Advocating to not index

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masonstone
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Advocating to not index

Post by masonstone » Mon Jul 02, 2018 8:20 pm

Shouldn’t we not advocate for indexing too much due to the efficiency non-indexers bring to the market? Essentially I am benefiting from others paying brokerage fees to make the index market more efficient for me. If too many people index then the market becomes inefficient.

mcraepat9
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Re: Advocating to not index

Post by mcraepat9 » Mon Jul 02, 2018 8:28 pm

It seems like this is self-correcting. There will always be someone who wants to trade and try to outperform, as the pool of indexers gets larger, the pool of traders gets smaller and I think more people have an opportunity to outperform?

Non-issue to me.
Amateur investors are not cool-headed logicians.

PFInterest
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Re: Advocating to not index

Post by PFInterest » Mon Jul 02, 2018 8:30 pm

masonstone wrote:
Mon Jul 02, 2018 8:20 pm
Shouldn’t we not advocate for indexing too much due to the efficiency non-indexers bring to the market? Essentially I am benefiting from others paying brokerage fees to make the index market more efficient for me. If too many people index then the market becomes inefficient.
Will never happen. Too many people looking out to make money.
Look up how much hedge funds are worth..,..

Dottie57
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Re: Advocating to not index

Post by Dottie57 » Mon Jul 02, 2018 8:38 pm

Bogleheads are small in the universe of investing.

I have one acquaintance who is contributing to all of the funds in her 403b. Equal percentage to all.


Arg!

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arcticpineapplecorp.
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Re: Advocating to not index

Post by arcticpineapplecorp. » Mon Jul 02, 2018 8:39 pm

yes we should advocate that others stop indexing immediately. I suggest that you stop indexing first, since you're making the market less efficient for me.

See how this wouldn't work? You want to index, but you don't want others to index because they'll mess it up for you? That doesn't sound fair. Others who have been indexing far longer than you have think you're messing it up for them. Get it?

By the way, there have been many posts on this subject at bogleheads over the past several years. Not sure if you typed your question into the google search bar, but I would recommend that next time. Many questions have already been asked and answered. I'll give you some other posts to read that hopefully will answer your question in more detail than you probably want or could possibly imagine. The basic gist of it is it's not a problem so why worry about things that aren't yet a problem. If it becomes a problem, then it's worth discussing and it may never become a problem because it's a self correcting system (when too many make a market inefficient, then the inefficiencies are there to be exploited. Who will do that? Those active traders who choose not to index. Then the market becomees efficient again and the indexers will benefit from the active traders. The falacy of the assumption rests on believing people won't seek to maximize profit. Clearly that's not true).

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Last edited by arcticpineapplecorp. on Tue Jul 03, 2018 8:56 am, edited 2 times in total.
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arcticpineapplecorp.
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Re: Advocating to not index

Post by arcticpineapplecorp. » Mon Jul 02, 2018 8:40 pm

Dottie57 wrote:
Mon Jul 02, 2018 8:38 pm
Bogleheads are small in the universe of investing.

I have one acquaintance who is contributing to all of the funds in her 403b. Equal percentage to all.


Arg!
it's funny that you say that. I'm reading a book that said because people are overwhelmed by the number of choices in their 401k that they just invest equally in all of the choices. I thought he was making that up. Apparently it's true.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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LadyGeek
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Re: Advocating to not index

Post by LadyGeek » Mon Jul 02, 2018 9:38 pm

^^^ I actually did that - a very long time ago. As an engineer, it makes sense (equal distribution). I don't remember when I switched over to a target retirement fund.

This thread is now in the Investing - Theory, News & General forum (theory).
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

JBTX
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Re: Advocating to not index

Post by JBTX » Mon Jul 02, 2018 9:40 pm

masonstone wrote:
Mon Jul 02, 2018 8:20 pm
Shouldn’t we not advocate for indexing too much due to the efficiency non-indexers bring to the market? Essentially I am benefiting from others paying brokerage fees to make the index market more efficient for me. If too many people index then the market becomes inefficient.
At some level that is true. But some institutional active investors have built in advantages over you and me as active traders:

1. Potentially lower trading fees
2. Potentially better information / inside info
3. Technology advantages - High frequency trading / front running

Our best defense against that is passive investing - just follow what they do.

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dodecahedron
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Re: Advocating to not index

Post by dodecahedron » Mon Jul 02, 2018 10:05 pm

LadyGeek wrote:
Mon Jul 02, 2018 9:38 pm
^^^ I actually did that - a very long time ago. As an engineer, it makes sense (equal distribution). I don't remember when I switched over to a target retirement fund.
Back in the old days, when there were only two choices available, many academics (including Harry Markowitz, a founder of modern portfolio theory) went with the equal distribution choice of 50/50 in their 403(b) plans. It seemed to serve folks in good stead, 50% in TIAA (fixed income) and 50% in CREF (equities). (I believe that when CREF was first introduced, 50% was the maximum that was allowed to be allocated to CREF.)

