The End of Indexing?

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AgentOrange
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The End of Indexing?

Post by AgentOrange » Fri Oct 19, 2018 9:47 pm

I was wondering of anyone here had read, and has opinions about a new book, called The End of Indexing by Niels Jensen. Because I'm lazy, here's the synopsis from Amazon:

"Index-tracking is the flavour of the day - it accounts for around one-third of the total US mutual fund market, and is still growing rapidly. Indexing appears to be unstoppable.

But, in The End of Indexing, investment veteran Niels Jensen presents a different vision. In a forthright and compelling examination of the investment landscape, Jensen argues that the economic environment we are entering will be unsuited to index-tracking strategies.

Jensen identifies six structural mega-trends that are set to disrupt investors around the globe:
1. End of the debt super-cycle
2. Retirement of the baby boomers
3. Declining spending power of the middle classes
4. Rise of the East
5. Death of fossil fuels
6. Mean reversion of wealth-to-GDP

In conjunction, these six themes have the potential to create conditions resembling a perfect storm that will result in low economic growth for decades to come. Investment techniques and methodologies - including passive investing strategies - that have worked so well in the bull market of the last 35 years will no longer deliver acceptable results.

As a new investment approach is called for, The End of Indexing provides investors with a guide to the challenging environment ahead and a warning about the future decline of index-tracking."

I thought I would ask here because most here have much more experience with indexes, and might have some opinions. I haven't read it yet,I just got it from the library.

delamer
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Re: The End of Indexing?

Post by delamer » Fri Oct 19, 2018 9:54 pm

If “acceptable results” is matching the market return — which is the aim of indexing — then nothing has changed.

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willthrill81
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Re: The End of Indexing?

Post by willthrill81 » Fri Oct 19, 2018 10:13 pm

AgentOrange wrote:
Fri Oct 19, 2018 9:47 pm
I was wondering of anyone here had read, and has opinions about a new book, called The End of Indexing by Niels Jensen. Because I'm lazy, here's the synopsis from Amazon:

"Index-tracking is the flavour of the day - it accounts for around one-third of the total US mutual fund market, and is still growing rapidly. Indexing appears to be unstoppable.

But, in The End of Indexing, investment veteran Niels Jensen presents a different vision. In a forthright and compelling examination of the investment landscape, Jensen argues that the economic environment we are entering will be unsuited to index-tracking strategies.

Jensen identifies six structural mega-trends that are set to disrupt investors around the globe:
1. End of the debt super-cycle
2. Retirement of the baby boomers
3. Declining spending power of the middle classes
4. Rise of the East
5. Death of fossil fuels
6. Mean reversion of wealth-to-GDP

In conjunction, these six themes have the potential to create conditions resembling a perfect storm that will result in low economic growth for decades to come. Investment techniques and methodologies - including passive investing strategies - that have worked so well in the bull market of the last 35 years will no longer deliver acceptable results.

As a new investment approach is called for, The End of Indexing provides investors with a guide to the challenging environment ahead and a warning about the future decline of index-tracking."

I thought I would ask here because most here have much more experience with indexes, and might have some opinions. I haven't read it yet,I just got it from the library.
Since indexing merely seeks to mirror the returns of the market less the costs of the funds that employ it, which can be extremely low, such an argument is levied against the market itself unless the author believes (or believes that he can convince you that he can) he can outsmart the market, a song and dance we've heard too many times to count.

Considering that the market not only survived the Great Depression, two world wars, many other conflicts, stagflation, terrorism, etc., I don't see these six supposed trends as any more dangerous. Might these or other events have a negative impact on the market at some point? Something certainly will at some point. There is another bear market out there somewhere. That's been the story of stocks for well over a hundred years, and yet capitalism has come out on top.

My suggestion is not to waste your time reading such material. There are far more productive things you can do with your time, which is an asset that you can never recover.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Nate79
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Re: The End of Indexing?

Post by Nate79 » Fri Oct 19, 2018 10:18 pm

Nope, have better things to do with my time than to read such financial trash.

jalbert
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Re: The End of Indexing?

Post by jalbert » Fri Oct 19, 2018 10:26 pm

Neils Jensen, the founder of Absolute Return Partners, a UK-based alternative investment product provider and institutional investment advisor, doesn’t like index funds? Shocking.
Last edited by jalbert on Sat Oct 20, 2018 1:23 am, edited 1 time in total.
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Re: The End of Indexing?

