The Index Fund "Tipping Point"
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- Опубликовано: 15 ноя 2022
- Index funds are mainstream. At year end 2021 more of the US stock market was owned by index funds than by actively managed funds. Funds only own about 30% of the US market, but taking a broader view of institutional investors, assets have been shifting toward more passive institutions.
Index investing as a theoretically optimal investment strategy works best in an efficient market, but if everyone turns into a passive index investor the market can’t be efficient. This is commonly known as the Grossman-Stiglitz Paradox, and it has some people raising the alarm about a tipping point for market efficiency.
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Wow I've heard people say "this market is so bad it's making me pull my hair out", but never have seen "this market is so bad it's making me grow hair back" 😂😂
Was about to say, who are you and what did you do to ben!!!
I checked the comments to see a coment to the hair. Was not disaponted 🤣
Ben, u're lookin good. Just wanted to tell u!
Hair implants are a thing
Isn't that what happened when covid first came? (with among other things, people not being able to get a haircut due to lock downs)
"Hopefully that feeds your index investing confirmation bias"
Ben knows his audience. 😆
I was thinking that exactly and at the same time i am really worried it's getting too big
Yep, my favourite line.
Confirmation bias is an important part of temperament. And wealth accumulation is nine parts temperament.
I was thinking the same. The top 500 companies are getting more money than they deserve. The index bubble will pop. And people might lose their retirement
Ouch, I felt that!
@@teaadvice4996 they don't get any money when you buy a share. The only way the share price might help them is by maybe making it easier to get loans but banks will still look at the company's ability to pay back
As a bald man I feel absolutely BETRAYED
Omg I was thinking the same thing! Hair, when did that happen!? And it was voluntary!?
@@XAUCADTraderit wasn’t voluntary. Ben did not ask for this, and yet there they are.
continued growth of Index fund popularity,
goes for an investor hand in hand with,
continued hair growth.
This is exactly what always confused me about traders/active investors saying you shouldn't invest in index funds. Surely if index funds make market less efficient, they would want that, because they will have higher profits from exploiting the inefficiencies.
The key is that many active investors don't realize or don't believe in this dynamic between active vs passive. To be fair, we're in uncharted waters here as index investing strategies continue to claim more and more capital share and various movers and shakers continue to opine on what exactly is going to happen, but I think it's safe to bet that people will do what's needed to make money. Passive investing will be a thing for as long as it competently generates wealth. Me? I'm overjoyed that people love passive strategies, doubly so because they continue to obsess over large caps. Leaves a very fertile and low traffic area for people like me to make their fortunes and I'm glad I don't have to compete against a horde of other active investors.
@@KatelynCate I've never understood the love for low cap stocks. Especially in aggregate. They underperform the large cap stocks in the long run, and they do so for a few fundamental reasons. Large cap companies have economies of scale to help improve profitability. Low cap companies do not and must compete with large cap companies that do. In addition, there is much greater risk that unexpected market shocks could dramatically alter the profitability of low cap stocks, and without a large asset-base (and "too big to fail" federal subsidies) low cap stocks are more likely to succumb whereas large cap might be more likely to survive. Of course, a number of low cap companies will become large cap companies, but the general trend will be for fewer of them to do so.
In other words, the expected value for investing in a collection of low cap stocks is lower than the expected value for investing in large cap stocks.
That said, low cap stocks generally have more room to grow, so the few that do eventually become large cap stocks have a ton of potential for small cap investors. But fundamentally, your stock picks would have to be not just average, but substantially above average in order to generate a profit. Naturally, you might expect that percentage of skill would be close to 50%. It might be higher because of the benefits of large cap stocks over small cap stocks, but the difference between the two aggregates is substantial, but relatively small. However, close to 80% of active investors fail to beat the market. The remaining 20% are not necessarily intelligent investors, either. As I've just said, you'd expect closer to 50% to be making more than the market just by random chance. How many of the 20% succeed by random chance and how many succeed by skill is difficult to determine.
