If everybody indexed, the only word you could use is chaos, catastrophe

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BolderBoy
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Re: John Bogle warning

Post by BolderBoy » Sat Jun 17, 2017 8:06 am

Ho Hum. Did you listen to the Bogle interview at the BerkshireHathaway meeting (I did)?

You also noticed that the article you link above is an OPINION piece, right? And the title is the usual journalistic endeavor to get folks to click on the link.

Ho Hum.
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Re: John Bogle warning

Post by AlohaJoe » Sat Jun 17, 2017 8:08 am

I think you probably didn't read the article.
Bogle stressed that there is a long way to go before indexing reaches a level at which market stability begins to crumble
His comments have been discussed here previously; you can find those conversations via a search.

fourwheelcycle
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Re: John Bogle warning

Post by fourwheelcycle » Sat Jun 17, 2017 8:22 am

There was recently another thread on this topic: viewtopic.php?t=218396

I am certainly not an expert on how the stock market actually functions, but it seems to me the problem would be self-correcting. People are moving to index funds now because there are more articles explaining how unlikely it is to consistently beat the market with managed funds, net of ERs. If too much money in index funds ever caused the market to stop reflecting stocks' underlying values, PEs, company prospects, etc., there would begin to be more articles about managed funds that were actually beating the market. Money would then move toward the successful managed funds and prices for individual stocks would begin to move back to realistic market values.

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Re: John Bogle warning

Post by Helo80 » Sat Jun 17, 2017 8:27 am

I would not underestimate human psychology and the need to be "different" or "better" than others.

How many different investment firms are out there?
How many spend millions of dollars on ad campaigns?
How many make all sorts of promises about financial expertise?

I just don't see a time where everybody will drink the index fund kool aid to the point where the entire market is indexed. In a way, index funds are the Toyota Camry's of the stock market.... That's exactly what we all want.

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nisiprius
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Re: John Bogle warning

Post by nisiprius » Sat Jun 17, 2017 10:33 am

1) The article isn't by John Bogle, it's by one Conrad de Aenlle.

2) The actual interview, Bogle's words, are here. I suggest reading what he says, not what Conrad de Aenlle says.

3) The word "warning" does not appear in Bogle's interview. He is not "warning" anybody about anything. The "chaos and catastrophe" he envisions are hypothetical and would occur if everybody indexed. He then says, “Now, what are the chances of everybody indexing? It’s zero.”

4) If everybody were to flush their toilets at the same time, chaos and catastrophe would ensue, but that's not going to stop me from flushing our toilet.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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TD2626
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Re: John Bogle warning

Post by TD2626 » Sat Jun 17, 2017 10:58 am

There are pleanty of people (including on this forum) who have a portion of their portfolios in active funds or individual stocks. These posters claim they intend to maintain this strategy for the rest of their lives.

The chance of everyone indexing in the foreseeable future is basically zero.

The Vanguard Wellington fund is a venerable active fund. For everyone in the market to index this fund would not be able to exist in its current form.

It is easily possible that, say, 60-80% of funds could be indexed in our lives. There could be issues with this since there would be relatively fewer dollars working on price discovery and making markets efficient.

The potential issues associated with high levels of indexing in the market are unforeseeable. By definition, the word unforeseeable means we can't predict the outcome. No one knows what would happen if 80% of the market indexed because this hasn't happened before - and what would happen is hard to predict.

It may be acceptable for those who are worried about high levels of indexing in the market to index most of their portfolio but put 20-30% in several broadly diversified, low cost actively managed funds, such as Vanguard's.