Post by SoonerD » Fri Oct 19, 2018 10:30 pm

Please tell us about the author’s biography. Is he from the active management world, the ivory towers or from a passive management shop.

Anyone can weave a tale of plausible guesses about the future of any subject matter in which he knows a smidge more than the average bear. There are an infinite number of plausible outcomes for the future; all, except one, are wrong.

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Raymond
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Re: The End of Indexing?

Post by Raymond » Fri Oct 19, 2018 10:38 pm

Niels Jensen is the CIO and founder of Absolute Return Partners (ARP), based in the United Kingdom.

Formerly with "Sherson" (according to his bio page on ARP - did they mean "Shearson"?) Lehman, Goldman Sachs, Oppenheimer, etc.

https://www.arpinvestments.com/who-we-are

According to the website, they provide "Bespoke alternative investment solutions for institutional investors" and "We do not offer investment advice to private investors."

Oh, well, I was looking for bespoke advice to go with my bespoke suit...

I have not read the book, and have no plans to.

[Edit] The Amazon.com reviews don't look promising, and the publisher (Harriman House) appears to be a vanity press for authors writing on financial subjects - someone correct me if I am off here.

So, the book looks suspiciously like an advertisement (that you pay for.)
Last edited by Raymond on Fri Oct 19, 2018 10:50 pm, edited 1 time in total.
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Re: The End of Indexing?

Post by AlohaJoe » Fri Oct 19, 2018 10:42 pm

viewtopic.php?t=251173

It has been discussed in the past.

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Watty
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Re: The End of Indexing?

Post by Watty » Fri Oct 19, 2018 10:45 pm

AgentOrange wrote:
Fri Oct 19, 2018 9:47 pm
3. Declining spending power of the middle classes
Middle class is a problematic term for multiple reasons but just FYI the "middle class spending power" is surging in unprecedented numbers. A lot of it is in places like China and India but there are literally billions of people that have moved up from living in poverty or near poverty conditions to being what might be called middle class.

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Re: The End of Indexing?

Post by EnjoyIt » Fri Oct 19, 2018 10:46 pm

delamer wrote:
Fri Oct 19, 2018 9:54 pm
If “acceptable results” is matching the market return — which is the aim of indexing — then nothing has changed.
What a simple, to the point and perfect response.

NoHeat
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Re: The End of Indexing?

Post by NoHeat » Fri Oct 19, 2018 10:57 pm

Recent video of a lecture by the author, on the themes of his book:
https://www.youtube.com/watch?v=-AowDdb2m3o

He speaks so poorly that it's impossible to watch more than a few minutes, but as far as I can tell it's not about indexing at all.

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JoMoney
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Re: The End of Indexing?

Post by JoMoney » Sat Oct 20, 2018 12:26 am

AgentOrange wrote:
Fri Oct 19, 2018 9:47 pm
...
Jensen identifies six structural mega-trends that are set to disrupt investors around the globe:
1. End of the debt super-cycle
2. Retirement of the baby boomers
3. Declining spending power of the middle classes
4. Rise of the East
5. Death of fossil fuels
6. Mean reversion of wealth-to-GDP

In conjunction, these six themes have the potential to create conditions resembling a perfect storm that will result in low economic growth for decades to come. Investment techniques and methodologies - including passive investing strategies - that have worked so well in the bull market of the last 35 years will no longer deliver acceptable results...
Sounds like the typical scary sales pitch from someone peddling gold and/or active emerging markets or highly specialized and narrow funds.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

MathWizard
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Re: The End of Indexing?

Post by MathWizard » Sat Oct 20, 2018 12:58 am

None of the "six structural mega-trends" mentioned will kill indexing.

The two things that I worry about for my retirement are:

1) Concentration of wealth to the point where private equity dwarfs the public market
The growth of GDP is correlated with the weighted average of the public and private equity markets.
The public market is currently dominant, and is available to everyone, not just qualified investors.
Should that change, I may be locked out of being able to benefit by become a tiny silent partner in thousands of businesses.

2) Capital, or at least by selling company shares, may become unimportant
This may seem far off, but I can see a post scarcity society coming sooner that people might think, based on
the huge increases in efficiency by substituting energy for the limited resource of human & animal labor .
In a less extreme version, companies get loans without having to give up a percentage of
the company. Now we only have a bond market, not an equity market, with much lower returns.

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JoMoney
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Re: The End of Indexing?