But if the odds are greater than 80% against you, why take that risk? You can't effectively diversify your investment, because as you increase your diversification, your income will trend to the lower average that the small cap stocks generate. You have to be able to reliably pick substantially above-average stocks and risk a large proportion of your portfolio in them in order to prosper, and any mistake (or unpredicted shock) can wipe out or substantially decrease your investment. I get that most people think they are substantially smarter than the average person. But realistically, half are below average. And even if you look at investment fund managers who have years of formal education, teams of coworkers to assist in gathering information, and spend their full time monitoring the market and looking for non-public information, they STILL tend to underperform the market by wide margins. What gives your average Joe without all those advantages any hope of beating the odds?
@@Mathignihilcehk
Historically, small-caps have outperformed large-caps on average, not the other way around.
However, that's because small-caps are incredibly risky, especially if you're investing in a handful of individual stocks.
All the logic you were talking about is the reason investors tend to shy away from small-caps, which is exactly why they have higher returns. What factor investing seems to tell us is that the highest returns in aggregate are from the really bad companies that individual investors stay away from like the plague because they're too risky.
Having no-one else crowding you out means you can get them at dirt-cheap prices.
You have to look at it from the perspective of single active investors, if they do know about this balance, then their thoughts should be along the lines of not having enough sway over people to actually create inefficiencies, or they know that they arent actually good enough to exploit the inefficiencies. In either case getting more people to invest in either their stocks or management product is the right play.
If they dont know about it, then the same also holds true.
@@IamGrimalkin higher risk doesn't cause outperforming. More risk asks for higher returns because it has to account for losses. Just like how people with bad credit have to pay higher interest rates to compensate for others in their risk category who go bankrupt. The historical outperformance of small cap has more to do with it being less attractive because it's more work to invest in a lot of small companies than to invest in a few big ones. But later funds have been created to specifically target small call so now that's mostly gone. As always, an investment strategy only beats the market until too many use it
Exactly! and even if the "tipping point" occurs and money starts to flow away from the index funds into actively managed funds, it would eventually "tip" the other way with the opportunity going back to passive investing.
3/4 of buyers are not long term investors but short term speculators. So the short term investors are « pricing» the markets when they are selling/buying motivated by fomo and fear of loss. Humans never learn. That is the avrage investor is motivated by emotions.
@@Ikaros23 What’s your source of 3/4 of the market being speculators?
@@Ikaros23 if you're actively deciding on when to buy and sell you're not a passive investor, even if you invest into an index fund. Besides those people usually invest in all kinds of things, not just the broad market, so there's some price finding going on
Thanks a lot, Ben!! As usual an extraordinary piece of information.
Never heard of your channel before, but great video! Nice to see one with actual citations, since *so* many videos are from people selling their active management and are completely unsourced.
Another outstanding video! Great job Ben!
❤️👌🏼
Very interesting arguments against this famous 'too much passive investing'.
Thank you so much Ben.
You have hair?!
It's fake.
That's his "winter coat" coming in.
Inflation done got a hold of Ben☠️☠️. He let his hair grow out crazzy☹️☹️🤣
The price of a good haircut is TOO DAMN HIGH!!
It’s feels so weird to see hair on his head .
He is not bald after all! Crazy times
Still not grey yet
Wow. I'll have to rewatch your video a couple of times to really absorb all the content. Appreciate your work in trying to simplify investor concerns without sacrificing rigor too much.
Thank you, Ben. You are the absolute best source of information, period.
agreed
My takeaway......we should be at peace with our love of index investing. Thanks hippy Ben! ✌️
Thanks for a well laid out video, based on empirical studies, while providing a succinct summary that was easy to comprehend. I hope you continue to make such digestible content for those who are newer to investing, such as myself!
Super interesting getting me to think. I went passive 6-8 years ago when I got tired of picking mutual funds especially considering the reported underperformance (65-85%) of active managers and lower expense ratio. I do however use mutual funds in the fixed income and international areas.
I love that you include DOIs of the papers you cite in your recent videos.
