PBS Newshour Article: 17 predictions for 2017 (and beyond)

[Atlas Axis]

 

From PBS Newshour Making Sense:

Column: 17 predictions to watch for in 2017 (and the next five years)

here is the last prediction:

17. The meteoric rise of passive investing strategies continues to unsustainable heights. Passively managed assets under management exceed those that are actively managed. Asset prices move in lockstep with fund flows, negating the very price mechanism upon which passive strategies rely. Passive investing begins losing its appeal as active managers take advantage of these distortions to outperform indices.

Can someone explain/comment on this potential pitfall of index fund investing?

Is the Boglehead sky falling?

[Peds]

honestly there is no pitfall. only to WallStreet! as soon as an inefficiency is noted in the market, people will pounce. the market will never be 100% indexed, someone out there is looking for a quick buck.

i am contempt to sit back and let the market do its thing.

no one said indexes outperform. by definition they NEVER do. but after fees and random performance they come out way ahead.

 

[PhysicianOnFIRE]

As @Peds says, the Index Fund can't outperform the Index it follows (will actually trail by the amount = to its fees), but the average investor trails the indexes, often by several percentage points. Last year, the average investor @ Openfolio gained 5%, while the S&P gained 11.9% (with dividends reinvested). My portfolio was up 11.5%, so I guess my Mom was right all along -- I am above average!

[RadDoc6876]

Atlas Axis wrote:

Asset prices move in lockstep with fund flows, negating the very price mechanism upon which passive strategies rely.

Click to expand...

This statement makes no sense to me, at all.  I suspect this sounded "smart" and therefore passed editorial review, but is intellectual nonsense.  The next sentence about active managers "taking advantage" of this and implying that they will then beat the indices, has been proven to be incorrect for a clear majority of active managers and is precisely the rationale *for* index investing.  Again, intellectual nonsense masquerading as some kind of insight that everyone else is missing.

[Zaphod]

It is mainly a scare tactic. There are other issues like competition and who controls boards and whats best overall due to a few investment brokers like vanguard having such a large position in each company, but those are entirely different.

Whats happening right now is exactly what you would expect in a slowly but still efficient market. Philosophical Economics blog has an excellent multi part piece on this.

[DMFA]

That's the thing with index funds - you get the indices' results (assuming a good r²).  The key is beating the index by enough to justify the fees, and that's been demonstrated not to be a reliable situation.  Getting rich slowly by doubling every 12 years (assuming a 6% average annual return) is just fine for a lot of people.  Hey, I'll take it.

[The White Coat Investor]

I figure you only need something like 5-10% of the money being actively managed to keep prices efficient enough that passive investing will still be the right move.

[hightower]

Wow, what a rosy outlook on our future!  Makes me want to build a bunker and hide underground.  I hope they colonize mars sooner rather than later!