7 ms·

Do we think index funds will continue to be this financial savior for regular people in the future? On the one hand total market index exposure is fantastic.

by bix6 2y ago

Do we think index funds will continue to be this financial savior for regular people in the future? On the one hand total market index exposure is fantastic. On the other it’s accumulating more and more with a few firms giving them exceptional power. Does this unravel at some point? It’s hard to think the index itself could go bad but perhaps everything behind the scenes could fall apart?

spencerflem 2y ago
It seems like it has to at some point. Things have been so unsustainable for so long
eadmund 2y ago
> On the other it’s accumulating more and more with a few firms giving them exceptional power. I think that the next step will be for individual investors to instruct that their shares be voted according to certain guides. And then the step after that will be for large index investors to be able to directly vote their shares.
TechDebtDevin 2y ago
The system is designed to only let one or two dominoes fall at a time.
- pipes 2y ago
  What is the evidence that it has been designed this way?
walthamstow 2y ago
The book 'Trillions' by FT journo Robin Wigglesworth is very good on this subject
- bix6 2y ago
  Anything stand out to you? I’ll add it to the list but in the meantime I found these points from Chat interesting. 3. Impact on Corporate Governance With substantial holdings across numerous companies, major index fund providers possess significant voting power in shareholder decisions. Wigglesworth discusses the implications of this influence, questioning whether these firms can effectively oversee corporate management without the traditional incentives that drive active investors. 4. Systemic Risks and Market Stability The author also examines the potential systemic risks posed by the dominance of index funds. He explores scenarios where market shocks could be exacerbated by the passive nature of index investing, potentially leading to increased volatility and reduced market resilience.
amanaplanacanal 2y ago
I think I'd still recommend index funds and real estate for a young person today. Buy the biggest house you can reasonably afford, and invest every spare bit of money you have in an index fund. Do everything you can to move from the worker class to the capital owning class, because that's where the returns go. And inflation isn't going away. In theory, capitalism could fail completely. In theory, governments could stop inflating their currencies. I sure wouldn't bet that way though.
- whitepoplar 2y ago
  why "the biggest house you can reasonably afford"?
  - protonbob 2y ago
    In the US, the mortgage markets are propped up by the government and are basically subsidized as good investment vehicles. You can pretty much guarantee that governments aren't going to get their act together and make housing affordable (change zoning laws etc) so it makes sense to buy ASAP.
    - no_wizard 2y ago
      >In the US, the mortgage markets are propped up by the government and are basically subsidized as good investment vehicles. You can pretty much guarantee that governments aren't going to get their act together and make housing affordable (change zoning laws etc) so it makes sense to buy ASAP. I have some thoughts on this. Not because owning a home is a bad idea, but because you should really factor what you're buying and why. None of this is to say your premise is incorrect, but merely there should be more nuance when thinking about this. Buying a place you want to live in is fundamentally different than buying an investment vehicle. I currently rent an apartment, but also own multiple investment properties. Why? Because it makes more sense for my situation, where I myself may need to move more often and therefore some aspects of being in a home that isn't turning profit into my pocket are undesirable, where as buying a house where I am going to live has a very different set of checkboxes, namely between economic issues in the macro and personal health stuff where myself or my wife have to travel a bunch, we're regionally limited and have determined we may or may not want to live in our current metro long term. That said, I absolutely did buy one of the properties with the future intent of living there myself, I simply am delaying that to make money on the property rather than letting it sit empty. I'm easily a few years away from permanently moving into it myself, but in the advent I decide to live elsewhere long term than where I am right now, I at least have the income stream. and absolutely, the regulations (and there by, the law) favors home owners every time. Renters get screwed in this I even tell this to young renters who rent from me. You simply can't get a break on the ever growing rise of rent vs a fixed rate mortgage, but you gotta understand what you're buying and why, and don't conflate the difference between a home and an investment vehicle, as many people do.
davidw 2y ago
It feels like after living through the great recession, a pandemic, incipient authoritarianism, that that system unravelling is exactly the kind of thing that could fall apart on some of us when we near our retirement years.
MangoCoffee 2y ago
>Do we think index funds will continue to be this financial savior for regular people in the future? why not? its an basket of stocks. correct me if i'm wrong but in the long run, index beat out stock picking. i did some stock picking just for fun. two of my picks that i put real money into end up badly that i lose money.
- entuno 2y ago
  One of the key ideas behind the stock market is that is allows capital to efficiently allocated - perform well and have good potential more people buying their shares, and companies that perform badly or have poor potential get fewer. So money should go towards more productive companies, although how well this works in practice is debatable. Passive investment breaks that approach, because you're basically buying shares in every company in an index, regardless of its performance or future prospects. And if passive investment is 1% (as it was back in the 90s) of the market then that's not a big deal, because most of the investment should still be based around performance and productivity. Nowadays its more like 50% - but what happens when that gets even higher? Does the stock market still work effectively if 90% of the money is just blindly invested without any regard of individual company performance or merit? 99%? 100%? I don't know. But we may well reach a point where the inefficiency of passive investment creates serious problems.
  - triceratops 2y ago
    There will always be active investors who look to profit off the inefficiency of passive investing. As long as we maintain healthy competition among them price discovery isn't a problem IMO.