Absolutely, that's a must!
Did watch the RR episode but I must admit I missed some points there, while this sumup is really valuable and dense of information. Thanks Ben!
I love this content. - I have to pause it every three seconds to think about what he’s saying, but I keep watching anyway
Hidden gem channel! 💎
This guy really knows his stuff!
Right? He's a wealth of knowledge. You can tell that's it's knowledge he intuitively understands and isn't just stuff he memorized from a book.
Good video, Ben. If I'm not mistaken the message you've portrayed basically echoes the video you made a couple years ago about the 'index bubble.'
Similar. Different angle and evidence this time.
Hey, I really like your work. Just a suggestion. I think that if you could provide some examples using graphics to slow down the pace of the videos will be extremely helpful for newbies like me! I find myself repeating sections of the videos a few times so I can understand all the arguments that are being made. So adding examples will probably give me enough time to understand what you are saying the first time that I view the video.
something, I just thought about recently, you read my mind :)
One additional part, I thought about is this in combination with factor investing, so something like this: is the tipping point different for different factors.
What I don't really understand in this video is how the tipping point could possibly not exist, how would that work, doesn't the market have to have at least one active manager? (for example the medallion fund) Because if everyone indexes, relative valuations of all companies compared to eachother stay the same regardless of changes in the world, right? Wouldn't that be non-sensical?
Good job, Ben. Sadly, I don't think Cathy Wood saw this video and claims there is an index fund "bubble." I think she was trying to sell me something.
I gonna guess all the comments are gonna be about his hair.🤣
Great video Ben!
Yeah he got his hair back! awesome!
Yep can confirm, but how come this video was posted 15 minutes ago but your comment was 16 minutes ago????
@@RobertoMattes he never lost it. just shaved it regularly
Really informative video! Thank you!
Weird to see a new guy on this channel but he's still good.
Hello Ben. I love your material!. I think it would be great if you shared your thoughts on bonds investing. With interest rates being what they are, I reckon that now would be a great time to add bonds to a portfolio but I am pretty ignorant on what makes sense for most people on what to buy, how to buy, and how much.
I remember listening about this on the RR podcast. Thank you for posting this video! (Also, comment for the RUclips algorithm)
I don't worry about this point because rich people hold way too much of the world's wealth. Rich people will never want market returns. If we hit this tipping point it would probably be in an environment that that was no longer the case and our world would be a whole lot better. In theory, I would want us to hit this tipping point. It would be great if more people could participate in wealth accumulation than do today.
Interesting, very nice study! I have a question how would this scenario apply to a house owner who managed to refinance or HELOC mortgage and pump that money along with covid handouts into index funds? Would it still not affect?
as always great info .... but hard to challenge as need source tracking and scientific scrutiny
I feel like I got about a decades worth of context distilled into 10 minutes... Now THAT is efficient!
Dude i trade a hedge fund daily. I have had this feeling and talked to people about this for a while. Well said borther, bravo.
Thank you again! Great information!
The tipping point isn't the same for everybody. We have all different knowledge and areas of expertise. And for most investors there is no tipping point.
Index funds are best for most people but there will be always some people that have information that others don't. There is always somebody who knows of an opportunity that has a great potential.
Ben. Thank you for explaining a tough concept so well
Glad to see a new video. Hoping your next one is on FTX
What I have learned is never stop buying the index...idc if it pops, idk if it goes down 70% just keep buying the index. People who say otherwise typically are trying to sell you something...
If you are "investing" in anything that has 40-80% drawdowns, you are NOT INVESTING, you are a gambler watching youtube videos that tell you you're an amazing investor. If this soothes your emotions, so be it. It wont protect your hard earned capital.
@@Biggischkris And it discounts the effect on your future emotions.
@@Biggischkris that 40 to 80 percent drop isn't necessarily permanent in index funds over the long term, investors should worry most about the risk of permanent loss of capital, not the risk of temporary capital loss due to market volatility, hell even active investing could still be considered smart investing if the lost capital is eventually recovered, real long-term investors care little about volatility no matter how bad it is
@@Biggischkris market index funds has dropped more than 40% before and it will happen again, so it's failing now?
