Are index funds pyramid schemes?

[runfast00]

As more investors use index funds - and that includes me as I am 60% VTI - does it become a pyramid scheme IF the underlying economy is unsound. Do index funds only work in a sound economy?

I think index funds are a great investment. But how do I know if the underlying economy is sound? I guess we could look at the last 100 years of index funds to dispute this statement. Are there other ways to think about this.

[Peds]

How does the economy change an index fund at all?
If all companies go to 0, we have bigger problems.

I don't understand what your logic is trying to get at. Can you please clarify.

[Anne]

Either your question demonstrates that you don't understand what index funds are, or my understanding of index funds is way off.

Also, you can't look at the last 100 years of index funds. They've only been around since the 1970s

[Anne]

Another great planet money episode that touches on the origin of index funds and why they're a good idea. (PM should start paying me for advertising!)

https://www.npr.org/sections/money/2019/01/23/688018907/episode-688-brilliant-vs-boring

[Antares]

If you are asking whether one would outperform index funds if one could determine which companies within the index would do best and invest only in those, the answer is yes. But very few people can do that, and I’m sure I can’t.

[CordMcNally]

I think you’re confused about what index funds are or what a pyramid scheme is. Probably both.

[Hank]

Index funds are great! As a higher and higher percentage of pension and retirement funds move towards index investing, those genius stock pickers who can consistently outperform the market on a risk-adjusted, after tax basis over time should be able to make even more money betting against the blind indexers. (The evidence for this actually happening is scant at best.)

[Lordosis]

I know I posted this before but I always think of this at any mention of pyramid scheme.

https://youtu.be/lC5lsemxaJo

[pulmdoc]

No, they are not pyramid schemes. Perhaps if you explained yourself more we could understand the source of your confusion??

[Peds]

!!!!!This is a peds test!!!!!

Ok 8 responses, please no one else respond until OP clarifies position.

This is how these threads derail!

[Tangler]

CordMcNally wrote:

I think you’re confused about what index funds are or what a pyramid scheme is. Probably both.

Click to expand...

Sorry, but yes, CordMcNally is right. You are confused. There are some great books about index funds and what they are and why they are a good idea. I get no royalties (no hidden agenda) but I would invest in the following book (one of the best books on index funds). The Index Revolution by Charles D Ellis the audio version is $10, the kindle version is $10 and it might save you over 1 million, easily.

If you were my family member,  I would insist you spend some time reading this book.

Here is a link: https://www.amazon.com/Index-Revolution-Investors-Should-Join/dp/B06XC621FS/ref=sr_1_2?crid=2GZ8IZQBCP3MG&keywords=the+index+revolution+by+charles+d.+ellis&qid=1560103118&s=gateway&sprefix=the+index+rev%2Caps%2C131&sr=8-2

 

[Tangler]

Peds wrote:

!!!!!This is a peds test!!!!!

Ok 8 responses, please no one else respond until OP clarifies position.

This is how these threads derail!

Click to expand...

sorry......I did not see this (I was writing at the same time perhaps?) sorry you are right, sorry

[Hatton]

A peds like reply.  Index fund=good.  Pyramid scheme=bad.  The two do not correlate.

[runfast00]

No I’m not implying that the index fund does not hold real value. It is more a comment on two things. First, that early investors in index fund will do better because the fund itself will rise as well as the individual holdings.

Second, the index fund is worthless if the underlying economy crashes. I was thinking about this as I invested in Vanguard international stock index fund. If for example I invested in just one country (Eg Nigerian index fund) and that economy crashed; the index fund may also be worthless.

And yes I agree we have bigger problems if the world economy crashes.

[Lordosis]

A peds like reply would be simply:

No