An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

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Boxtrap
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An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Boxtrap » Wed Apr 25, 2018 10:05 am

Apparently the person who wrote this article believes Vanguard and passive management will be the cause of the next catastrophic bear market.

I couldn't disagree more with literally everything this article states. Would love to know what others think.

http://www.investivdaily.com/the-next-b ... ill-start/

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Meg77
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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Meg77 » Wed Apr 25, 2018 10:20 am

I don't disagree with some of the author's assertions: that many people are blindly dumping money into the market each month, that we will likely see a major correction at some point in the future, that current valuations are higher than historical averages. Even that some stocks will outperform the S&P 500 index and that the real return of the index may be low over the next 20-30 years (the author projects 4%).

But singling out Vanguard and index investing as the cause of this makes no sense to me. By the author's own logic (that Vanguard investors blindly invest every day/month/year no matter what), index investors should help prevent market volatility and crashes. But the suggestion is that buy and hold index investors only buy on the way up and at some point will all panic and sell en masse. That's possible, but such behavior is hardly unique to investors who use index funds.
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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by GAAP » Wed Apr 25, 2018 10:43 am

About the author:
On the professional side, Sven is involved in managing two hedge funds in the Netherlands
Don't think I need much more information...

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Clever_Username » Wed Apr 25, 2018 10:43 am

Yikes, what a terribly written article.

He comments, scattered among pretty pictures, that an undiversified portfolio is bad, that something in the S&P 500 will do better than the S&P 500 average (great detective work there buddy), and that behavioral problems will cost people money compared to buy and hold. He's right on these three things, but that doesn't make his conclusion correct from these facts. And the bizarre things he's scattered in there...

I hope I saved some people a click.
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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by heyyou » Wed Apr 25, 2018 10:51 am

The click-bait title and the immediate ad to enter the site are indicative. Here are the concluding lines (color added by me):
There are far better opportunities out there than what the S&P 500 offers. Even in the S&P 500, there are stocks that are cheaper and will probably outperform the index in the long run.
Stocks with relatively low debt and lower P/E ratios are Corning Inc. (NYSE: GLW), Bed Bath & Beyond Inc. (NASDAQ: BBBY), American Express (NYSE: AXP), Gap Inc. (NYSE: GPS), Whirlpool Corp. (NYSE: WHR), PVH Corp. (NYSE: PVH), and CVS Corp. (NYSE: CVS). However, the average P/E ratio of this list is still at 13 which implies just a 7% long term return. For those who want more, the best thing to do is to look for special situations and emerging markets.
Can't find the dislike button.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Pelerus » Wed Apr 25, 2018 11:01 am

Meg77 wrote:
Wed Apr 25, 2018 10:20 am
By the author's own logic (that Vanguard investors blindly invest every day/month/year no matter what), index investors should help prevent market volatility and crashes.
They (not just index investors, but “buy the dippers” in general) reduce volatility in the short run, but make a volatility explosion and catastrophic crash more likely in the long run. It’s like preventing an active volcano from periodically venting gases - you reduce minor short term pain at the cost of much greater pain at some point in the future. Either way, volatility will have its day.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by RadAudit » Wed Apr 25, 2018 11:06 am

Even in the S&P 500, there are stocks that are cheaper and will probably outperform the index in the long run.
Can't agree more that some stocks in the S&P 500 will outperform the S&P 500 average - unless they've repealed some of the laws of mathematics. The question of course is which ones.
Last edited by RadAudit on Wed Apr 25, 2018 6:50 pm, edited 1 time in total.
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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by munemaker » Wed Apr 25, 2018 12:02 pm

Boxtrap wrote:
Wed Apr 25, 2018 10:05 am
I couldn't disagree more with literally everything this article states. Would love to know what others think.
Maybe you would like to invest in his hedge funds. I think Warren Buffet just put that one to bed, didn't he?

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by GCD » Wed Apr 25, 2018 12:04 pm

Clever_Username wrote:
Wed Apr 25, 2018 10:43 am

I hope I saved some people a click.
You did. Thanks.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Lauretta » Wed Apr 25, 2018 12:52 pm

the charts are quite misleading as he doesn't show total returns but only the indices. However I do agree that the S&p500 is very expensive and long term expected returns should be very low and I think EM are more promising.
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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Boxtrap » Wed Apr 25, 2018 4:18 pm

The S&P is on the expensive side right now, and there will of course be individual S&P stocks that outperform the benchmark over time, but I was pretty aghast at how he hangs indexing out to dry and has decided that passive management will be the catalyst for the next bear market. But then again, he works for a hedge fund...