Depends, inflation was pretty obvious that I made 25% out of the increase in price of commodities alone. If you’re industry insider you will have plenty of opportunities to make money, sadly many of such opportunities also happens when index is at its weakest so it makes bad pair of investments tools for me
Hi Ben! Love your videos. You've made plenty of the videos in the past talking about capturing various risk premia in the market. I was wondering if you could make a video discussing whether it is beneficial to add the Volatility Risk Premium (VRP) to a portfolio either by selling options yourself or through some fund. Thank you!
Another way to put it, there is a "value of information" that will be payed to the people that gather said information (active investors), and like most things that have value, people will spend to gather that/sell it (thru the market) to be rewarded as long as it is profitable.
@Ben Felix could you please make a video about alternative investments? I’m getting a lot of ads from companies like Vinovest (wine), Masterworks (fine art), etc… do you have any position on these?
Subscribed. For the good information as well as for not having ridiculous thumbnails of silly faces, explosions, and red arrows.
How is this channel not yet having 2+ Million subscribers it's a mystery to me....
Most people don't care about investments. Of those that do, many of them probably don't watch RUclips. And so on down the filter. I'm watching this, but I'm not subscribed. It just gets recommended to me.
I like this reassurance of my index investing bias because I've already heard several times Michael Burry's concerns about "ETF bubble" (or whatever) but found no one to actually explain what exactly he thinks the problem is, and how exactly the bubble could burst
If I recall correctly, his main concern is that a large withdrawal of funds during a panic will cause the liquidity of a subset of the stocks in the fund to completely dry up causing those stocks to collapse in price. Normally an investor would cease selling those particular shares in such a scenario but because the index funds must sell shares blindly across the board, they continue to sell those severely underpriced shares as clients continue to pull out funds. If confidence in the market is restored and funds start to flow back into index funds, those illiquid stocks immedietly shoot way up in price due to the low liquidity before the fund is able to rebuy the shares they sold. Liquidity is not usually a problem in large cap stocks in normal market conditions. However, you constantly see this in small cap stocks that are always illiquid. If you view each stock as having only a limited number of people who understand it and have cash on hand ready to buy it, once those people have exhausted their cash during a heavy sell-off, the stock price may collapse until the price becomes such a bargain that less knowledgeable investors are willing to spend their limited cash on it rather than stocks/8ndustries they are more familiar with.
Hopefully that conveys the general gist of the concern and can serve as a starting point if you want to investigate it further.
@@jonathansteinbronn4738 Thanks! Appreciate it
Great video as always. Nice DIY here cut! Your left side is a little out of sync with the right side. Or vice versa. Minor details ;)
Ben's long haired hippy twin makes some great points here.
Some consideration for "informed" vs. "uninformed" passive investors is called for as well. I believe there have been studies that show that some fraction of passive index investors underperform the index, because they try to time the market or buy at peaks and sell at troughs. I don't know if that has any impact on market efficiency or not, but for as long as the assumption that all market participants are informed and always act optimally for their own interests continues to be violated in a significant way, we're never going to see a tipping point.
If someone uses index funds and tries to time the market. They are effectively an active investor. They just don’t want to admit it.
@@DeepFriedLiver I agree. How can you "time" the market with dollar cost averaging on index funds?
@@michaelyoon9355 if you have access to all your capital now, lump sump would be a better idea than DCA if you believe that the market would go up over the long run, if you believe there would better buying opportunities due to low price in the future, then you would want to invest later and not now when price is high, the issue now is, trying to predict the market's low is a loser's game with most failing to do it, DCA although it is more systematic than discretionary market timing, still has some element of the expectation of lower stock price in the future, besides, if you believe the market would be up over the long term, why would you hold on your investments unless you believe there would be better buying opportunities in the future (effectively market timing)
I hardly know anything about this topic but its good to hear that my index funds are safe... for now.