Post by JoMoney » Sat Oct 20, 2018 2:27 am

MathWizard wrote:
Sat Oct 20, 2018 12:58 am
None of the "six structural mega-trends" mentioned will kill indexing.

The two things that I worry about for my retirement are:

1) Concentration of wealth to the point where private equity dwarfs the public market
The growth of GDP is correlated with the weighted average of the public and private equity markets.
The public market is currently dominant, and is available to everyone, not just qualified investors.
Should that change, I may be locked out of being able to benefit by become a tiny silent partner in thousands of businesses.

2) Capital, or at least by selling company shares, may become unimportant
This may seem far off, but I can see a post scarcity society coming sooner that people might think, based on
the huge increases in efficiency by substituting energy for the limited resource of human & animal labor .
In a less extreme version, companies get loans without having to give up a percentage of
the company. Now we only have a bond market, not an equity market, with much lower returns.
I can't see that happening. Whether it's private or publicly owned, the equity is going to be owned by someone, and there will be people who need to liquidate there equity for cash they can spend today or wish to unload the risk of uncertain future returns for a promise of stable income. In recent times, private equity investors have been willing to pay a higher premium for businesses, so that's where the financiers have been going. At some point it will swing back to public stocks. As an investor, I would be more leery if we had tons of IPOs being dumped on the market. Even if the entire system turned to private equity that doesn't mean small investors would be locked out of ownership, it just means it would be less liquid, and unless you're an active trader I don't think that would even be all that bad.
You could worry about business equity being socialized, but for most industries that hasn't had a good record of incentivizing profits and has tended to turn the system into a liability rather than an asset, social equity has been better served with a tax claim on profits.
"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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Re: The End of Indexing?

Post by nisiprius » Sat Oct 20, 2018 4:22 am

One of the (very small number) of Amazon Reader Reviews says:
Title is misleading. Terrible book. Watch out.
Disjointed to put it charitably. Would not recommend. Waste of time and money. Arguments are simplistic and only the last chapter directly addresses indexing and then only briefly. I got hooked by the title like a dummy. Whoops. Will be returning.
An inspection of the Table of Contents shows at a glance that this is true. Chapter 12 is entitled "Why Indexing Will Dwindle." The rest is about his "megatrends." Now, I personally feel that "megatrends" are not so easy to identify... and that, having identified them, even if correct,, far less easy to figure out how an individual investor could profit by knowing about them.

But in any case, it is clear enough from the summary (and the chapter titles and the Reader Review) that his argument is simply that the stock market will disappoint in coming decades, which is the opposite of being original--it is something like consensus conventional wisdom nowadays. And the next question, which to be sure has been a frequent forum topic, is: if so, what then?

If you have decided to invest in the stock market in the first place, then indexing and staying the course continue to be a good way to do so. Perhaps the results will be worse than disappointing, but so will every other strategy for investing in the market. This leads in two different directions. Investing in something else, as occurred during the "death of equities" era of 1966-1982 according to the famous BusinessWeek article, or trying harder to beat the market. To date, the record of "something else," as shown by Morningstar category averages for commodities, "multialternatives," managed futures, and so forth has been worse than dismal.

As for trying harder to beat the market, certainly this will offer a sales opportunity. The siren song of stock-pickers is "even when the market is going down, some stocks are going up."

I am perfectly prepared to believe that if the stock market enters a lousy period, workers will lose interest in their 401(k)'s and inflows to all stock mutual funds, including index funds, may decline. i am also prepared to believe that a lousy stock market may lead to enough people flailing around in the mistaken believe that they are entitled to good enough returns to retire on, and thus perhaps a tapering off or reverse of flows into index funds. But so what? It is hard to believe that people could try much harder to beat the market than they do now, and it pretty much doesn't work, and as has been often showed e.g. by Larry Swedroe, and others, the idea that active management works any better in down markets than up markets simply has no evidence behind it. It's just one of a number of talking points against indexing.

If the percentage of stocks under passive management does in fact decline over the next few decades, that is still a "so what?" It may be important for people in the investment industry. It could lead to Vanguard receding to just being one of the biggest mutual fund companies instead of the biggest, as John C. Bogle has hinted at in his essays about the trajectories of mutual fund companies. Massachusetts Investors Trust, now part of MFS, is one of is examples of a company that lost its way, stopped putting investors first, and declined. But, hey MFS is definitely still around, and Massachusetts Investors Trust itself currently has $6 billion invested in it, so the supposed decline leaves the fund perfectly viable and not posing any difficulties for any investor who wants to stick with it.