DebtDeflation 2y ago
It unravels when unemployment spikes and all of these automatic 401k contributions stop and eventually reverse as the unemployed start draining their retirement savings to survive.
- bix6 2y ago
  That sounds like a general stock market unwinding not necessarily the index system breaking down?
parpfish 2y ago
what happens in a theoretical market where 100% of investors were in an index funds? companies lucky enough to be listed in the S&P or whatever would get a huge influx of cash, but their actual quarterly performance wouldn't change whether people buy/sell their stock because people aren't picking and evaluating individual companies. so... what would determine their price?
- neogodless 2y ago
  Unless this theoretical market prevents individual investment, anyone who has opinions on any company being over- or under- valued would then be able to take advantage of the passive investors and make a lot of money buying and selling. And this would affect the price. But then it's no longer your theoretical market that is 100% passively invested.
  - parpfish 2y ago
    but even if you know a company was under valued, you should only invest in it if you think it'll be 'properly valued' in the future. for that to work, there needs to be a mechanism for price discovery on individual stocks. but if (nearly) nobody is buying individual stocks, how would it be possible? and it's not even that the index fund is driving price discovery of the aggregate market because people using these funds just keep dumping money in on a schedule because they've internalized the message "time in market beats timing the market".
    - ljlolel 2y ago
      Discounted returns of dividend or buybacks from profits
- dowager_dan99 2y ago
  probably way more efficient as only a small group of the base index funds are doing company-by-company evaluation? If we contrast the sub-prime mortgage crisis where repackaging mixed in more and more dogshit every time, this feels like the opposite.
- 2y ago
wing-_-nuts 2y ago
>Do we think index funds will continue to be this financial savior for regular people in the future? I've never argued that there are not market inefficiencies that can be exploited by active managers, but the twist is the very act of exploiting those opportunities quickly eliminates them. Thus why it's so hard for an active manager to beat index funds long term. If you're worried about a few high market cap companies dominating stock indexes, you could always tilt towards small cap value. That sector has under performed for decades, but every dog has it's day.
toast0 2y ago
In the time since Index Funds were created, retail trade commissions have gone to zero and fractional share trading has become mainstream possible. If it becomes untenable to trust firms to manage index funds, it would be possible , if onerous, to replicate at least a S&P 500 in a retail brokerage. There's a lot of nice things the fund does to earn their 0.03% expense ratio that you'd miss out on, especially convenience; but you'd also be able to vote your shares as you wish for all that that's worth. The indexes themselves I don't think can stray too far from their mission, or funds will throw a fit, S&P 500 index consideration is nearly a mechanical judgement. At the tail end of companies on the 'all market' type indexes, there's perhaps room for shenanigans that could be material for those doing the manipulation, but given the realities of a market value weighted index, it won't make much difference to those following the index if an inappropriate company is added to the index and followers have to spend 0.001% of their fund on it.
crazygringo 2y ago
> On the other it’s accumulating more and more with a few firms giving them exceptional power. Which firms are you referring to? Firms like Vanguard or firms like Apple? I don't really see how Vanguard gets "power" here. They have no choices. They can't deviate from the index, so the money they control doesn't give them "power" to affect anything. Or if you mean firms at the top of the index like Apple, they owe their power to their competitiveness and profit-making ability. I don't really see how inclusion in indexes inflates their power, except in an arguably slightly higher stock price. But it's not allowing them to engage in "powerful" behaviors they wouldn't otherwise. Apple isn't buying up companies it wouldn't if it weren't in index funds, for example.
- entuno 2y ago
  Vanguard do still have a lot of control by choosing their investments, because many of the people investing through them are buying blended funds rather than ones invested in a single index. For instance, if you look at funds like the LifeStrategy ones (which you'll commonly see recommended online by people), it's made up of lots of different funds: https://www.vanguardinvestor.co.uk/investments/vanguard-lifestrategy-100-equity-fund-accumulation-shares/portfolio-data https://www.vanguardinvestor.co.uk/investments/vanguard-life... So while they can't easily pick and choose which S&P 500 stocks they include in a fund like that, they can decide if the S&P 500 is 1% or 10% or 50% of what that fund invests in. And given the total amount of investments they have, if they decide to move towards or away from certain countries/indexes/etc that could have a significant impact.
- lambertsimnel 2y ago
  > I don't really see how Vanguard gets "power" here. They have no choices. They do have voting rights in companies that are part of the index. In my judgement, that's the more reasonable interpretation of the GP's point. On the other hand, the more of the market held in index funds, the less is available to active investors to perform their valuation service, as described elsewhere in this discussion.[0] [0] https://news.ycombinator.com/item?id=43859024 https://news.ycombinator.com/item?id=43859024
  - 2y ago
lr4444lr 2y ago
> perhaps everything behind the scenes could fall apart The problems in the world that would result in the entire top line public companies falling apart that make up the TSM or even S&P 500 fall apart protractedly - not like a few companies getting knocked out and replaced by others but the _entire concept_ failing - would be of such magnitude that people's retirement savings would probably not be the 20th thing on their list to worry about. Look at how COVID even at its worst could barely knock things down more than 25% or so for a few months.
- bix6 2y ago
  I’m less concerned about all the companies failing and more concerned about the implications of an index itself that is managed by a few titans.
pm90 2y ago
My prediction is that index funds will become even bigger as investing is opened up to populations outside of the west. Its likely that most of the economy will be fairly automated and steadily rising unless we face major worldwide shocks (World War, plague, environmental catastrophe etc)