Are DFA and Avantis funds considered active or passive in context to the topic of this video?
Good to know that Tesla has been priced correctly all along.
The game isn't to pick the best or most profitable companies, it's to pick the ones that most others will pick, and at that, indexing can't be beat.
Stock picking doesn't work I'm afraid.
Phew, so we are ok? I've been following some active investors recently and it almost looked like we got it wrong. Glad to see if I switch back to passive, there is an opposite argument. :)
Great video.... if they had an MBA thesis this would work for a paper.
Damn, I've seen so many videos saying that we're far away from such a tipping point but I've never heard the statement that unskilled investors switching to index funds making the market more efficient, even though it makes perfect sense
How do thematic (or narrow) indexes fit in? Are they considered active since it is not broad index?
Hello sir, do investors actually own the stocks in an index fund or does the fund go up depending on how many other people own the fund? I’m confused on that cause spy and VOO are at different prices. Probably a dumb question but please answer:) thanks
Hi, I was wondering what your investing strategy is for the upcoming months, are you already buying or do you think the market will present better opportunities for you?
Thanks a lot!
I'm new here, tell me if got it wrong, all I understood is that continue passive investing?
the hair style... I was not ready for this Ben. oh, and the video is great as usual.
you have hairs!!!
OMG
just kidding
I've made a marathon with all you videos since I've discovered your channel
I've learned a lot
thank you from an italian guy
Thanks as always.
Would you consider Dimensional Fund Advisors active or passive management? What does DFA think about themselves; active or passive? Would you consider DFA taking 'active share'; or is the 'active share' negligible because DFA include so many stocks in their portfolio?
3:32 Isn't the Berk and van Bisnbergen study contradicting the Fama French DFA doctine that nobody can persistently outpferform the market? What is your and DFAs reaction to this study? ;)
6:50 'Has likely affected valuations.....smaller firms'. affected; In which direction: up or down? and why and how?
Thank you for your insights and channels
Americans are so lucky to have index funds. As a Singaporean I am subject to the 30% dividend witholding tax, and if I want to avoid it I have to get around it by buying Irish-domiciled ETFs, which is unnecessarily complicated and I trust about as much as I can throw an elephant.
Great discussion!
Brilliant video! Thank you.
While there is some validity to these concerns about index investing, I'm certainly not going to trust active fund managers to be honest about it. Of course, these fund managers have a direct interest in sewing doubts about index investing because this style of investing reduces their management fee profits. We all just need to pay attention to real time market trends and make adjustments when it makes sense to do so. There is no magic formula for this.
Ben is a genius
Can we get a video on yield to maturity of bonds? Schwab, and other supposedly reputable sources say that they assume coupon payments are reinvested at the same rate... If they truly make this assumption, then yield to maturity is a bizarre way to compare bonds because you can't know a priori what rate of return you will be able to achieve on coupon payments. Some literature on the topic says that this is stated erroneously in textbooks and by many that learned from those books in investor education materials, e.g. like those provided by Schwab. Certainly the standard formula for yield to maturity does not assume anything about reinvestment of coupons... so are some institutions (e.g. Schwab) using a nonstandard formula, or are they actually wrong to state that assumption? When attempting to get an answer from Schwab directly, their chat support doesn't have an answer and their fixed income specialists have been busy when I have tried calling so far. Any insight on this is appreciated.
Hi Mr Ben,
You should do a video on student loan repayment (6.5% interest) vs investing.
Very informative, thanks.
Very helpful - thanks!
Where do you find these research papers?
If more money goes into index funding, although that is proportional so it shouldn't affect the relative value of those stocks, the amount of money of active investing relative to passive does decrease. So the relative changes in stock prices due to active investing should decrease, right? Also, one thing is investing in the whole market. Another one is in the biggest 500 companies. Doesn't that distort valuations of the highest 500 relative to the rest?
You said the potential growth of index funding is potentially infitive. But let's consider an extreme case where 90% of investments are passive. Would the fees charged by active investors would be very low, because it would be easy to make money in such an inefficient market? Or such a percentage would actually never be reached.
