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I have maintained a portfolio of both index funds and well-chosen individual stocks. 20 years in, the individual stocks have vastly outperformed the index funds. In the current bearish market, the index funds have fallen faster.
These are my 20-year results, not the current popular theory of how to invest.
No, over the long haul you cannot beat the returns of a solid broad-based Index Fund. John Bogle proved that.
Well, one obvious downside is you’ll never beat the market.
Since that’s tremendously important to a huge chunk of brokerage firms, professional traders, financial advisors, fund managers and wealthy people, it’s hard to imagine indexing going beyond a minority of investors.
Indexing is literally saying you’re willing to accept average performance. That’s completely unacceptable to most investors regardless of how many stories they read about ending up with more money in the end. Everyone wants bragging rights. The earlier comment about hitting a bear market and looking for better returns elsewhere is spot on. That’s when I think the popularity will wane.
Who hires a coach to help them be average?
There is a lot of concern that index funds concentrate the shareholder voting power of huge blocks of stock to a few people at Vanguard, Black Rock, Fidelity and State Street. This has become a concern as so many ESG environmental issues are raised by shareholder proxy votes. Those few dozen people that are responsible for voting the index fund shares are potentially subject to mob rule by activists.
Indexing is so 2019.
I get texts from my little brother and uncle about hot meme stocks and crypto. Not index funds.
Besides, 2020 proved that index funds were not a legit threat to markets. Index funds simply match the market caps of what active investors are doing. It’s nothing magical or a black box.
The big downside is investor behavior – doing the wrong things at the wrong times. An advisor can help with behavioral alpha to avoid such pitfalls.
For indexing to work, there must remain substantial number of investors (or gamblers) who actively trade and, more importantly, to believe in the stock market as winnable. Contempt for indexers is precisely what is needed to keep indexing viable.
When I read about endowments and pension funds investing billions of dollars, almost all appear to employ active managers who, in turn, help set market prices. It appears that the mantra of “beat the market” is alive and well.
Not in theory but probably in practice. The current popularity of indexing is at least in part due to performance chasing. The next time we have an extended bear market, those performance chasers may jump ship. That said, the virtues of indexing far outweigh the downsides.
For index investors, probably not (here’s an article explaining the logic of why that’s the case). For active fund managers, there is potentially an advantage—there are more opportunities to discover mispricings and find alpha! Ben Felix has a helpful video that digs into this question.
I’ve read recent articles disparaging indexing due to the growing size of certain companies with the most popular index funds and ETFs.
Yet, over the last 40 years, the shift from defined benefit plans (“pensions”) to defined contribution plans (“401k/403b/457’s”) put ordinary workers in the untenable position of investing for retirement in a sophisticated, global financial system they barely comprehend. Most recent retirees find their social security monthly benefit too low to cover expenses, and health or other factors limit their ability to continue working. It’s essential that these defined contribution plans experience a reasonable positive return.
Companies do not want to be in the business of assuring their employees have good retirements. Many people don’t even have long term jobs anymore. Let individuals/firms with a higher risk tolerance or more money to play with, and more time to research and bet on companies, do the active investing and hiring of active managers. Ordinary investors benefit from low expenses and market matching returns offered by index funds. IMO total market indexing should be even more popular!
I would also point out that active investors as a group cannot outperform a market index. Those active investors who outperform in any given year are matched by others who under perform. Working people saving for retirement are better off not trying to pick active managers who try to beat the market.
I agree that total market index funds or ETFs should be the core holdings in the portfolios of workers saving for retirement.
This question makes for a fascinating thought experiment. What if everyone invested in the same index? Would there be enough of a market to support the buying and selling? I think that, even though people are trading the same shares, there are enough people invested, at various stages of life, to support the buying and selling. I once attended a lecture by Dr. Jeremy Siegel, of the Wharton School. His research looked at the wealth transfer from the baby boom generation to succeeding generations. His results indicated that there was sufficient demand to support the inter-generational wealth transfer, if you considered the global market (like India).