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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by IlliniDave » Wed Apr 25, 2018 7:10 pm

The implication in all these kinds of arguments is that people who buy stock index funds would not invest in stocks if there were no index funds, as if index investors were unaware stock index funds contained stocks. Otherwise, were it not for index funds, the same investors would buy other mutual funds instead, or make their own portfolios out of individual stocks, and when the big dollop hits the fan, they'd sell just like some fraction of index fund owners will when the time comes.
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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Dead Man Walking » Wed Apr 25, 2018 7:15 pm

Most workers are dumping money into a retirement account of some sort. The ones I know wish Vanguard funds were on the list of choices for their plan. Fidelity, American, etc. should also be listed as culprits.

DMW

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by jalbert » Wed Apr 25, 2018 7:20 pm

Nobody ever expressed concern about employees causing a market crash by mindlessly directing their 401K contributions to actively managed mutual funds, many of which have about a 20-25% active share and 75-80% of holdings that look like an index fund.
Risk is not a guarantor of return.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by sorting retirement » Wed Apr 25, 2018 7:45 pm

He has a youtube channel too, which is actually pretty interesting. I think the part of his perspective worth paying attention to is the experience of seeing multiple countries where stock markets have remained down from their historic highs for decades (and perhaps even downright failed).

Part of the risk of the stock market is the risk that it will stay down for the rest of our lifetimes. While the 'Death of Equities' in the US preceded the greatest bull market in history, in many places it simply preceded the actual death (or close to it) of equities. It is certainly possible that right now we would all be better off putting everything in TIPS than in the stock market--but of course there's no way of knowing.

I'm counting on American exceptionalism, and I don't think there is anything more promising than a broad index fund heavily weighted towards the US. But I certainly realize that this may not be a great idea, and would love to be able to just make a TIPS ladder and be done with it.
Boxtrap wrote:
Wed Apr 25, 2018 10:05 am
Apparently the person who wrote this article believes Vanguard and passive management will be the cause of the next catastrophic bear market.

I couldn't disagree more with literally everything this article states. Would love to know what others think.

http://www.investivdaily.com/the-next-b ... ill-start/

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Bastiat » Wed Apr 25, 2018 11:07 pm

Pelerus wrote:
Wed Apr 25, 2018 11:01 am
Meg77 wrote:
Wed Apr 25, 2018 10:20 am
By the author's own logic (that Vanguard investors blindly invest every day/month/year no matter what), index investors should help prevent market volatility and crashes.
They (not just index investors, but “buy the dippers” in general) reduce volatility in the short run, but make a volatility explosion and catastrophic crash more likely in the long run. It’s like preventing an active volcano from periodically venting gases - you reduce minor short term pain at the cost of much greater pain at some point in the future. Either way, volatility will have its day.
Why is this so?

Based on what evidence?

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by BeerTooth » Thu Apr 26, 2018 9:27 am

did anyone else notice that article was written a year ago? April 2017

Check out Author Nostradamus's list of hot stock tips at the bottom:

Whirlpool has dropped from $185 to $155
Bed Bath and Beyond has dropped from $40 to $18 and is teetering on the brink of bankruptcy

I'll stick with my index funds, thx

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Pelerus » Thu Apr 26, 2018 10:22 am

Bastiat wrote:
Wed Apr 25, 2018 11:07 pm
Pelerus wrote:
Wed Apr 25, 2018 11:01 am
Meg77 wrote:
Wed Apr 25, 2018 10:20 am
By the author's own logic (that Vanguard investors blindly invest every day/month/year no matter what), index investors should help prevent market volatility and crashes.
They (not just index investors, but “buy the dippers” in general) reduce volatility in the short run, but make a volatility explosion and catastrophic crash more likely in the long run. It’s like preventing an active volcano from periodically venting gases - you reduce minor short term pain at the cost of much greater pain at some point in the future. Either way, volatility will have its day.
Why is this so?

Based on what evidence?
https://static1.squarespace.com/static/ ... k_2017.pdf

Good write-up from Artemis Capital Management on the scope and pervasiveness of the short volatility trade, and its implications for systemic risk.

From the article -
Shadow Risk in Passive Investing

Peter Diamandis, the entrepreneur and founder of the X prize, said it best, "If you want to become a billionaire, find a way to help a billion people". The purpose of efficient markets is to allocate capital to institutions that add the most value. In a market without value, the only thing left to do is to allocate based on liquidity. The massive stimulus provided by central banks resulted in the best risk-adjusted returns for passive investing in over 200 years between 2012 and 2015. Today investors are chasing that historical performance. By the start of 2018, 50% of the assets under management in the US will be passively managed according to Bernstein Research.