At the tipping point, are returns expected to be lower?
Given human nature, there will always be investors that are trying to beat the market for personal "greed". That benefits the whole market by enabling price discovery. As an example: I (and many others) don't haggle the grocery store about the price of eggs, but that doesn't mean that the price of eggs is not subject to market and price forces
The day Elon Musk talks about putting 69% of his wealth into an Index Fund with 420 stocks, is when the tipping point has been crossed.
Nice!
Ben’s hair increased with inflation
My only youtube notification! Glad to hear index is still the way to go.
Informative as usual but....Hair! You look different, Ben, in a good way, haha
I fed a different confirmation bias of mine from this video. Around 3:30 he says that there is evidence of 'persistently skilled mutual fund managers'.
I have always believed that there are people who can beat the market provided they do not have a huge net worth that they need to invest. I need to read the cited research paper but I am, at least temporarily, feeding that confirmation bias for now.
Great info! I love me some index fund ETF's
Man give it a cut! I love your contents btw
What are the implications of allowing the index managers, who dictate what companies get in or out of the index, to determine what we invest in?
It’s not really the managers since they are following indexes based on market capitalization weights. This means that the market is dictating the weights of the assets in the index. If markets are efficient these capital allocation decisions are theoretically optimal.
thanks Ben.
Buy a index when it drops to 52 week low or below 50 DMA ?
good discussion, lots of interesting ideas
I wish profesor Fama had a better mic. Still great content. Thanks
Ive been investing mostly into passive, but through company investment that is offset by about 30% active
Should I be worried investing in neutral ETF?
This suggests an excellent signal for the tipping point: If active posters on Wallstreet Bets increases, we are moving away from the tipping point. As the number of active posters on Wallstreet Bets approaches zero, we are moving closer to the tipping point. 😉🤣
I remember a professor stating that he believes that even when 90% of invested money is passive, the 10% would keep the market efficient.
The avrage buyer of etf’s and indexfunds are short term speculating. So they are « pricing» the market. The index investors could be a part of creating the bubble. But bubbles would be created anyway. It’s more likely they make the market less risky ( there will always be indexinvestors buying and selling in any markets creating a stable flow of liquidity in crisis markets). All over most investors are trying to time the markets. This is human nature
Very informative as always. Liked 😊👌
This video changed my life. I never knew Ben Felix had hair. 😱😱😱
Hey Ben! Can you talk about the 90/60 portfolio or other portfolios with leveraged bonds that achieve market returns with lower risk/volatility. Are the other risks involved and if not why do you seemingly get a better risk adjusted return with these portfolios 'for free'?
Although Ben has actually advocated for using gearing or leverage in previous videos the over 100% comes from a loan on a house or small business loan, something like that , that can be used as partial collateral and serves some practical function in your daily living. Not just stonks and bonds.
This is a very time period specific portfolio. It looks amazing for the last 40 years. Through history the left tails of stocks and bonds are much more correlated than they were over this period, so this strategy would look much worse.
Hey Ben, I’m into the stage of passing my CFP (Quebec) in the following years, What’s your number one piece of advice when talking about working in financial planning? I’m looking to work in a fee based firm like PWL, Peak, etc. Thanks for your awesome content over the years
I am doing the Pl. Fin. right now too. I don't have pieces of advice ranked by importance. Try to learn something new every day. I am always ashamed of how little I knew a year ago, and I think that's a good feeling to have when you work in a knowledge-based field.
This is me gathering more information (* goes to Ben's channel *)
I actively trade my passive ETFs. Best of both worlds.
These video are great, but I always feel dumb when I have to slow the playback speed to 85% to keep up haha
You should do a video on subordinated debt!
If you look at large cap Canadian mutual fund top holdings and Canadian index ETF top holdings, it’s not a lot different. Most of us moved to passive index investing is to get away from the predatory active investing industry.
Great video.
I miss Agent 47.