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> There isn’t a simple formulaic answer to the question of how society should most optimally invest it’s excess capital. So then investing in an index fund sho

> There isn’t a simple formulaic answer to the question of how society should most optimally invest it’s excess capital. So then investing in an index fund should be a fine choice for some, even many, correct?

FredPret 3y ago
Yes but optimally there would be at least some proliferation in index funds, and they would index differently. There are 2 top funds that invest in the same 500 companies. Many in the US who earns well is sending x% of their income to these funds without forethought. It's far too much mindless capital concentration. Even without the index funds, the S&P 500 is used as a base reference in many investment contexts. When everyone blindly accepts a truth in investing, it's worth keeping an careful eye on it to make sure it stays true.
- gruez 3y ago
  > Yes but optimally there would be at least some proliferation in index funds, and they would index differently. Great, now investors have to choose between which index fund to pick. What makes you think the average investor is qualified to make that choice? By definition one of them will make above average returns, and the other below average returns, so half of investors will make below average returns and the other half will make above average returns. You can't have everyone making above average returns. Why not split the difference and invest in both of them (ie. buy the market), and get average returns without having to worry about which one to choose? That's basically what buying broad market index funds (eg. VTI or ITOT) does.
  - FredPret 3y ago
    I'm not saying average investors are qualified to pick index funds or stocks. I'm saying they really ought to be. Money is a form of power, and blindly applying it in a spot just because everyone else is doing the same strikes me as not optimal. Our saving grace is probably that the S&P500 is extraordinarily well-chosen. It's diversified across place, industry, and to some extent size. And it helps that America is an economic machine for the ages.
    - gruez 3y ago
      > I'm not saying average investors are qualified to pick index funds or stocks. I'm saying they really ought to be. In the sense they "ought" to vote, or they should do it because it would result in better returns for them personally? I don't think the former is a good reason, because I don't think the average investor is going to do a better job at allocating capital than wall st analysts. The latter has empirically been proven false. Actively managed funds have collectively underperformed passively managed funds, and daytrading retail investors almost always lose money. >Money is a form of power, and blindly applying it in a spot just because everyone else is doing the same strikes me as not optimal. People investing money in passive funds aren't messing with the price discovery process. Since they buy everything in proportion to market cap, they're not picking winners or losers. As long as some active participants exist, price discovery will still happen. If their numbers drop critically low, the market might be more be less accurate or be more susceptible to manipulation, but we're not anywhere near that point yet. In contrast, encouraging "average investors" to pick stocks absolutely does mess up the price discovery process. The average person is dumb and spends way too much time chasing whatever they heard on news yesterday night. A horde of retail investors likely reduces the overall "intelligence" of the market (through idiotic trades) and likely results in losses for them (from more sophisticated investors taking advantage of their behavior).
- anthomtb 3y ago
  >Yes but optimally there would be at least some proliferation in index funds, and they would index differently. Is there not? I rolled over a 401k a few weeks ago and had several indexes to choose from, each represented by multiple funds. The S&P 500 was included in some of those indexes. But there were plenty of options that did not touch the S&P at all. > It's far too much mindless capital concentration. Maybe it is. Maybe there is a systemic risk there. I have long thought this myself but cannot articulate the risk beyond "big money in small place". And I cannot rule out that there isn't a systemic risk and that the top 500 US companies are near-optimal allocators of capital. Therefore being the best place to send your money. About the "mindless" bit. Index funds are mindless. That's their job. You put money in, it grows (or shrinks) with the market, all while keeping your guaranteed losses, aka management fees to an absolute minimum (I'm sure you know all this). Is that really a mindless choice? I do not to think so. I think of it like choosing Python over C when I just need to bang out a few calculations. > When everyone blindly accepts a truth in investing, it's worth keeping an careful eye on it to make sure it stays true. I think what you see as everyone accepting a blind truth is really a large number of people making rational individual decisions. If its truly mindless dogma everyone is following, and you are not, then congratulations - you are well positioned to "win" the investing game.
  - FredPret 3y ago
    You make good points. I meant mindless as a bad thing on the part of the investors. Index funds indeed beat most investors by being mindless! (At least while everyone sends cheques their way every month).