Dottie57
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Re: Advocating to not index

Post by Dottie57 » Mon Jul 02, 2018 11:10 pm

arcticpineapplecorp. wrote:
Mon Jul 02, 2018 8:40 pm
Dottie57 wrote:
Mon Jul 02, 2018 8:38 pm
Bogleheads are small in the universe of investing.

I have one acquaintance who is contributing to all of the funds in her 403b. Equal percentage to all.


Arg!
it's funny that you say that. I'm reading a book that said because people are overwhelmed by the number of choices in their 401k that they just invest equally in all of the choices. I thought he was making that up. Apparently it's true.
I just think it is sad she hasn’t done any reading or learned about the funds. Fortunately she has a government pension and SS as her main retirement income.

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Phineas J. Whoopee
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Re: Advocating to not index

Post by Phineas J. Whoopee » Mon Jul 02, 2018 11:33 pm


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JoMoney
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Re: Advocating to not index

Post by JoMoney » Tue Jul 03, 2018 1:19 am

If those non-indexers don't have special information, they might be making things less efficient.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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corn18
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Re: Advocating to not index

Post by corn18 » Tue Jul 03, 2018 5:35 am

Well, even here in indexing nervana, there are myriad threads every day on people tilting, bobbing and weaving trying to beat the index. I think greed will sustain the true indexers until the next meteor comes along and resets evolution.

nova1968
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Re: Advocating to not index

Post by nova1968 » Tue Jul 03, 2018 6:37 am

I frequently have people ask me for Financial advice related to Investing, I explain the concept of Index investing, More often than not the advice falls on deaf ears.

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bertilak
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Re: Advocating to not index

Post by bertilak » Tue Jul 03, 2018 6:43 am

JoMoney wrote:
Tue Jul 03, 2018 1:19 am
If those non-indexers don't have special information, they might be making things less efficient.
True, and another thing ...

Even if low-information non-indexers DID help market efficiency, I don't see how it is their DUTY (as sometimes implied) to make ill-advised decisions for the benefit of other, smarter people (or the mysterious Mr. Market).
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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zaboomafoozarg
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Re: Advocating to not index

Post by zaboomafoozarg » Tue Jul 03, 2018 6:46 am

I never talk to anyone in real life about investing, because I don't feel like opening up that potential risk of getting blamed for monetary loss.

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bottlecap
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Re: Advocating to not index

Post by bottlecap » Tue Jul 03, 2018 6:54 am

masonstone wrote:
Mon Jul 02, 2018 8:20 pm
Shouldn’t we not advocate for indexing too much due to the efficiency non-indexers bring to the market? Essentially I am benefiting from others paying brokerage fees to make the index market more efficient for me. If too many people index then the market becomes inefficient.
This is posted about frequently.

The answer is you don't have to worry about it. If indexing ever stops being efficient and active starts beating indexes, more people will resume picking stocks and your "problem" will be solved.

JT

carguyny
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Re: Advocating to not index

Post by carguyny » Tue Jul 03, 2018 7:15 am

I'm no longer a big Index Fund fan - I think the space has become too crowded and won't manage the next major drawdown without significant tracking error and increases in costs trying to manage liqiduity as investors flee.

I now use the IB SMAs for 8 bps and hold the shares directly. The small little cost is worth the risk insurance for an industry that has balooned since 2008.

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vineviz
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Re: Advocating to not index

Post by vineviz » Tue Jul 03, 2018 7:53 am

carguyny wrote:
Tue Jul 03, 2018 7:15 am
I'm no longer a big Index Fund fan - I think the space has become too crowded and won't manage the next major drawdown without significant tracking error and increases in costs trying to manage liqiduity as investors flee.
You don't need to be a fan (the Malvern Indexers aren't an NFL franchise, after all), but you should be open to hearing that the premise ("the space has become too crowded and won't manage the next major drawdown without significant tracking error and increases in costs trying to manage liqiduity as investors flee") is flawed.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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arcticpineapplecorp.
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Re: Advocating to not index

Post by arcticpineapplecorp. » Tue Jul 03, 2018 11:03 am

carguyny wrote:
Tue Jul 03, 2018 7:15 am
I'm no longer a big Index Fund fan - I think the space has become too crowded and won't manage the next major drawdown without significant tracking error and increases in costs trying to manage liqiduity as investors flee.

I now use the IB SMAs for 8 bps and hold the shares directly. The small little cost is worth the risk insurance for an industry that has balooned since 2008.
Do you think you can do better with tracking error than this?

https://www.bogleheads.org/wiki/Vanguar ... king_error

Image

Admiral shares had better tracking:

Image
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

chevca
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Re: Advocating to not index

Post by chevca » Tue Jul 03, 2018 11:08 am

zaboomafoozarg wrote:
Tue Jul 03, 2018 6:46 am
I never talk to anyone in real life about investing, because I don't feel like opening up that potential risk of getting blamed for monetary loss.
Same here. Outside of Bogleheads and some talks with DW, I never talk investing. Who exactly should "we" stop advocating to?? "Hey, all you Bogleheads, stop indexing please"... good luck with that! :happy

heyyou
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Re: Advocating to not index

Post by heyyou » Tue Jul 03, 2018 11:44 am

As long as there are greedy people, indexing will not overly crowd stock market behavior. So far, so good, no end in sight.

