Bogle: Even indexing can be too much of a good thing

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testing321
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Bogle: Even indexing can be too much of a good thing

Post by testing321 » Thu Jun 01, 2017 3:42 pm

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I have always wondered about this. ETFs are on auto pilot, and if the vast majority of people are on auto pilot, it could be salad days for active investors.

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Re: Bogle: Even indexing can be too much of a good thing

Post by RadAudit » Thu Jun 01, 2017 4:19 pm

You may want to wait before breaking out the salad forks. The article says Mr. Bogle guesses that at least 75% of the market has to be owned by indexers before it gets dangerous. I think we have a way to go.
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SinisterMethods
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Re: Bogle: Even indexing can be too much of a good thing

Post by SinisterMethods » Thu Jun 01, 2017 4:29 pm

RadAudit wrote:You may want to wait before breaking out the salad forks. The article says Mr. Bogle guesses that at least 75% of the market has to be owned by indexers before it gets dangerous. I think we have a way to go.
Yeah from what I have been reading, The market is still quite a ways off from reaching that number.

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TheTimeLord
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Re: Bogle: Even indexing can be too much of a good thing

Post by TheTimeLord » Thu Jun 01, 2017 4:34 pm

testing321 wrote:link
I have always wondered about this. ETFs are on auto pilot, and if the vast majority of people are on auto pilot, it could be salad days for active investors.
viewtopic.php?f=10&t=218396
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unclescrooge
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Re: Bogle: Even indexing can be too much of a good thing

Post by unclescrooge » Thu Jun 01, 2017 6:27 pm

SinisterMethods wrote:
RadAudit wrote:You may want to wait before breaking out the salad forks. The article says Mr. Bogle guesses that at least 75% of the market has to be owned by indexers before it gets dangerous. I think we have a way to go.
Yeah from what I have been reading, The market is still quite a ways off from reaching that number.
The article seems to imply that we're less than 10 years from such a number.

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Re: Bogle: Even indexing can be too much of a good thing

Post by boglephreak » Thu Jun 01, 2017 6:47 pm

im confident that when index funds reach the threshold (whatever percentage number that may be) and that active funds start to beat the market (and index funds) more often that the flow of money will move back to active funds, and then we will all be "safe" again. never underestimate greed and poor long term decision making by the masses.

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Re: Bogle: Even indexing can be too much of a good thing

Post by cutehumor » Thu Jun 01, 2017 7:05 pm

unclescrooge wrote:
SinisterMethods wrote:
RadAudit wrote:You may want to wait before breaking out the salad forks. The article says Mr. Bogle guesses that at least 75% of the market has to be owned by indexers before it gets dangerous. I think we have a way to go.
Yeah from what I have been reading, The market is still quite a ways off from reaching that number.
The article seems to imply that we're less than 10 years from such a number.
This site needs to be deleted immediately! :P I need to start posting pro active management mutual funds around here! :sharebeer

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SinisterMethods
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Re: Bogle: Even indexing can be too much of a good thing

Post by SinisterMethods » Thu Jun 01, 2017 8:11 pm

unclescrooge wrote:
SinisterMethods wrote:
RadAudit wrote:You may want to wait before breaking out the salad forks. The article says Mr. Bogle guesses that at least 75% of the market has to be owned by indexers before it gets dangerous. I think we have a way to go.
Yeah from what I have been reading, The market is still quite a ways off from reaching that number.
The article seems to imply that we're less than 10 years from such a number.
Possibly. But I would imagine that it is something relatively easy to see coming. It's a percentage of trading stocks outside of indexes right? I guess the question is what percent actually causes the danger.

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Re: Bogle: Even indexing can be too much of a good thing

Post by Tamalak » Fri Jun 02, 2017 8:15 am

The article is pretty confusing. Bogle talks about "chaos, catastrophe" and then "refuses to elaborate in the interview". Thanks dude :oops:

If he weren't the founder of (popular) indexing, the users of this forum would treat Bogle as just another fraud and his words as just more noise.

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Re: Bogle: Even indexing can be too much of a good thing

Post by SimpleGift » Fri Jun 02, 2017 8:55 am

SinisterMethods wrote:Yeah from what I have been reading, The market is still quite a ways off from reaching that number.
This is the latest projection I’ve seen published:
But keep in mind, it’s not the percentage of assets passively managed that matters — it’s the amount of active trading which determines efficient prices. If passive funds are 70% of the market, but only have 5% turnover, the remaining 30% of actively-managed funds will still be doing most of the trading and price setting (since their turnover is so much higher). See this related post.