MindBogler
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Re: John Bogle warning

Post by MindBogler » Sat Jun 17, 2017 11:12 am

TD2626 wrote:The chance of everyone indexing in the foreseeable future is basically zero.
I believe the chance is exactly zero. Does anyone think algorithmic trading is going anywhere? The end game might be some percentage of indexers with the majority of market movement driven by robots but this future is also unlikely. Never underestimate the power of human self-delusion. There will always be people who think they know more or can do it better -- unless somehow millions of years of evolution can also be undone by the wonders of indexing. :wink:

And just for a minute lets examine the scenario where 100% of the market were indexed. What percentage of indexers buy and sell shares every day? It isn't zero. The market would still operate because no one has an infinite holding period. People accumulate and then spend. Most people accumulate a little then take out 401k loans to buy boats and other depreciating assets. :shock: People die and their children liquidate their retirement accounts. There would always be market movement because life happens.


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Re: If everybody indexed, the only word you could use is chaos, catastrophe

Post by LadyGeek » Sat Jun 17, 2017 11:44 am

I merged FBN2014's thread into here, which is a similar discussion.

The marketwatch.com article: Opinion: John Bogle has a warning for index fund investors (June 1, 2017)

is a rehash of the Yahoo finance article: Jack Bogle envisions 'chaos, catastrophe' in markets if everyone were to index (May 6, 2017)

The Yahoo Finance article includes a video interview.
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nedsaid
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Re: John Bogle warning

Post by nedsaid » Sat Jun 17, 2017 12:09 pm

nisiprius wrote:
4) If everybody were to flush their toilets at the same time, chaos and catastrophe would ensue, but that's not going to stop me from flushing our toilet.
Let's do a little experiment, calling all Bogleheads. Everyone on the count of three, flush!!!
A fool and his money are good for business.

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M_to_the_G
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Re: If everybody indexed, the only word you could use is chaos, catastrophe

Post by M_to_the_G » Sat Jun 17, 2017 5:41 pm

Helo80 wrote:I would not underestimate human psychology and the need to be "different" or "better" than others.
Not only this, but also the need to believe that there is a "silver bullet" solution that offers low risk and high reward. Or the perceived need, based on desperation, to make a lot of money in a short period of time. Or the simple desire to churn and try one's odds.

There is no more risk of index investing becoming the norm than there is risk of any rational, healthy, moderate behavior becoming the norm. Junk food is never going out of style. Nor are scratch tickets and casinos. Nor is heroine.

Jack Bogle is right. The risk of this is essentially zero.
"It’s basically the plot of 'Charlie and the Chocolate Factory.' If you stick around, doing nothing, while everyone around you ****s up, you’re going to win big." - John Oliver

Helo80
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Re: John Bogle warning

Post by Helo80 » Sun Jun 18, 2017 2:10 pm

TD2626 wrote:There are pleanty of people (including on this forum) who have a portion of their portfolios in active funds or individual stocks. These posters claim they intend to maintain this strategy for the rest of their lives.

That's me. A good 70% of my equities are indexed, and although it's irrational, YOLO and I'll take my roll at the craps table.

BuyAndHoldOn
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Re: If everybody indexed, the only word you could use is chaos, catastrophe

Post by BuyAndHoldOn » Sun Jun 18, 2017 2:22 pm

Da5id wrote:Anything that can't go on forever won't do so in the real world. If there is a percentage at which indexing becomes less efficient than stock picking or other strategies, indexing will presumably not grow to a higher percentage than that value. Doesn't matter whether that percentages is 50%, 80%, or 95%, the market will presumably find it...

That is what I think also [not that that means anything :happy ].

I am sure Bogleheads could happily leave a portion of invested assets (particularly equities) in index funds, and also have a portion of active management should that become a proven, favorable, long-term strategy. In fact, I bet many have some active management in their portfolio(s) now. I know I do.

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randomizer
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Re: If everybody indexed, the only word you could use is chaos, catastrophe

Post by randomizer » Sun Jun 18, 2017 2:38 pm

thevigilante wrote:And this is why I find myself sleeping soundly after recommending indexing to pretty much every wage earner who doesn't have the time, knowledge, motivation, and risk tolerance to make a reasonable attempt at trading to make money off the inefficiency.
Which is to say, "to everybody".