The same will likely be true of Vanguard and index funds. They may become less popular, but I invested in them when they weren't popular and am perfectly prepared to stay in course in them if they become less popular again. The reasons for using indexing as a strategy for investing in the stock market do not change, even if investing in the stock market becomes less rewarding as an investing strategy.
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Re: The End of Indexing?

Post by nisiprius » Sat Oct 20, 2018 4:23 am

One of the (only three) of Amazon Reader Reviews says:
Title is misleading. Terrible book. Watch out.
Disjointed to put it charitably. Would not recommend. Waste of time and money. Arguments are simplistic and only the last chapter directly addresses indexing and then only briefly. I got hooked by the title like a dummy. Whoops. Will be returning.
An inspection of the Table of Contents shows at a glance that this is true. Chapter 12 is entitled "Why Indexing Will Dwindle." The rest is about his "megatrends." Now, I personally feel that "megatrends" are not so easy to identify... and that, having identified them, even if correct,, far less easy to figure out how an individual investor could profit by knowing about them.

But in any case, it is clear enough from the summary (and the chapter titles and the Reader Review) that his argument is simply that the stock market will disappoint in coming decades, which is the opposite of being original--it is something like consensus conventional wisdom nowadays. And the next question, which to be sure has been a frequent forum topic, is: if so, what then?

If you have decided to invest in the stock market in the first place, then indexing and staying the course continue to be a good way to do so. Perhaps the results will be worse than disappointing, but so will every other strategy for investing in the market. This leads in two different directions. Investing in something else, as occurred during the "death of equities" era of 1966-1982 according to the famous BusinessWeek article, or trying harder to beat the market. To date, the record of "something else," as shown by Morningstar category averages for commodities, "multialternatives," managed futures, and so forth has been worse than dismal.

As for trying harder to beat the market, certainly this will offer a sales opportunity. The siren song of stock-pickers is "even when the market is going down, some stocks are going up."

I am perfectly prepared to believe that if the stock market enters a lousy period, workers will lose interest in their 401(k)'s and inflows to all stock mutual funds, including index funds, may decline. I am also prepared to believe that a lousy stock market could lead to enough people flailing around in the mistaken believe that they are entitled to good enough returns to retire on, and thus perhaps a tapering off or reverse of flows into index funds. But so what? It is hard to believe that people could try much harder to beat the market than they do now, and it is at the least extremely difficult to do. And as has been often showed e.g. by Larry Swedroe, and others, the idea that active management works any better in down markets than up markets simply has no evidence behind it. It's just one of a number of talking points against indexing.

If the percentage of stocks under passive management does in fact decline over the next few decades, that is still a "so what?" It may be important for people in the investment industry. It could lead to Vanguard receding to just being one of the biggest mutual fund companies instead of the biggest, as John C. Bogle has hinted at in his essays about the trajectories of mutual fund companies. Massachusetts Investors Trust, now part of MFS, is one of is examples of a company that lost its way, stopped putting investors first, and declined. But, hey MFS is definitely still around, and Massachusetts Investors Trust itself currently has $6 billion invested in it, so the supposed decline leaves the fund perfectly viable and not posing any difficulties for any investor who wants to stick with it.

The same will likely be true of Vanguard and index funds. They may become less popular, but I invested in them when they weren't popular and am perfectly prepared to stay the course in them if they become less popular again. Like Massachusetts Investors Trust (MITTX), I think Vanguard Total Stock Market Index will be a big, viable fund indefinitely. The reasons for using indexing as a strategy for investing in the stock market do not change, even if investing in the stock market becomes less rewarding as an investing strategy.
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Re: The End of Indexing?

Post by randomizer » Sat Oct 20, 2018 4:29 am

It can't be the end. I am just getting started!
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Re: The End of Indexing?

Post by nisiprius » Sat Oct 20, 2018 4:40 am

I have to wonder how the original poster stumbled on this book. Only three people have given it Amazon Reader reviews---one gave it one star, one three, and one five--and its Amazon rank isn't too impressive,#640,579 Paid in Kindle Store (See Top 100 Paid in Kindle Store), #469 in Stock Market Investing. It's hard to figure out if this is a "real" or a self-published book, as Harriman House, the publishers, apparently do both. The fact that the cover was designed by a design firm that does work for Absolute Return Partners, rather than the publishers, seems to hint at the latter.