Time for the Mark Twain quote, "Reports of my demise have been greatly exaggerated."

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bertilak
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Re: Advocating to not index

Post by bertilak » Tue Jul 03, 2018 11:55 am

heyyou wrote:
Tue Jul 03, 2018 11:44 am
As long as there are greedy people, indexing will not overly crowd stock market behavior. So far, so good, no end in sight.
I think it's a little rough calling non-index investors "greedy." Are index investors simply less greedy? Where does one draw the line between greedy and not greedy?
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

balbrec2
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Re: Advocating to not index

Post by balbrec2 » Tue Jul 03, 2018 2:38 pm

nova1968 wrote:
Tue Jul 03, 2018 6:37 am
I frequently have people ask me for Financial advice related to Investing, I explain the concept of Index investing, More often than not the advice falls on deaf ears.
I am loath to give investing advice to anyone other than to use a TDF.
In addition to getting me off the hook for bad advice, It is usually the best thing for those
that are happily ignorant.

Dandy
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Re: Advocating to not index

Post by Dandy » Wed Jul 04, 2018 7:55 am

Passive investing by itself doesn't make the market more efficient and probably makes it less efficient since investing and even holding passive investments are not actively selecting specific stocks but all that are in the fund. There are some actions that indexes/index funds take that do contribute to add to efficiency e.g. the firm creating the index changes the composition by adding and deleting some members based on their goals for the index. e.g. a firm like GE might be subtracted and a more representative firm selected to replace it. Also, some index funds don't capture all the stocks included in the fund but take a representative sample. But, usually that sampling is very much geared to be representative of the index and not targeted to over or underweight better or worse performers.

So it seems that the efficiency of the equity market depends, to a large extent, on active investors. Individuals, active fund mangers, pension fund managers, college endowments, hedge fund managers, variable annuity providers, etc.
But, they usually have better research and other information than individual investors who now opt for index funds instead of trying to pick winners by investing in individual stocks.

The decline in the number of listed stocks is also happening due to mergers and private equity activity. e.g. could large passive index dollars be chasing a smaller group of stocks over time distorting their value while the "smart" money is investing in private equity deals?

The increase in passive index investing assets and the decline in the number of stocks to invest in does raise a bit of a concern to me. I guess I never underestimate the creativity of the "street" to survive and prosper -- usually to the detriment of the individual investor. e.g. we still can't get brokers to be charged to do what is best for their clients only what is suitable. You would think that would be a basic tenant of those firms/individuals that want to be your investment firm/adviser.

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Re: Advocating to not index

Post by ofcmetz » Wed Jul 04, 2018 2:05 pm

balbrec2 wrote:
Tue Jul 03, 2018 2:38 pm
nova1968 wrote:
Tue Jul 03, 2018 6:37 am
I frequently have people ask me for Financial advice related to Investing, I explain the concept of Index investing, More often than not the advice falls on deaf ears.
I am loath to give investing advice to anyone other than to use a TDF.
In addition to getting me off the hook for bad advice, It is usually the best thing for those
that are happily ignorant.
Yeah, if someone at work asks I usually say to save more and use one of the great target date funds we have.
Never underestimate the power of the force of low cost index funds.

Jeff Albertson
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Re: Advocating to not index

Post by Jeff Albertson » Wed Jul 11, 2018 7:03 am

JoMoney wrote:
Tue Jul 03, 2018 1:19 am
If those non-indexers don't have special information, they might be making things less efficient.
The Buttonwood columnist seems to agree.
Yet if more people are buying the index, might the market become less efficient? And might that, in turn, create opportunities for the very stockpickers who Samuelson thought should cease trading? In fact, the opposite is more probable. If index investing has displaced bad stockpickers, as seems likely, it will have made the market more efficient, not less.
https://www.economist.com/finance-and-e ... eindexfear

Jeff Albertson
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Re: Advocating to not index

Post by Jeff Albertson » Thu Jul 12, 2018 8:07 am

Larry Swedroe adds -
The basic argument of these and other critiques is that the popularity of indexing (and the broader category of passive investing) is distorting prices as fewer shares are traded by investors performing the act of “price discovery.” Let’s examine the validity of such claims.
http://www.etf.com/sections/index-inves ... nopaging=1

GAAP
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Re: Advocating to not index

Post by GAAP » Thu Jul 12, 2018 9:49 am

LadyGeek wrote:
Mon Jul 02, 2018 9:38 pm
^^^ I actually did that - a very long time ago. As an engineer, it makes sense (equal distribution). I don't remember when I switched over to a target retirement fund.
And I remember reading a study that concluded this behavior was remarkably effective.

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