Mass adoption of index investing = diminished returns?

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Rizzle
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Joined: Thu Sep 13, 2012 1:32 am

Mass adoption of index investing = diminished returns?

Post by Rizzle »

Don't they say in investing that you get diminishing returns for the greater number of people using the same investing approach? Let's say that 100% of institutional and at home investors eventually flock to index investing. Would this in effect make the approach completely redundant? I'm not suggesting this is going to happen, but wouldn't index investing returns be negatively correlated with the number of people adopting it?

Finally, I'm well aware of the pitfalls of high management costs (hence my interest in investing in Vanguard Australia index funds). Now this is a very noob question but is the only way to buy into these via their ETF funds (https://www.vanguardinvestments.com.au/ ... sp#etfstab)? If for example I want to invest in the Vanguard® Australian Shares Index ETF which has a management cost 0.15%, it would also cost an additional 0.4% expense through my online broker with a $5000 investment ($20/$5000 = 0.4%). I want to know is there a way to buy in to these funds through Vanguard directly as opposed to my broker? (it doesn't look like there is but I wanted to double check).

TIA
Tonen
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Re: Mass adoption of index investing = diminished returns?

Post by Tonen »

If you have a loose $500k laying around, knock yourself out :)
https://www.vanguardinvestments.com.au/ ... lVASIF.jsp

There may be relatively cheap access to the managed funds rather than the ETF's through some of the public offer super funds. I haven't looked at it for some years, but if you are looking to salt some low cost passive investments away in superannuation under cheap Vanguard or State Street vehicles, try the usual suspects - Sunsuper, Australian Super and so on.

And in response to your first question - its a hypothetical that will never happen, and to make a long answer short, even if it did happen - "no".
Call_Me_Op
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Re: Mass adoption of index investing = diminished returns?

Post by Call_Me_Op »

Rizzle wrote:Don't they say in investing that you get diminishing returns for the greater number of people using the same investing approach?
What they should say is "you get what you don't pay for."
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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nisiprius
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Re: Mass adoption of index investing = diminished returns?

Post by nisiprius »

Rizzle wrote:Don't they say in investing that you get diminishing returns for the greater number of people using the same investing approach? Let's say that 100% of institutional and at home investors eventually flock to index investing. Would this in effect make the approach completely redundant? I'm not suggesting this is going to happen, but wouldn't index investing returns be negatively correlated with the number of people adopting it?
No, the reason why index investing is interesting is that is the only investment approach that is not subject to this effect. If you own the total market, everyone else's shifts balance out and do not affect you. It doesn't matter whether they shift from one stock to another, from one strategy to another--not even if the shift is toward indexing.

If everyone runs to the port side of a ship--a 74-gun ship-of-the-line, perhaps--the ship heels and everyone who's already on the port side goes down. But index investors are sitting at the exact center of buoyancy; they don't go up or down when that happens. And if everyone suddenly decides to rush to the exact center of the ship, it doesn't make the ship go down, because the total weight of the ship doesn't change.

The total market is the total market. If you invest in the Vanguard Total Stock Market Index, you get the returns of the total market, to within a few basis point. Period. It's as simple as that. It doesn't matter whether a few people do it or a lot of people do it.

OK, if literally everyone indexed, there wouldn't be anyone intelligent analyzing securities and there wouldn't be a mechanism for "price discovery," and the stock market wouldn't efficiently allocate capital to enterprises. Just as if literally everyone literally rushed to the exact center of the ship nobody would be left to steer. However, when people like me, who don't spend a good forty-hour work week studying one or two companies, try to evaluate stocks we don't add anything useful, and if anything prices will be set more accurately and capital allocated more efficiently if the people who don't know how to do it opt out. The ship doesn't steer any better if everyone on board puts their hand on the wheel.
Last edited by nisiprius on Thu Sep 13, 2012 5:31 pm, edited 1 time in total.
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BYUvol
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Re: Mass adoption of index investing = diminished returns?

Post by BYUvol »

nisiprius wrote:
Rizzle wrote:Don't they say in investing that you get diminishing returns for the greater number of people using the same investing approach? Let's say that 100% of institutional and at home investors eventually flock to index investing. Would this in effect make the approach completely redundant? I'm not suggesting this is going to happen, but wouldn't index investing returns be negatively correlated with the number of people adopting it?
No, the reason why index investing is interesting is that is the only investment approach that is not subject to this effect. If you own the total market, everyone else's shifts balance out and do not affect you. It doesn't matter whether they shift from one stock to another, from one strategy to another--not even if the shift is toward indexing.

If everyone runs to the port side of a ship--a 74-gun 1787 ship-of-the-line, perhaps--the ship heels and everyone who's already on the port side goes down. But index investors are sitting at the exact center of buoyancy; they don't go up or down when that happens. And if everyone suddenly decides to rush to the exact center of the ship, it doesn't make the ship go down, because the total weight of the ship doesn't change.

The total market is the total market. If you invest in the Vanguard Total Stock Market Index, you get the returns of the total market, to within a few basis point. Period. It's as simple as that. It doesn't matter whether a few people do it or a lot of people do it.

OK, if literally everyone indexed, there wouldn't be anyone intelligent analyzing securities and there wouldn't be a mechanism for "price discovery," and the stock market wouldn't efficiently allocate capital to enterprises. Just as if literally everyone literally rushed to the exact center of the ship nobody would be left to steer. However, when people like me, who don't spend a good forty-hour work week studying one or two companies, try to evaluate stocks we don't add anything useful, and if anything prices will be set more accurately and capital allocated more efficiently if the people who don't know how to do it opt out. The ship doesn't steer any better if everyone on board puts their hand on the wheel.
And until stock options cease being a form of compensation, not everyone will index.
Topic Author
Rizzle
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Re: Mass adoption of index investing = diminished returns?

Post by Rizzle »

Thanks all, seems like I need to aim for $500k.

BRB...saving
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