The author gives a "bear hug" to Elroy Stimson and his co-workers, and says he's benefited in his thinking from personal contacts with John Mauldin and Rob Arnott. I'm not in the industry and don't know if other people he thanks are well-known, too. Arnott allowed his name to be used on the cover, where he calls the book "a treasure trove."

The author's bio is:
Niels Clemen Jensen has over 30 years of investment banking and investment management experience. He began his career in Copenhagen in 1984 before moving to Sherson Lehman in London in 1986. In 1989 he joined Goldman Sachs and became co-head of its U.S. equity business in Europe in 1992, a post he held until 1996, when he joined Oppenheimer to manage its European business. In 1999 he re-joined Lehman Brothers, now in charge of European Wealth Management. In 2006 he was appointed Director of Trafalgar House Trustees Limited, advising one of the UK’s leading corporate pension funds on its investment strategy. Niels founded Absolute Return Partners in 2002 and is Chief Investment Officer. He is a graduate of University of Copenhagen with a Masters Degree in economics.
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Watty
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Re: The End of Indexing?

Post by Watty » Sat Oct 20, 2018 6:02 am

nisiprius wrote:
Sat Oct 20, 2018 4:22 am
Now, I personally feel that "megatrends" are not so easy to identify... and that, having identified them, even if correct,, far less easy to figure out how an individual investor could profit by knowing about them.
You also have to identify them before most other people do and price them into the market price.

You can also be right about megatrends and be wrong about which company will be the winning bet. For example cell phones were an easy megatrend to spot 20 years ago but the big players were companies like Nokia, Erickson, Blackberry, Motorola, and Palm Pilot.

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Re: The End of Indexing?

Post by Stormbringer » Sat Oct 20, 2018 6:27 am

nisiprius wrote:
Sat Oct 20, 2018 4:23 am
If the percentage of stocks under passive management does in fact decline over the next few decades, that is still a "so what?"
Pray for that to happen.

For a market to function properly, there needs to be price discovery. Someone has to determine the value of the individual components of the index. The buy-and-hold index investor doesn't help determine that KO is worth $46.33 today, and not $48 or $44. We are price-takers. We are free-riders on other people's work.

This works great when there are only so many of us. We get market returns at a very low price. But it also sets up a tragedy of the commons problem. At 100% indexing, the market fails because there can be no price discovery for the individual stocks (not to mention a corporate governance problem). So there is some point -- and I don't know what percentage of the market that is -- where too much indexing starts to create problems. I'm not sure that market returns of a dysfunctional market is necessarily a desirable goal.

My hunch is that if too many people index, we'll get a more volatile market. Perhaps that will make it easier for active investors to beat the market, allowing them to close the performance gap with indexing. I'm not sure.

So even though I put my mom into index funds, I hope she doesn't tell all her friends.
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Re: The End of Indexing?

Post by JoMoney » Sat Oct 20, 2018 6:44 am

Stormbringer wrote:
Sat Oct 20, 2018 6:27 am
... not to mention a corporate governance problem...
That's something that concerns me more than the idea that indexers will somehow cause pricing to be more wrong than if they were following some other investment scheme.
My consolation, is that it's not a new problem. Common stock investors have long seemed to be negligent when it comes to that.
Benjamin Graham in The Intelligent Investor wrote:[shareholders]... As a class they show neither intelligence nor alertness. They vote in sheeplike fashion for whatever the management recommends and no matter how poor the management’s record of accomplishment may be. . . . The only way to inspire the average American shareholder to take any independently intelligent action would be by exploding a firecracker under him. . . . We cannot resist pointing out the paradoxical fact that Jesus seems to have been a more practical businessman than are American shareholders. 1

1 Graham explains his reference to Jesus this way:
“In at least four parables in the Gospels there is reference to a highly critical relationship between a man of wealth and those he puts in charge of his property. Most to the point are the words that “a certain rich man” speaks to his steward or manager, who is accused of wasting his goods: ‘Give an account of thy stewardship, for thou mayest be no longer steward.’ (Luke, 16:2).” Among the other parables Graham seems to have in mind is Matt., 25:15–28.
Mr. Bogle has expressed some hope that indexers might be a good factor, since most are long-term buy and hold investors. Traders can simply sell a stock if they don't care for the management, indexers can be "Passive Investors, Not Passive Owners"
"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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Re: The End of Indexing?

Post by Nowizard » Sat Oct 20, 2018 7:10 am

Nothing new. If you think you can beat the market, then join that group now rather than wait.

