Passive Investing and impact in markets

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Alain_Investing
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Joined: Wed Oct 12, 2016 11:26 am

Passive Investing and impact in markets

Post by Alain_Investing » Thu Mar 26, 2020 4:52 pm

It appears that is in vogue to criticize passive investing as un-American or that is destroying capitalism. As an example of that criticism, consider the following sentence from a Forbes article quoting John Bogle (https://www.forbes.com/sites/greatspecu ... 7af432b99)

“If everybody indexed, the only word you could use is chaos, catastrophe,” “The markets would fail,”

According to Investopedia, passive investing broadly refers to a buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market. This definition leave a lot up for interpretation:

- Does it include factors/tilts?
- Does it count if it implements risk parity constructed portfolios?
- Is trend following active or can it be deemed passive?
- Is it passive investing if % split of international/domestic equities is different than the global market cap?
- How about interest rate sensitivity considerations (ST, Intermediate vs LT)?
- Is it passive if it considers a mix of fixed income other than market weighted composition (treasuries, corporates, high yield)?
- What about an allocation to gold?

Many of the above considerations cause passive investors to construct portfolios that vary significantly from one another. Not to mention, behavioral considerations where investors are unable to stick to their strategies due to prolonged underperformance against the benchmark or inability to handle losses. Are we not participating in the market by choosing different asset allocations based on our personal investment preference to achive our goals in the long-run? If so, is this truly distorting or dangerous to markets?

Obviously John Bogle defended the market portfolio throughout most of his life; however, it appears active investors have been warning about a passive bubble in the making which is mostly self-serving.

Silk McCue
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Re: Passive Investing and impact in markets

Post by Silk McCue » Thu Mar 26, 2020 5:08 pm

Type “Passive investing” into the search box and you will find that this is a thoroughly discussed topic.

Cheers

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firebirdparts
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Re: Passive Investing and impact in markets

Post by firebirdparts » Thu Mar 26, 2020 7:19 pm

That article is a year old but of course the issue is 40 years old.

Mods had to merge 100 Michael Burry threads do that’s the longest one. You can get a thorough discussion there.
A fool and your money are soon partners

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firebirdparts
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Re: Passive Investing and impact in markets

Post by firebirdparts » Thu Mar 26, 2020 7:19 pm

double
Last edited by firebirdparts on Thu Mar 26, 2020 10:14 pm, edited 1 time in total.
A fool and your money are soon partners


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