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Re: Bogle: Even indexing can be too much of a good thing

Post by deltaneutral83 » Fri Jun 02, 2017 9:51 am

I don't think that last quartile will go to indexing anytime in the next decade or two. It's all the rage now and still less than 50% of even domestic equity assets according to that article. Many, many years away. There has been a mass exodus to indexing the last 1-3 years to the tune of 46% domestic. Each 1% more will be tougher especially if we hit a bear market and active outperforms (before load and AUM of course).

^ I really don't see 60% passive by 2030

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Re: Bogle: Even indexing can be too much of a good thing

Post by AlwaysBeClimbing » Fri Jun 02, 2017 10:25 am

"One development could mitigate much of the advantage that index funds enjoy and slow the rush to own them, but you’re probably not going to like it. When the market suffers a prolonged decline, active managers can gain an edge over indexers by moving large portions of assets into cash or into defensive sectors such as utilities and consumer staples."
Yeah but indexers could move to cash or into defensive sector ETF indexes just as easily if they choose. I think it's more a question of buy and hold(vs active), not indexing(vs active) that is the issue here.

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SinisterMethods
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Re: Bogle: Even indexing can be too much of a good thing

Post by SinisterMethods » Fri Jun 02, 2017 12:52 pm

Simplegift wrote:
SinisterMethods wrote:Yeah from what I have been reading, The market is still quite a ways off from reaching that number.
This is the latest projection I’ve seen published:
But keep in mind, it’s not the percentage of assets passively managed that matters — it’s the amount of active trading which determines efficient prices. If passive funds are 70% of the market, but only have 5% turnover, the remaining 30% of actively-managed funds will still be doing most of the trading and price setting (since their turnover is so much higher). See this related post.
Interesting. I wonder what the long term solution is.

I could ride through a crash. But that's assuming things will pick up on the other side of the crash. But this particular problem seems to need a long term solution.

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Re: Bogle: Even indexing can be too much of a good thing

Post by Theoretical » Fri Jun 02, 2017 1:33 pm

My highest turnover stock fund is IJS at 35-45%. Everything else is a fundamental index with some legacy S&P 500. Turnover rates are between 10-25% for everything else and they're indexes. Clearly I have an active strategy, but should my holdings be classified as passive or active for the purposes of the passive/active graph since I still own a large majority of the investible market, just at different weights?

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Re: Bogle: Even indexing can be too much of a good thing

Post by Northern Flicker » Fri Jun 02, 2017 1:51 pm

One development could mitigate much of the advantage that index funds enjoy and slow the rush to own them, but you’re probably not going to like it. When the market suffers a prolonged decline, active managers can gain an edge over indexers by moving large portions of assets into cash or into defensive sectors such as utilities and consumer staples.
I'd love to see evidence that more active managers can successfully time the decline and recovery of the market in this way than would be predicted by random chance among those who try.
Index fund investor since 1987.

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Re: Bogle: Even indexing can be too much of a good thing

Post by White Coat Investor » Fri Jun 02, 2017 1:58 pm

I doubt we need 25% of the market being actively managed to maintain enough efficiency that indexing works. I'd guess less than 5% would be enough.
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Re: Bogle: Even indexing can be too much of a good thing

Post by David Jay » Fri Jun 02, 2017 2:26 pm

Simplegift wrote:But keep in mind, it’s not the percentage of assets passively managed that matters — it’s the amount of active trading which determines efficient prices. If passive funds are 70% of the market, but only have 5% turnover, the remaining 30% of actively-managed funds will still be doing most of the trading and price setting (since their turnover is so much higher).
BH types are so fund-focused that even this discussion trends towards "active" versus "index" funds. Funds are not the primary market-makers.

Traders in individual stocks are the real market-makers. As long as there is a Wall Street firms, there will be price discovery by buyers and sellers of individual stocks.
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Re: Bogle: Even indexing can be too much of a good thing

Post by Theoretical » Fri Jun 02, 2017 3:59 pm

jalbert wrote:
One development could mitigate much of the advantage that index funds enjoy and slow the rush to own them, but you’re probably not going to like it. When the market suffers a prolonged decline, active managers can gain an edge over indexers by moving large portions of assets into cash or into defensive sectors such as utilities and consumer staples.
I'd love to see evidence that more active managers can successfully time the decline and recovery of the market in this way than would be predicted by random chance among those who try.
It's a pretty bad record from what I've read. In fact, it simply raises the stakes of being right, but early. What the active managers tout as a feature, I consider a bug, because it wrecks the asset allocation decisions I as an investor have set.