Tim

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Re: The End of Indexing?

Post by Watty » Sat Oct 20, 2018 7:28 am

Stormbringer wrote:
Sat Oct 20, 2018 6:27 am
My hunch is that if too many people index, we'll get a more volatile market. Perhaps that will make it easier for active investors to beat the market, allowing them to close the performance gap with indexing. I'm not sure.

So even though I put my mom into index funds, I hope she doesn't tell all her friends.
Except for expenses there is no performance gap between active investors and index funds.

Pretty much by definition, before expenses, half of them will beat the index and half of them will underperform the index.

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Re: The End of Indexing?

Post by 3funder » Sat Oct 20, 2018 7:28 am

willthrill81 wrote:
Fri Oct 19, 2018 10:13 pm
AgentOrange wrote:
Fri Oct 19, 2018 9:47 pm
I was wondering of anyone here had read, and has opinions about a new book, called The End of Indexing by Niels Jensen. Because I'm lazy, here's the synopsis from Amazon:

"Index-tracking is the flavour of the day - it accounts for around one-third of the total US mutual fund market, and is still growing rapidly. Indexing appears to be unstoppable.

But, in The End of Indexing, investment veteran Niels Jensen presents a different vision. In a forthright and compelling examination of the investment landscape, Jensen argues that the economic environment we are entering will be unsuited to index-tracking strategies.

Jensen identifies six structural mega-trends that are set to disrupt investors around the globe:
1. End of the debt super-cycle
2. Retirement of the baby boomers
3. Declining spending power of the middle classes
4. Rise of the East
5. Death of fossil fuels
6. Mean reversion of wealth-to-GDP

In conjunction, these six themes have the potential to create conditions resembling a perfect storm that will result in low economic growth for decades to come. Investment techniques and methodologies - including passive investing strategies - that have worked so well in the bull market of the last 35 years will no longer deliver acceptable results.

As a new investment approach is called for, The End of Indexing provides investors with a guide to the challenging environment ahead and a warning about the future decline of index-tracking."

I thought I would ask here because most here have much more experience with indexes, and might have some opinions. I haven't read it yet,I just got it from the library.
Since indexing merely seeks to mirror the returns of the market less the costs of the funds that employ it, which can be extremely low, such an argument is levied against the market itself unless the author believes (or believes that he can convince you that he can) he can outsmart the market, a song and dance we've heard too many times to count.

Considering that the market not only survived the Great Depression, two world wars, many other conflicts, stagflation, terrorism, etc., I don't see these six supposed trends as any more dangerous. Might these or other events have a negative impact on the market at some point? Something certainly will at some point. There is another bear market out there somewhere. That's been the story of stocks for well over a hundred years, and yet capitalism has come out on top.

My suggestion is not to waste your time reading such material. There are far more productive things you can do with your time, which is an asset that you can never recover.
+1

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Re: The End of Indexing?

Post by JoMoney » Sat Oct 20, 2018 7:36 am

Watty wrote:
Sat Oct 20, 2018 7:28 am
...Pretty much by definition, before expenses, half of them will beat the index and half of them will underperform the index.
In practice, it's more like 40% beat the index in a single year, and after multiple years fewer and fewer show any ability to consistently beat the index.
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"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

IowaFarmBoy
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Re: The End of Indexing?

Post by IowaFarmBoy » Sat Oct 20, 2018 7:47 am

When I look at that list of megatrends, they all seem plausible and all could have impacts on the market. The problem (as several have already mentioned) is figuring out how to profit from them. I read a statistic recently that the majority of returns have always come from a relatively small number of stocks. Indexing seems to be the only way to ensure that you own these stocks.

The question that a list of mega-trends like does raise for me is what my international allocation should be. I've been over-weighted to the US but it does make me think about whether I should pursue a truly global weighting. But that brings other risks like currency risks into play....

Ron Scott
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Re: The End of Indexing?

Post by Ron Scott » Sat Oct 20, 2018 8:41 am

Imdexing is problematic but the foolish fearbook referenced doesn’t address any of the problems.

An interesting one for those who think about the growing trend toward index investing:
http://theconversation.com/these-three- ... rica-77072

Combined, Vanguard, Blackrock, and State Street (The Big Three) are the largest shareholder in 90% of the companies in the S&P 500.

They hold their shares for us, the investors.

How large shareholders influence the behavior of management has always been an important issue; management pays attention! Hence the dilemma.

