The more active a trader is, over a longer time frame, the more likely they are to underperform the market. This has been shown through SPIVA over 15+ years, at least in the US and Canada:
That can't possibly be true in the limit though. A market with no active management would allocate capital arbitrarily, without an eye to returns. A company burning money on making millions of unwanted skunk-scented bouncy balls would be as likely to attract capital as one that made, say, food or medicine. Resource allocation would break down if nobody made active capital allocation decisions.
The question is how high the share of passive investment can go before we see misallocation.
> A market with no active management would allocate capital arbitrarily, without an eye to returns.
I recommend you read up on the following (from me elsewhere on this topic):
> So what would happen if the majority of investors started to buy the market and stopped trying to beat the market?
> Mispricings would start to develop regularly, and the people that had continued to try and pick stocks would be able to profit. The profits that these people made would attract other people, and eventually everyone would return to chasing the dream of beating the market. Behavioral finance plays a huge role in market efficiency; nobody wants to accept being average by taking what the market gives them when there are hot shot managers that promise to consistently beat their benchmark. There is a lot more emotional attraction to investing with the guy, or to being the guy that can beat the market.
The GP isn't disagreeing with you. They just said in the limit that all investment couldn't be passive. There is probably some equilibrium value between active/passive investment.
Yes, and what the article I posted is saying is that even if all investment was passive at some point, people would would jump from passive-to-active if/when pricing irregularities were noticed.
The concern that passive/index investing will ruin The Market is just not something we need to worry about.
Jack Bogle made the claim that even if 90% of the market went passive, the remaining 10% would probably be enough to keep things going:
I'm less worried about the issue of market and price efficiencies, and more about shareholder votes and company management decisions. How do passive, potentially 'non-opinionated' index funds vote on various measures?
Yes, and not only that, but the index funds a skewed towards entities with large market caps.
Someone could make their own "index fund" with 10% of it allocated to FAANG, maybe 20% of it in the largest tech names overall, and then a distribution of the largest market cap names, and lo and behold, one has an s&p 500 "index fund". Tesla's about to be added to the S&P 500. There are strong opinions on both sides - it's going up, no, it's going down. You don't have much of a choice if you're a Boglehead who bought into the S&P 500, you're just in it for the ride.
Vanguard themselves have changed things so that employees no longer have the option of choosing the S&P 500 fund in their own retirement accounts, but rather the Total Market fund:
An individual's best bet, long term: buy as much of 'The Market' as you can. The greater, the better. The S&P 500 is simply a smaller portion of the market, and while not bad, may not be ideal:
>Anyone investing in equities is just in it for the ride, as it is impossible to predict what will happen
So people like Jim Simons are merely the luckiest people alive?
The average person earns the average market return, less fees; that's a tautology. Unless you have some reason to believe you aren't average, most people are better off following your advice. It's what I do, personally.
But the idea that no one is winning at this game flies in the face of a lot of evidence.
> So people like Jim Simons are merely the luckiest people alive?
No one reasonable, not even Fama and French who came up with the Efficient Market Hypothesis, claim that the market is 100% efficient.
And given that no one knows anything about Jim Simon's Medallion Fund, we actually have no idea how successful they are. But given the quantities and/or trading volumes possibly involved, they don't have to be right very often.
In a perfectly efficient market, it's 50/50 whether you'll get the better end of the deal. Now think of a casino: for many games the house's edge is only 1.5% (e.g. blackjack, baccarat, three-card poker).
There's always someone out of approx. 1 million who will flip a coin heads 20 times in a row. The guy who does is always the poster boy for active management. You can (of course only after the fact) interview him, ask him how he thinks he became such a good coin flipper, and read investment books about him, or just passively invest and accept market returns.
Index funds are strongly a momentum investment strategy. I don’t see this appreciated so often.
But of course, a properly diversified index fund portfolio contains much more than just the S&P500. Mine has some thousand global stocks, on the order of 5000.
Yeah, one of the oddest arguments I see from EMH pumpers is "dude, just by SPY, you can't beat the market".
SPY is hardly diversified. A far better and pretty easy portfolio consists of a global financial assets allocation: US stocks and bonds, developed world ex-US stocks and bonds, emerging markets stocks and bonds, real estate and commodities. 10-12 ETFs will do it.
There is a weird argument by one of the commenters further up. Index funds are too risky because are not diversified enough and mostly focus on tech companies (mostly wrong). Why not buy 5000 stocks individually? Who is going to pick 5000 stocks by hand?
I'm not sure why you assume that people are forced to engage in passive investment. You can conjure arbitrarily high percentages but they are ultimately meaningless if they don't happen in reality.
I'm happy to go through these in some depth, but the most obvious first response to this is, 1991... Is the landscape of 1991 the same as the landscape of 2020, with its 10% of the s&p in just a few companies, with Robin Hood kids, with money printing, with Seeking Alpha and information overload? Talk shows about stocks and news algorithms pumping stocks to the masses?
Some of your links are for active fund managers versus passive fund managers. Again, a red herring. No, there's not JUST a choice between bogleheading and day trading, and none of us here are active fund managers? Are fund managers (who have clients) compared to the likes of you and me ?
Some individual stocks you buy for the long term, others you trade short term. And sometimes, you can long a stock but only trade a percentage of the holding. You can keep it for a day or for years.
> […] Talk shows about stocks and news algorithms pumping stocks to the masses?
Please see the 1990s and "irrational exuberance". I live in Canada: ask anyone here above a certain age (40s) about Nortel and Bre-X.
> Are fund managers (who have clients) compared to the likes of you and me ?
Fund managers have more resources than you and me, and thus probably have better information to base decisions on. Unless, of course, you are using satellite imagery in your investing workflow:
> Currie’s prediction proved correct. As word spread that satellite images were a reliable predictor of corporate profits, a range of investment funds began buying retail-traffic data from RS Metrics. In the following years, the company expanded, tracking not just parked cars but solar-panel installations, lumber inventory at sawmills, and the mining of metals worldwide.
It is, actually. William F. Sharpe laid it out in the 1991 paper "The Arithmetic of Active Management":
* https://web.stanford.edu/~wfsharpe/art/active/active.htm
* https://www.jstor.org/stable/4479386?seq=1
Sharpe won the 1990 Economics Nobel for other work:
* https://en.wikipedia.org/wiki/William_F._Sharpe
The more active a trader is, over a longer time frame, the more likely they are to underperform the market. This has been shown through SPIVA over 15+ years, at least in the US and Canada:
* https://www.tma-invest.com/spiva-data-reveals-15-years-of-ac...
* https://www.ifa.com/articles/despite_brief_reprieve_2018_spi...
As of the end of 2019, internationally active managers didn't do too well either:
* https://dividendstrategy.ca/what-is-spiva/
This has been known to varying degrees since at least the 1970s:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street