Since the recession $2 trillion is assets have migrated from active to passive and momentum strategies according to JP Morgan. Passive investing is now just a momentum play on liquidity. Large capital flows into stocks occur for no reason other than the fact that they are highly liquid members of an index. All stocks in the index go up and down together, regardless of fundamentals. In effect, the volatility of the entire stock market can become dominated by a small number of companies and correlation relationships. For example, the top 10 stocks in the S&P 500 index, comprising only 2% of index membership, now control upward of 17% of the variance of the entire market. The largest 20 companies, or 4% of companies, are responsible for 24% of the variance.

The shift from active to passive investing is a significant amplifier of future volatility. Active managers serve as a volatility buffer, willing to step in and buy undervalued stocks when the market is falling, and sell overvalued stocks when the market is rising too much. Remove that buffer, and there is no incremental seller to control overvaluation on the way up, and no incremental buyer to stop a crash on the way down.
Last edited by Pelerus on Thu Apr 26, 2018 11:23 am, edited 1 time in total.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by dziuniek » Thu Apr 26, 2018 10:45 am

Meg77 wrote:
Wed Apr 25, 2018 10:20 am
I don't disagree with some of the author's assertions: that many people are blindly dumping money into the market each month, that we will likely see a major correction at some point in the future, that current valuations are higher than historical averages. Even that some stocks will outperform the S&P 500 index and that the real return of the index may be low over the next 20-30 years (the author projects 4%).

But singling out Vanguard and index investing as the cause of this makes no sense to me. By the author's own logic (that Vanguard investors blindly invest every day/month/year no matter what), index investors should help prevent market volatility and crashes. But the suggestion is that buy and hold index investors only buy on the way up and at some point will all panic and sell en masse. That's possible, but such behavior is hardly unique to investors who use index funds.
Blindly putting money into index funds would make the market rise instead of fall, I reckon?

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Boxtrap » Thu Apr 26, 2018 11:36 am

Pelerus wrote:
Thu Apr 26, 2018 10:22 am
Bastiat wrote:
Wed Apr 25, 2018 11:07 pm
Pelerus wrote:
Wed Apr 25, 2018 11:01 am
Meg77 wrote:
Wed Apr 25, 2018 10:20 am
By the author's own logic (that Vanguard investors blindly invest every day/month/year no matter what), index investors should help prevent market volatility and crashes.
They (not just index investors, but “buy the dippers” in general) reduce volatility in the short run, but make a volatility explosion and catastrophic crash more likely in the long run. It’s like preventing an active volcano from periodically venting gases - you reduce minor short term pain at the cost of much greater pain at some point in the future. Either way, volatility will have its day.
Why is this so?

Based on what evidence?
https://static1.squarespace.com/static/ ... k_2017.pdf

Good write-up from Artemis Capital Management on the scope and pervasiveness of the short volatility trade, and its implications for systemic risk.

From the article -
Shadow Risk in Passive Investing

Peter Diamandis, the entrepreneur and founder of the X prize, said it best, "If you want to become a billionaire, find a way to help a billion people". The purpose of efficient markets is to allocate capital to institutions that add the most value. In a market without value, the only thing left to do is to allocate based on liquidity. The massive stimulus provided by central banks resulted in the best risk-adjusted returns for passive investing in over 200 years between 2012 and 2015. Today investors are chasing that historical performance. By the start of 2018, 50% of the assets under management in the US will be passively managed according to Bernstein Research.

Since the recession $2 trillion is assets have migrated from active to passive and momentum strategies according to JP Morgan. Passive investing is now just a momentum play on liquidity. Large capital flows into stocks occur for no reason other than the fact that they are highly liquid members of an index. All stocks in the index go up and down together, regardless of fundamentals. In effect, the volatility of the entire stock market can become dominated by a small number of companies and correlation relationships. For example, the top 10 stocks in the S&P 500 index, comprising only 2% of index membership, now control upward of 17% of the variance of the entire market. The largest 20 companies, or 4% of companies, are responsible for 24% of the variance.

The shift from active to passive investing is a significant amplifier of future volatility. Active managers serve as a volatility buffer, willing to step in and buy undervalued stocks when the market is falling, and sell overvalued stocks when the market is rising too much. Remove that buffer, and there is no incremental seller to control overvaluation on the way up, and no incremental buyer to stop a crash on the way down.
Very thought provoking write up. By that reckoning future market volatility overall could be reduced if passive investing eventually topped off at some point. But I only see that happening if active management greatly lowered their fees and expenses ratios. And the likelihood of THAT happening is....slim to none.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Pelerus » Thu Apr 26, 2018 12:08 pm

Boxtrap wrote:
Thu Apr 26, 2018 11:36 am

Very thought provoking write up. By that reckoning future market volatility overall could be reduced if passive investing eventually topped off at some point. But I only see that happening if active management greatly lowered their fees and expenses ratios. And the likelihood of THAT happening is....slim to none.
Agreed, unless the demand for active management dries up so much that they are forced to lower fees to attract any customers at all - but we are still a ways off from their business model becoming that untenable.