What, in your opinion, is the correct posture for these large investment houses to adopt in influencing management to act in ways that provide the greatest benefit to us as individual investors?

If The Big Three phone it in and just vote for management's recommendations all the time, is that is our best interest?

And don't think it doesn't get tricky! What if it were more beneficial to holders of ALL an industry's stock to kill off one company and grow the others?


Here's an excerpt:

The power of passive investors

With corporate ownership comes shareholder power.

What is undeniable is that the Big Three do exert the voting rights attached to these shares. Therefore, they have to be perceived as de facto owners by corporate executives.

These companies have, in fact, publicly declared that they seek to exert influence. William McNabb, chairman and CEO of Vanguard, said in 2015 that, “In the past, some have mistakenly assumed that our predominantly passive management style suggests a passive attitude with respect to corporate governance. Nothing could be further from the truth.”

Interestingly, though, we found that the Big Three vote for management in about 90% of all votes at annual general meetings, while mostly voting against proposals sponsored by shareholders (such as calls for independent board chairmen).

One interpretation is that BlackRock, Vanguard and State Street are reluctant to exert their power over corporate America. Others question whether the Big Three really want this voting power, as they primarily seek to minimise costs.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

InvMoney
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Re: The End of Indexing?

Post by InvMoney » Sat Oct 20, 2018 9:24 am

I'm not an investment pro, but I have spent a considerable amount of time over many years analyzing mutual fund performance and have reached the following conclusions regarding index funds:

1. In a bull market when nearly all stocks are going up regardless of their fundamentals, index funds are hard to beat. But over a long-term period that includes both bull and bear markets, well run managed funds that avoid investing in stocks with poor fundamentals can deliver superior performance.

2. Index stock and bond balanced funds can deliver superior long-term performance to index stock funds.

3. Well run managed balanced funds can deliver superior long-term performance compared to both index balanced and stock funds.

4. Vanguard's Wellington and Wellesley Income, managed funds that have followed a consistent value oriented strategy for nearly 40 years, deliver superior long-term performance compared to index balanced and stock funds.

I believe the investing environment today is similar to that of the late 1990's. With that in mind, following is Portfolio Visualizer data for a number of Vanguard Investor Shares funds that indicates what a $100,000 investment in January 2000 would be worth in September 2018, a period that included two stock bull and bear markets. The funds are listed in descending order of performance.

$408,518 - Wellington - VWELX (65% stocks / 35% bonds)

$372,795 - Wellesley Income - VWINX (37% stocks / 63% bonds)

$288,717 - Balanced Index - VBINX (60% stocks / 40% bonds)

$269,557 - S&P 500 Index - VFINX (100% stocks)

$268,004 - Total US Stock Index - VTSAX (100% stocks)

$257,233 - Life Strategy Moderate Growth Index - VSMGX (60% stocks / 40% bonds - US and International)

$245,410 - Life Strategy Conservative Growth Index - VSCGX (40% stocks / 60% bonds - US and International)
Last edited by InvMoney on Sat Oct 20, 2018 10:26 am, edited 4 times in total.

MathWizard
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Re: The End of Indexing?

Post by MathWizard » Sat Oct 20, 2018 9:55 am

JoMoney wrote:
Sat Oct 20, 2018 2:27 am
MathWizard wrote:
Sat Oct 20, 2018 12:58 am
None of the "six structural mega-trends" mentioned will kill indexing.

The two things that I worry about for my retirement are:

1) Concentration of wealth to the point where private equity dwarfs the public market
The growth of GDP is correlated with the weighted average of the public and private equity markets.
The public market is currently dominant, and is available to everyone, not just qualified investors.
Should that change, I may be locked out of being able to benefit by become a tiny silent partner in thousands of businesses.

2) Capital, or at least by selling company shares, may become unimportant
This may seem far off, but I can see a post scarcity society coming sooner that people might think, based on
the huge increases in efficiency by substituting energy for the limited resource of human & animal labor .
In a less extreme version, companies get loans without having to give up a percentage of
the company. Now we only have a bond market, not an equity market, with much lower returns.
I can't see that happening. Whether it's private or publicly owned, the equity is going to be owned by someone, and there will be people who need to liquidate there equity for cash they can spend today or wish to unload the risk of uncertain future returns for a promise of stable income. In recent times, private equity investors have been willing to pay a higher premium for businesses, so that's where the financiers have been going. At some point it will swing back to public stocks. As an investor, I would be more leery if we had tons of IPOs being dumped on the market. Even if the entire system turned to private equity that doesn't mean small investors would be locked out of ownership, it just means it would be less liquid, and unless you're an active trader I don't think that would even be all that bad.
You could worry about business equity being socialized, but for most industries that hasn't had a good record of incentivizing profits and has tended to turn the system into a liability rather than an asset, social equity has been better served with a tax claim on profits.
Small investors would be locked out if all went to private equity.
Qualified (or accredited) investors require either investable assets of $1 Million or an annual (joint) income of $300K.