by bix6 2y ago

spencerflem 2y ago

It seems like it has to at some point. Things have been so unsustainable for so long

eadmund 2y ago

> On the other it’s accumulating more and more with a few firms giving them exceptional power. I think that the next step will be for individual investors to instruct that their shares be voted according to certain guides. And then the step after that will be for large index investors to be able to directly vote their shares.

TechDebtDevin 2y ago

The system is designed to only let one or two dominoes fall at a time.

pipes 2y ago
What is the evidence that it has been designed this way?

walthamstow 2y ago

The book 'Trillions' by FT journo Robin Wigglesworth is very good on this subject

bix6 2y ago
Anything stand out to you? I’ll add it to the list but in the meantime I found these points from Chat interesting. 3. Impact on Corporate Governance With substantial holdings across numerous companies, major index fund providers possess significant voting power in shareholder decisions. Wigglesworth discusses the implications of this influence, questioning whether these firms can effectively oversee corporate management without the traditional incentives that drive active investors. 4. Systemic Risks and Market Stability The author also examines the potential systemic risks posed by the dominance of index funds. He explores scenarios where market shocks could be exacerbated by the passive nature of index investing, potentially leading to increased volatility and reduced market resilience.

amanaplanacanal 2y ago

I think I'd still recommend index funds and real estate for a young person today. Buy the biggest house you can reasonably afford, and invest every spare bit of money you have in an index fund. Do everything you can to move from the worker class to the capital owning class, because that's where the returns go. And inflation isn't going away. In theory, capitalism could fail completely. In theory, governments could stop inflating their currencies. I sure wouldn't bet that way though.