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Re: Bogle: Even indexing can be too much of a good thing

Post by selftalk » Fri Jun 02, 2017 5:30 pm

Even if a larger percentage of people index I don`t think it matters and may even be good for indexers who stay the course. Can you even imagine the carnage that will manifest itself when the market turns to bear and falls sharply. Over thousands of years human emotion is most probably the same. Buy high and panic and sell low for most would be investors. Sound familiar ?

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Re: Bogle: Even indexing can be too much of a good thing

Post by Phineas J. Whoopee » Fri Jun 02, 2017 6:36 pm

boglephreak wrote:im confident that when index funds reach the threshold (whatever percentage number that may be) and that active funds start to beat the market (and index funds) more often that the flow of money will move back to active funds, and then we will all be "safe" again. never underestimate greed and poor long term decision making by the masses.
Most stock is held by institutional investors that are not funds. It's easy for we individual mutual fund investors to forget that.
PJW

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reriodan
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Re: Bogle: Even indexing can be too much of a good thing

Post by reriodan » Fri Jun 02, 2017 6:48 pm

Bogle is not a perfect individual. He has been wrong before (see his stance on international equities) and he will be wrong again. Ignore the noise.

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Re: Bogle: Even indexing can be too much of a good thing

Post by cutehumor » Fri Jun 02, 2017 6:48 pm

SinisterMethods wrote:
Simplegift wrote:
SinisterMethods wrote:Yeah from what I have been reading, The market is still quite a ways off from reaching that number.
This is the latest projection I’ve seen published:
But keep in mind, it’s not the percentage of assets passively managed that matters — it’s the amount of active trading which determines efficient prices. If passive funds are 70% of the market, but only have 5% turnover, the remaining 30% of actively-managed funds will still be doing most of the trading and price setting (since their turnover is so much higher). See this related post.
Interesting. I wonder what the long term solution is.

I could ride through a crash. But that's assuming things will pick up on the other side of the crash. But this particular problem seems to need a long term solution.
maybe vanguard will close ALL INDEX FUNDS to new investors!

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Re: Bogle: Even indexing can be too much of a good thing

Post by MathWizard » Fri Jun 02, 2017 7:39 pm

If that happens, they we can all agree to take 10% of our passive and put it into active so that the
90% of our portfolio will work well. So in addition to the AA ratio, we'll have an AP ratio (active vs. passive).

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Re: Bogle: Even indexing can be too much of a good thing

Post by BuyAndHoldOn » Fri Jun 02, 2017 8:43 pm

deltaneutral83 wrote:I don't think that last quartile will go to indexing anytime in the next decade or two. It's all the rage now and still less than 50% of even domestic equity assets according to that article. Many, many years away. There has been a mass exodus to indexing the last 1-3 years to the tune of 46% domestic. Each 1% more will be tougher especially if we hit a bear market and active outperforms (before load and AUM of course).

^ I really don't see 60% passive by 2030
Yep. Investor psychology is [still; always] a market driver.

Some markets (fixed income) demonstrably outperform with active management anyway. (I am still ~90% passive in fixed income, however).

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Re: Bogle: Even indexing can be too much of a good thing

Post by Lobster » Fri Jun 02, 2017 9:54 pm

White Coat Investor wrote:I doubt we need 25% of the market being actively managed to maintain enough efficiency that indexing works. I'd guess less than 5% would be enough.
David Jay wrote:Funds are not the primary market-makers.
Traders in individual stocks are the real market-makers. As long as there is a Wall Street firms, there will be price discovery by buyers and sellers of individual stocks.
Both of these points are very important. It's not about what % of assets are passive or active, it's about the volume/frequency of trading. The vast majority of trading is done through automation by a small handful of the largest firms. The volume of trading today is unbelievably larger today than it was in the 50s for example. Having a large chunk of the money held passively won't 'actively' cause any harm to the ecosystem. Those supercomputer trading engines will keep chugging away, and slick salespeople will still convince many people to entrust their money to active managers for many many years to come.
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Re: Bogle: Even indexing can be too much of a good thing

Post by packer16 » Sun Jun 04, 2017 9:03 am

I think a related question is this large amount of short term trading making the market more efficient in the long-term. I believe the answer is no. Much of this short term trading is not based upon long-term fundamentals as there is risk that the realized value may not occur for until years in the future. This can be seen by the turnover in a firm's shares. The firms who have traditionally provided liquidity when short-term traders sold were value investors. Now you have funds being pulled from these liquidity providers and given to indexers who buy & sell automatically based upon fund inflows & outflows.

I think the next downturn will be interesting as the amount of assets the liquidity providers have been depleted while the assets of the pure funds flow buyer and sellers have increased. I think BTW the 2000 downturn in index performance was magnified by this effect.

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