Not many people get to $1 Million investable assets without having already invested (or inherited).
The road to wealth for the vast majority would become either inherit or start a business.
Public stock investing is the most reliable way to financial security for most people.

I'm not trying to be political here, but having come from a poor family, there are fewer avenues for the poor to attaining wealth.
For me, investing in human capital through education and using the higher income to invest has been successful.
For my brothers it was education and starting a business as the other path. They invested as well, just in a concentrated way,
which had a bigger upside potential, but carried a higher risk of underperforming the market.

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JoMoney
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Re: The End of Indexing?

Post by JoMoney » Sat Oct 20, 2018 10:16 am

MathWizard wrote:
Sat Oct 20, 2018 9:55 am
... Small investors would be locked out if all went to private equity.
Qualified (or accredited) investors require either investable assets of $1 Million or an annual (joint) income of $300K...
As I said, I don't believe it would ever get to the point of being a world of only private equity, but if it did, and there were small investors wanting to invest there would be opportunities made available... not saying it would be as cheap as buying stocks are today, but if there was demand from investors and businesses needing financing it would happen at some price point.
Even today, without being an otherwise qualified/accredited investor some RIA's can sell small investors private equity 'fund of funds', there are non-traded REITs, and various non-traded "crowd funding" investments have been popping up on the Internet. I wouldn't recommend any of these things, but there are options out there for people who really want small fractional pieces of private equity, are willing to pay for it, and willing to accept the risks, lack of liquidity, lower disclosures.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

jalbert
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Re: The End of Indexing?

Post by jalbert » Sat Oct 20, 2018 12:45 pm

InvMoney wrote:
Sat Oct 20, 2018 9:24 am
1. In a bull market when nearly all stocks are going up regardless of their fundamentals, index funds are hard to beat. But over a long-term period that includes both bull and bear markets, well run managed funds that avoid investing in stocks with poor fundamentals can deliver superior performance.
It is easy to identify the active funds that used a winning strategy in a backtest, but can you identify the very small percentage of them a priori that will beat an index over the long run? The odds are not favorable for successful identification.

2. Index stock and bond balanced funds can deliver superior long-term performance to index stock funds.

3. Well run managed balanced funds can deliver superior long-term performance compared to both index balanced and stock funds.

$408,518 - Wellington - VWELX (65% stocks / 35% bonds)

$372,795 - Wellesley Income - VWINX (37% stocks / 63% bonds)

$288,717 - Balanced Index - VBINX (60% stocks / 40% bonds)

$269,557 - S&P 500 Index - VFINX (100% stocks)

$268,004 - Total US Stock Index - VTSAX (100% stocks)

$257,233 - Life Strategy Moderate Growth Index - VSMGX (60% stocks / 40% bonds - US and International)

$245,410 - Life Strategy Conservative Growth Index - VSCGX (40% stocks / 60% bonds - US and International)
The start date of your backtest is at a local stock market peak and the start of a period where bonds outperformed stocks as a result. It is a mistake to generalize such a backtest to future expectations.
Risk is not a guarantor of return.

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Phineas J. Whoopee
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Re: The End of Indexing?

Post by Phineas J. Whoopee » Sat Oct 20, 2018 4:00 pm


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nisiprius
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Re: The End of Indexing?

Post by nisiprius » Sat Oct 20, 2018 5:07 pm

I just did a very slow double-take. Rob Arnott lets his name be used on the jacket:

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Rob Arnott is also the champion of an indexing system developed by his firm, "RAFI Fundamental Indexing" and, I assume, approves of the mutual funds that track it (including some big Schwab funds).
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venkman
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Re: The End of Indexing?

Post by venkman » Sat Oct 20, 2018 7:46 pm

There are no Megatrends that can change fundamental arithmetic. Combined, everyone in the market earns the market average, before costs. The long term winners are the ones who pay the least in costs.

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