whitepoplar 2y ago
why "the biggest house you can reasonably afford"?
- protonbob 2y ago
  In the US, the mortgage markets are propped up by the government and are basically subsidized as good investment vehicles. You can pretty much guarantee that governments aren't going to get their act together and make housing affordable (change zoning laws etc) so it makes sense to buy ASAP.
  - no_wizard 2y ago
    >In the US, the mortgage markets are propped up by the government and are basically subsidized as good investment vehicles. You can pretty much guarantee that governments aren't going to get their act together and make housing affordable (change zoning laws etc) so it makes sense to buy ASAP. I have some thoughts on this. Not because owning a home is a bad idea, but because you should really factor what you're buying and why. None of this is to say your premise is incorrect, but merely there should be more nuance when thinking about this. Buying a place you want to live in is fundamentally different than buying an investment vehicle. I currently rent an apartment, but also own multiple investment properties. Why? Because it makes more sense for my situation, where I myself may need to move more often and therefore some aspects of being in a home that isn't turning profit into my pocket are undesirable, where as buying a house where I am going to live has a very different set of checkboxes, namely between economic issues in the macro and personal health stuff where myself or my wife have to travel a bunch, we're regionally limited and have determined we may or may not want to live in our current metro long term. That said, I absolutely did buy one of the properties with the future intent of living there myself, I simply am delaying that to make money on the property rather than letting it sit empty. I'm easily a few years away from permanently moving into it myself, but in the advent I decide to live elsewhere long term than where I am right now, I at least have the income stream. and absolutely, the regulations (and there by, the law) favors home owners every time. Renters get screwed in this I even tell this to young renters who rent from me. You simply can't get a break on the ever growing rise of rent vs a fixed rate mortgage, but you gotta understand what you're buying and why, and don't conflate the difference between a home and an investment vehicle, as many people do.

davidw 2y ago

It feels like after living through the great recession, a pandemic, incipient authoritarianism, that that system unravelling is exactly the kind of thing that could fall apart on some of us when we near our retirement years.

MangoCoffee 2y ago

>Do we think index funds will continue to be this financial savior for regular people in the future? why not? its an basket of stocks. correct me if i'm wrong but in the long run, index beat out stock picking. i did some stock picking just for fun. two of my picks that i put real money into end up badly that i lose money.

entuno 2y ago
One of the key ideas behind the stock market is that is allows capital to efficiently allocated - perform well and have good potential more people buying their shares, and companies that perform badly or have poor potential get fewer. So money should go towards more productive companies, although how well this works in practice is debatable. Passive investment breaks that approach, because you're basically buying shares in every company in an index, regardless of its performance or future prospects. And if passive investment is 1% (as it was back in the 90s) of the market then that's not a big deal, because most of the investment should still be based around performance and productivity. Nowadays its more like 50% - but what happens when that gets even higher? Does the stock market still work effectively if 90% of the money is just blindly invested without any regard of individual company performance or merit? 99%? 100%? I don't know. But we may well reach a point where the inefficiency of passive investment creates serious problems.
- triceratops 2y ago
  There will always be active investors who look to profit off the inefficiency of passive investing. As long as we maintain healthy competition among them price discovery isn't a problem IMO.

DebtDeflation 2y ago

It unravels when unemployment spikes and all of these automatic 401k contributions stop and eventually reverse as the unemployed start draining their retirement savings to survive.

bix6 2y ago
That sounds like a general stock market unwinding not necessarily the index system breaking down?

parpfish 2y ago

what happens in a theoretical market where 100% of investors were in an index funds? companies lucky enough to be listed in the S&P or whatever would get a huge influx of cash, but their actual quarterly performance wouldn't change whether people buy/sell their stock because people aren't picking and evaluating individual companies. so... what would determine their price?

neogodless 2y ago
Unless this theoretical market prevents individual investment, anyone who has opinions on any company being over- or under- valued would then be able to take advantage of the passive investors and make a lot of money buying and selling. And this would affect the price. But then it's no longer your theoretical market that is 100% passively invested.
- parpfish 2y ago
  but even if you know a company was under valued, you should only invest in it if you think it'll be 'properly valued' in the future. for that to work, there needs to be a mechanism for price discovery on individual stocks. but if (nearly) nobody is buying individual stocks, how would it be possible? and it's not even that the index fund is driving price discovery of the aggregate market because people using these funds just keep dumping money in on a schedule because they've internalized the message "time in market beats timing the market".
  - ljlolel 2y ago
    Discounted returns of dividend or buybacks from profits
dowager_dan99 2y ago
probably way more efficient as only a small group of the base index funds are doing company-by-company evaluation? If we contrast the sub-prime mortgage crisis where repackaging mixed in more and more dogshit every time, this feels like the opposite.
2y ago