FredPret 3y ago

Yes but optimally there would be at least some proliferation in index funds, and they would index differently. There are 2 top funds that invest in the same 500 companies. Many in the US who earns well is sending x% of their income to these funds without forethought. It's far too much mindless capital concentration. Even without the index funds, the S&P 500 is used as a base reference in many investment contexts. When everyone blindly accepts a truth in investing, it's worth keeping an careful eye on it to make sure it stays true.

gruez 3y ago
> Yes but optimally there would be at least some proliferation in index funds, and they would index differently. Great, now investors have to choose between which index fund to pick. What makes you think the average investor is qualified to make that choice? By definition one of them will make above average returns, and the other below average returns, so half of investors will make below average returns and the other half will make above average returns. You can't have everyone making above average returns. Why not split the difference and invest in both of them (ie. buy the market), and get average returns without having to worry about which one to choose? That's basically what buying broad market index funds (eg. VTI or ITOT) does.
- FredPret 3y ago
  I'm not saying average investors are qualified to pick index funds or stocks. I'm saying they really ought to be. Money is a form of power, and blindly applying it in a spot just because everyone else is doing the same strikes me as not optimal. Our saving grace is probably that the S&P500 is extraordinarily well-chosen. It's diversified across place, industry, and to some extent size. And it helps that America is an economic machine for the ages.
  - gruez 3y ago
    > I'm not saying average investors are qualified to pick index funds or stocks. I'm saying they really ought to be. In the sense they "ought" to vote, or they should do it because it would result in better returns for them personally? I don't think the former is a good reason, because I don't think the average investor is going to do a better job at allocating capital than wall st analysts. The latter has empirically been proven false. Actively managed funds have collectively underperformed passively managed funds, and daytrading retail investors almost always lose money. >Money is a form of power, and blindly applying it in a spot just because everyone else is doing the same strikes me as not optimal. People investing money in passive funds aren't messing with the price discovery process. Since they buy everything in proportion to market cap, they're not picking winners or losers. As long as some active participants exist, price discovery will still happen. If their numbers drop critically low, the market might be more be less accurate or be more susceptible to manipulation, but we're not anywhere near that point yet. In contrast, encouraging "average investors" to pick stocks absolutely does mess up the price discovery process. The average person is dumb and spends way too much time chasing whatever they heard on news yesterday night. A horde of retail investors likely reduces the overall "intelligence" of the market (through idiotic trades) and likely results in losses for them (from more sophisticated investors taking advantage of their behavior).
anthomtb 3y ago
>Yes but optimally there would be at least some proliferation in index funds, and they would index differently. Is there not? I rolled over a 401k a few weeks ago and had several indexes to choose from, each represented by multiple funds. The S&P 500 was included in some of those indexes. But there were plenty of options that did not touch the S&P at all. > It's far too much mindless capital concentration. Maybe it is. Maybe there is a systemic risk there. I have long thought this myself but cannot articulate the risk beyond "big money in small place". And I cannot rule out that there isn't a systemic risk and that the top 500 US companies are near-optimal allocators of capital. Therefore being the best place to send your money. About the "mindless" bit. Index funds are mindless. That's their job. You put money in, it grows (or shrinks) with the market, all while keeping your guaranteed losses, aka management fees to an absolute minimum (I'm sure you know all this). Is that really a mindless choice? I do not to think so. I think of it like choosing Python over C when I just need to bang out a few calculations. > When everyone blindly accepts a truth in investing, it's worth keeping an careful eye on it to make sure it stays true. I think what you see as everyone accepting a blind truth is really a large number of people making rational individual decisions. If its truly mindless dogma everyone is following, and you are not, then congratulations - you are well positioned to "win" the investing game.
- FredPret 3y ago
  You make good points. I meant mindless as a bad thing on the part of the investors. Index funds indeed beat most investors by being mindless! (At least while everyone sends cheques their way every month).