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M_to_the_G
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Re: If everybody indexed, the only word you could use is chaos, catastrophe

Post by M_to_the_G » Sun Jun 18, 2017 4:30 pm

randomizer wrote:
thevigilante wrote:And this is why I find myself sleeping soundly after recommending indexing to pretty much every wage earner who doesn't have the time, knowledge, motivation, and risk tolerance to make a reasonable attempt at trading to make money off the inefficiency.
Which is to say, "to everybody".
Exactly. But to Jack Bogle's point, "nobody" is going to listen... or accept that they are "everybody." I've been shocked by the numbers of people I've explained things to, in the clearest language I know how to use, who then proceed to ignore what I've just explained to them... or who nevertheless think they can "win." The saddest cases are the ones who have an epiphany and realize that what you say is true, but they can't extract themselves from a relationship with a FA. The excuses are heartbreaking: "Yeah, he's fleecing me, I realize that... but he came to my daughter's birthday party..."

You can lead a horse to water... Every once in a blue moon, you meet someone who "gets" it and then does it. Those are the little victories.
"It’s basically the plot of 'Charlie and the Chocolate Factory.' If you stick around, doing nothing, while everyone around you ****s up, you’re going to win big." - John Oliver

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unclescrooge
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Re: If everybody indexed, the only word you could use is chaos, catastrophe

Post by unclescrooge » Sun Jun 18, 2017 4:43 pm

nisiprius wrote:Suppose you have a big pot of soup that contains 20% chicken. A line of indexers comes forward. Each one stirs it up thoroughly and takes out a ladleful of soup, containing 20% chicken in their ladleful. Does that ruin it for the people who come afterwards? Does it cause chaos if indexers take 30% of the soup? 50% of the soup? 80% of the soup?

Any other strategy is going to create problems if very, very widely adopted, much sooner than indexing. For example, only 2% of the stock market is small value, so there will be big problems if "everybody" decides they want a 10% small value tilt.

Indexing is the most scalable and stable of all strategies.
This is indisputable (except by people that deny math and facts, of which I sadly know several).

So why do pension funds and endowments (which collectively are the market) continually try to beat it?

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Re: If everybody indexed, the only word you could use is chaos, catastrophe

Post by alex_686 » Mon Jun 19, 2017 10:52 am

unclescrooge wrote:This is indisputable (except by people that deny math and facts, of which I sadly know several).

So why do pension funds and endowments (which collectively are the market) continually try to beat it?
3 reasons.

1. Arrogance and Stupidity Enough said on this point.

2. Why do you think they don't beat the market? Consider these points.

Certain higher fees - those associated with active management rather than marketing - have shown to have higher gross returns (before fees) than those with lower fees. The problem here for the ordinary investor is that portfolio managers have a better feel of their value than you do, and they charge their management fees accordingly. Trying to find a superior manager is about as hard as finding a superior single stock to invest in.

3. Why do you think they want market returns?

Lets start with pensions funds as a easy example. What they want is low risk constant returns, not market returns. They are willing to trade upside market participation for downside protection. They may tilt their portfolio more towards value and low beta stocks.

This is how you are supposed to create your Asset Allocation:

1. State your goals
2. State your risk tolerance.
3. State your market expectations.
4. Create a custom index / asset allocation which optimizes for the prior 3 points.
5. Execute.

This is expensive to implement. Most individual investors are better off using generic index products. They are pretty good and very cheap. Think custom tailored suit vs. off the rack. For most people "off the rack" is the more efficient choice. The big boys however can justify the higher expense to get exactly what they need.

A specific example is REITs. We have gone back and forth on if one should overweight REITs. However, something that is even better than REITs is direct holdings of real estate. Direct holdings does a even better job of diversification than REITs. However, they are illiquid, to get the necessary diversity you need to invest in over a dozen different projects, etc. The correct answer for a pension fund or foundation would be to buy direct holdings of real estate, then underweight REITs in their stock holdings. Here, you don't even want market returns.

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