT systems in keeping liquidity high: * https://news.ycombinator.com/item?id=24746836 https://news.ycombinator.com/item?id=24746836
gravitas 6y ago
> I don't think that's entirely true. When most people talk about investing in index funds they're largely talking about funds like eg. $SPY, not total market funds like $VTI. My personal performance of investing in all three categories (total market index, S&P 500 index, NASDAQ-100 index) matches every chart you can find online over last 5 years; the total index funds are carrying the baggage of all that "not S&P" weight and are worse returns than the 500, with the 100 achieving almost twice the performance as the 500 (near 24% returns over 5y). The new "target retirement date" funds are falling below all three with the highest expenses and lowest returns, worse than a generic total market fund, $0.02 anecdata from a lifetime passive investor in index funds. (I'm still in the red this year on small cap specific and world growth and similar "diversification" funds, they're by far the biggest money wastes compared to passive index fund investing in my portfolio)
- throw0101a 6y ago
  > matches every chart you can find online over last 5 years; the total index funds are carrying the baggage of all that "not S&P" weight and are worse returns than the 500, with the 100 achieving almost twice the performance as the 500 (near 24% returns over 5y). Looking at only the last five years is myopic and not wise. You may want to look up the "Lost Decade" of the S&P 500 from 2000 to 2009. See also this recent <15 minute video from Index Fund Advisors entitled "50 Year Market Review" for a longer perspective: * https://www.youtube.com/watch?v=M82Veytnsfw https://www.youtube.com/watch?v=M82Veytnsfw
  - gravitas 6y ago
    > Looking at only the last five years is myopic and not wise. You may want to look up the "Lost Decade" of the S&P 500 from 2000 to 2009. I'm 50+, my money has been moving around these funds since the late 90s. :) I lived as a tech worker through all the 2000-2010 had to offer us, everyone took a beating not just index funds. Besides that point, holding a fund 5 years is normal - it's not like you have to keep a fund longer than 5, make your money and let it go. Roll it over into something else - passive investing does not mean ignoring your investing, you must still tend to your crops from time to time.
atombender 6y ago
> they're largely talking about funds like eg. $SPY, not total market funds like $VTI. What makes you say that? The S&P 500 is "the market", but there are lots of other valuable indexes in popular use. For example, VTSMX, the mutual fund version of VTI, forms the backbone of all of Vanguard's FoFs — Target Date Retirement, LifeStrategy, etc. When I discuss index funds with fellow investors, I'm absolutely referring to VTI, as well as funds like VT, BND, etc.

throw0101a 6y ago

> When most people talk about investing in index funds they're largely talking about funds like eg. $SPY, not total market funds like $VTI. You're not wrong, but for most people, most of the time, this quibble is not worth getting into. Too many people are not saving anything, either because they (feel they) don't have enough income, are too scared of headlines, or just are not financially literate enough. If these people manage to get something (anything) going, even if it is into a 'non-optimal' S&P 500 fund, that's getting them from 0 to 80. I would be happy with more people doing 'only' that. If you want to try to try to get them from 80 to 100, be my guest: but IMHO the perfect is the enemy of the good in this case. > The usual counterargument to this is that we should reach an equilibrium where active managers will then be free to invest in companies that are undervalued simply because they're not a part of an index, but of course that also is making a number of assumptions. There will always people who think they can do better, and some of those people will be right (at least some of the time): * https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox

wgerard 6y ago
> You're not wrong, but for most people, most of the time, this quibble is not worth getting into. Sure. I assumed we were talking about whether passive investing could potentially cause negative effects at scale, not whether your average person should invest or not. I don't think the latter is much of a discussion (i.e. yes, they should). When people criticize passive investing, they're largely criticizing increased institutional passive investment, not retail investors--retail investors don't generally affect the market much one way or the other. And yes, even many institutional funds invest in indices that aren't just total market indices. If the concern about said passive investing is valid, this of course may end up affecting many average americans down the line, eg. CalSTRS is one of the largest funds in the world.
SpicyLemonZest 6y ago
The concern isn't that it's bad on the individual level, but that it might represent a long-term structural problem when everyone's doing it. If we end up in a scenario where the prices of S&P 500 stocks are determined primarily by the number of indexed investors rather than the performance of the underlying companies... well, that's a Ponzi structure, where the performance of index funds depends critically on people continuing to invest in them. Although it appears (https://www.economist.com/business/2020/08/06/joining-the-s-and-p-500-may-not-be-as-big-a-boon-as-often-assumed https://www.economist.com/business/2020/08/06/joining-the-s-...) that we aren't actually heading towards that scenario right now, I think it's a possibility worth some concern.
- throw0101a 6y ago
  > If we end up in a scenario where the prices of S&P 500 stocks are determined primarily by the number of indexed investors rather than the performance of the underlying companies... The prices of individual equities is determined by buyers and sellers coming to an agreement, not buy-and-holders. As long as there are two people who think they can take advantage of each other, there will be price discovery: * https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox https://en.wikipedia.org/wiki/Grossman-Stiglitz_Paradox Ben Felix, of PWL Capital in Canada, has good article/video on this: * https://www.pwlcapital.com/there-is-no-such-thing-as-an-index-fund-bubble/ https://www.pwlcapital.com/there-is-no-such-thing-as-an-inde... * https://rationalreminder.ca/blog/2020/1/31/there-is-no-such-thing-as-an-index-fund-bubble https://rationalreminder.ca/blog/2020/1/31/there-is-no-such-... From the article(s), Blackrock estimated that only about 5% of buy and selling is done by index funds, so the vast majority of market activity, where price discovery happens, is still with the active folks. See also the recent financial markets discussion with some of the sub-threads on about the (alleged?) usefulness of HFT systems in keeping liquidity high: * https://news.ycombinator.com/item?id=24746836 https://news.ycombinator.com/item?id=24746836

gravitas 6y ago

> I don't think that's entirely true. When most people talk about investing in index funds they're largely talking about funds like eg. $SPY, not total market funds like $VTI. My personal performance of investing in all three categories (total market index, S&P 500 index, NASDAQ-100 index) matches every chart you can find online over last 5 years; the total index funds are carrying the baggage of all that "not S&P" weight and are worse returns than the 500, with the 100 achieving almost twice the performance as the 500 (near 24% returns over 5y). The new "target retirement date" funds are falling below all three with the highest expenses and lowest returns, worse than a generic total market fund, $0.02 anecdata from a lifetime passive investor in index funds. (I'm still in the red this year on small cap specific and world growth and similar "diversification" funds, they're by far the biggest money wastes compared to passive index fund investing in my portfolio)

throw0101a 6y ago
> matches every chart you can find online over last 5 years; the total index funds are carrying the baggage of all that "not S&P" weight and are worse returns than the 500, with the 100 achieving almost twice the performance as the 500 (near 24% returns over 5y). Looking at only the last five years is myopic and not wise. You may want to look up the "Lost Decade" of the S&P 500 from 2000 to 2009. See also this recent <15 minute video from Index Fund Advisors entitled "50 Year Market Review" for a longer perspective: * https://www.youtube.com/watch?v=M82Veytnsfw https://www.youtube.com/watch?v=M82Veytnsfw
- gravitas 6y ago
  > Looking at only the last five years is myopic and not wise. You may want to look up the "Lost Decade" of the S&P 500 from 2000 to 2009. I'm 50+, my money has been moving around these funds since the late 90s. :) I lived as a tech worker through all the 2000-2010 had to offer us, everyone took a beating not just index funds. Besides that point, holding a fund 5 years is normal - it's not like you have to keep a fund longer than 5, make your money and let it go. Roll it over into something else - passive investing does not mean ignoring your investing, you must still tend to your crops from time to time.

atombender 6y ago

> they're largely talking about funds like eg. $SPY, not total market funds like $VTI. What makes you say that? The S&P 500 is "the market", but there are lots of other valuable indexes in popular use. For example, VTSMX, the mutual fund version of VTI, forms the backbone of all of Vanguard's FoFs — Target Date Retirement, LifeStrategy, etc. When I discuss index funds with fellow investors, I'm absolutely referring to VTI, as well as funds like VT, BND, etc.