Another important point is that the idea that passive management carries the faults and risks noted above, does not invalidate the criticisms of active management in regard to fees and failing to deliver alpha. Active management might be good and necessary for the market but still bad for the individual investor. Similar to how leveraged consumer spending can be good for the economy but bad for the individual consumer!

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by oldcomputerguy » Thu Apr 26, 2018 12:19 pm

The linked article states that Vanguard has $4.2 trillion under management.

According to stats published by Federated Investors, there is $69 trillion in the world stock market and $127 trillion in the global bond market.

Forgive me for being skeptical, but I find it difficult to wrap my head around the position that a company handling just over 2.1% of the world's total investable assets has enough clout to bring about the next bear market.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by JBTX » Thu Apr 26, 2018 12:45 pm

sorting retirement wrote:
Wed Apr 25, 2018 7:45 pm
He has a youtube channel too, which is actually pretty interesting. I think the part of his perspective worth paying attention to is the experience of seeing multiple countries where stock markets have remained down from their historic highs for decades (and perhaps even downright failed).

Part of the risk of the stock market is the risk that it will stay down for the rest of our lifetimes. While the 'Death of Equities' in the US preceded the greatest bull market in history, in many places it simply preceded the actual death (or close to it) of equities. It is certainly possible that right now we would all be better off putting everything in TIPS than in the stock market--but of course there's no way of knowing.

I'm counting on American exceptionalism, and I don't think there is anything more promising than a broad index fund heavily weighted towards the US. But I certainly realize that this may not be a great idea, and would love to be able to just make a TIPS ladder and be done with it.
Boxtrap wrote:
Wed Apr 25, 2018 10:05 am
Apparently the person who wrote this article believes Vanguard and passive management will be the cause of the next catastrophic bear market.

I couldn't disagree more with literally everything this article states. Would love to know what others think.

http://www.investivdaily.com/the-next-b ... ill-start/
Generally agree with this. The article does a decent job of pointing out the risks of putting all your money in one countries broad stock index, a risk that I think is taken too lightly even by some bogleheads. However some of his conclusions are just ridiculous, and the index fund criticism is nonsensical.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Phineas J. Whoopee » Thu Apr 26, 2018 1:22 pm

dziuniek wrote:
Thu Apr 26, 2018 10:45 am
...
Blindly putting money into index funds would make the market rise instead of fall, I reckon?
Yes, in precisely the same way that selectively investing the same amount in the stock market would make it rise instead of fall.

IlliniDave got it right upthread. All these arguments by salespeople who don't know where next month's boat payment is coming from are, without saying it directly which might subject them to civil liability, suggesting that people who invest in index funds would not invest in stocks at all were index funds not available.

It's always a neat illusion until you learn how the stage magician accomplishes it.

PJW

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Lancelot » Mon Apr 30, 2018 1:06 am

Interesting article; I noticed that the author echoed his support for low cost fees. Nice to hear from a hedge fund guy :sharebeer Since 2009 the market has enjoyed a nice run and yeah eventually the party will end, convincing many investors that stocks are bad and selling will ensue. But I have faith in younger investors, most without pensions, who understand that they are responsible for their own retirement. Market corrections are where the money is made :moneybag
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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by djpeteski » Mon Apr 30, 2018 5:57 am

Clever_Username wrote:
Wed Apr 25, 2018 10:43 am

I hope I saved some people a click.
While your intentions may be noble, this is a "train wreck" that I must see for myself.

:sharebeer

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by GibsonL6s » Mon Apr 30, 2018 11:49 am

Disagree with the article but this is a funny line.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by 3funder » Mon Apr 30, 2018 1:47 pm

I think this article is a great argument against free speech.

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Re: An Article Claiming Vanguard Will Be Responsible For The Next Bear Market

Post by Cycle » Mon Apr 30, 2018 2:12 pm

sorting retirement wrote:
Wed Apr 25, 2018 7:45 pm
I'm counting on American exceptionalism, and I don't think there is anything more promising than a broad index fund heavily weighted towards the US. But I certainly realize that this may not be a great idea, and would love to be able to just make a TIPS ladder and be done with it.
Autonomous vehicles, fusion reactors, machine learning, cancer vaccines, peptide enamel growing stuff (end of cavities), the future is not going to look like today and it is mainly publicly traded companies that will capitalize on this. Which ones? Hard to say, just index and invest in them all, no need to pay hedge fund fees and in my portfolio no need for tips.

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