wing-_-nuts 2y ago

>Do we think index funds will continue to be this financial savior for regular people in the future? I've never argued that there are not market inefficiencies that can be exploited by active managers, but the twist is the very act of exploiting those opportunities quickly eliminates them. Thus why it's so hard for an active manager to beat index funds long term. If you're worried about a few high market cap companies dominating stock indexes, you could always tilt towards small cap value. That sector has under performed for decades, but every dog has it's day.

toast0 2y ago

In the time since Index Funds were created, retail trade commissions have gone to zero and fractional share trading has become mainstream possible. If it becomes untenable to trust firms to manage index funds, it would be possible , if onerous, to replicate at least a S&P 500 in a retail brokerage. There's a lot of nice things the fund does to earn their 0.03% expense ratio that you'd miss out on, especially convenience; but you'd also be able to vote your shares as you wish for all that that's worth. The indexes themselves I don't think can stray too far from their mission, or funds will throw a fit, S&P 500 index consideration is nearly a mechanical judgement. At the tail end of companies on the 'all market' type indexes, there's perhaps room for shenanigans that could be material for those doing the manipulation, but given the realities of a market value weighted index, it won't make much difference to those following the index if an inappropriate company is added to the index and followers have to spend 0.001% of their fund on it.

crazygringo 2y ago

> On the other it’s accumulating more and more with a few firms giving them exceptional power. Which firms are you referring to? Firms like Vanguard or firms like Apple? I don't really see how Vanguard gets "power" here. They have no choices. They can't deviate from the index, so the money they control doesn't give them "power" to affect anything. Or if you mean firms at the top of the index like Apple, they owe their power to their competitiveness and profit-making ability. I don't really see how inclusion in indexes inflates their power, except in an arguably slightly higher stock price. But it's not allowing them to engage in "powerful" behaviors they wouldn't otherwise. Apple isn't buying up companies it wouldn't if it weren't in index funds, for example.

entuno 2y ago
Vanguard do still have a lot of control by choosing their investments, because many of the people investing through them are buying blended funds rather than ones invested in a single index. For instance, if you look at funds like the LifeStrategy ones (which you'll commonly see recommended online by people), it's made up of lots of different funds: https://www.vanguardinvestor.co.uk/investments/vanguard-lifestrategy-100-equity-fund-accumulation-shares/portfolio-data https://www.vanguardinvestor.co.uk/investments/vanguard-life... So while they can't easily pick and choose which S&P 500 stocks they include in a fund like that, they can decide if the S&P 500 is 1% or 10% or 50% of what that fund invests in. And given the total amount of investments they have, if they decide to move towards or away from certain countries/indexes/etc that could have a significant impact.
lambertsimnel 2y ago
> I don't really see how Vanguard gets "power" here. They have no choices. They do have voting rights in companies that are part of the index. In my judgement, that's the more reasonable interpretation of the GP's point. On the other hand, the more of the market held in index funds, the less is available to active investors to perform their valuation service, as described elsewhere in this discussion.[0] [0] https://news.ycombinator.com/item?id=43859024 https://news.ycombinator.com/item?id=43859024
- 2y ago

lr4444lr 2y ago

> perhaps everything behind the scenes could fall apart The problems in the world that would result in the entire top line public companies falling apart that make up the TSM or even S&P 500 fall apart protractedly - not like a few companies getting knocked out and replaced by others but the _entire concept_ failing - would be of such magnitude that people's retirement savings would probably not be the 20th thing on their list to worry about. Look at how COVID even at its worst could barely knock things down more than 25% or so for a few months.

bix6 2y ago
I’m less concerned about all the companies failing and more concerned about the implications of an index itself that is managed by a few titans.

pm90 2y ago

My prediction is that index funds will become even bigger as investing is opened up to populations outside of the west. Its likely that most of the economy will be fairly automated and steadily rising unless we face major worldwide shocks (World War, plague, environmental catastrophe etc)