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It's a finance person trying to justify their existence. Finance people love variance (bubbles in the extreme case) because it's the only way they make money. I
by dumbfoundded 5y ago
It's a finance person trying to justify their existence. Finance people love variance (bubbles in the extreme case) because it's the only way they make money. If stocks grew 5% a year with little variance, the best strategy is just to hold, wait and cash out when you need to spend the money. But if it goes down 15% one year, then up 22% the next, there's a lot more money making opportunities. Financial analysts love bubbles. They make tons of money and if things go really bad, they get bailed out. The worst thing in the world is consistent growth without variance. It's a way to make money without actually making anything. Most people in finance will try to justify themselves through some sort of liquidity argument but the author appears to be getting more creative.
- jl2718 5y agoIdea: an efficient market would be one with zero long-term covariance between investments. So, index funds would disappear. So, index funds are not really based on the efficient market hypothesis, they are based on the assumption of plutocracy.
- dumbfoundded 5y agoThat doesn't really make any sense. Prices will always correlate as long as there's any connection between asset prices whether it's a supply chain or shared customer base or shared economic conditions. Businesses don't live in an isolated bubble. Index funds are nothing but arbitrary groupings of assets enabling diversification along whatever lines the fund chooses. I'm not sure what point you're trying to make but the argument is poor.
- jl2718 5y agoYou're right. Sloppy thinking. I had something in my head about what might be causing the tendency for stronger gains toward the top end of capitalization-weighted indices.