Good reads from around the Web.
We’ve been kicking around the “What if?” consequences of everyone using index funds for years in the comments of Monevator.
But it’s always seemed a very academic debate.
“What if everyone builds their moon home near the Sea of Tranquility? What will that do to lunar property prices? And will they at least upgrade the roads?”
However index fund dominance is starting to look less like science fiction, given the market share gains in the US in the past few years.
Some of our favourite bloggers also addressed this issue recently after famous hedge fund manager Bill Ackman attacked indexing as a “bubble” – and revealed he suffered from a common delusion about how market cap-weighted index funds work in doing so.
Plotting the index funds’ downfall
As Abnormal Returns’ editor Tadas Viskanta writes:
One of the reasons why investors have flooded index funds of late has been because of their lower cost.
At some point this trend will lose steam because index fund fees are already pushing the zero bound.
However active managers are feeling the pinch.
Every major asset manager seems to be either launching a smart beta ETF or actively managed ETF.
Managers who are underperforming the market are finding fault in the indexing trend.
Tadas also introduces what he calls The Bernstein Curve, which looks to plot where index fund market share starts to work against stock market efficiency.
It’s a neat idea, though I think his suggested market share estimate is far too low.
I’d imagine index funds could probably take a 90% share of liquid markets before we saw any big changes in market efficiency.
Market efficiency is a woolly concept though, and nobody really knows.
Zero sum games don’t add up for most
Even if efficiency were to break down, I think most people would still be best off using index funds – because active investing is a zero sum game.
This implies that for every fund manager feasting on the greater inefficiencies we might see in an over-indexed world, another would be losing to the same degree.
And both would be charging higher fees.
It will certainly be interesting to see how this all plays out.
If indeed it does play out – as the growth in assets managed by market-lagging hedge funds has surely demonstrated, the desire to invest different remains a strong one.
Perhaps we’ll all become rich before we all become indexers!
From the blogs
Making good use of the things that we find…
- How long will you wait for Smart Beta to work? – Canadian Couch Potato
- Bright coloured fishing lures catch fishermen, not fish – Robert Seawright
- Basic portfolio construction – The Personal Finance Engineer
- Glaring examples where the market got it wrong – Pension Partners
- Beware of false correlations – The Value Perspective
- The next bear market low is on 22 May – Richard Beddard
- Is screening completely worthless? – Oddball Stocks
- Why the rich get richer – Investor Junkie
- You’re not my type – SexHealthMoneyDeath
- Bear markets are a teachable moment – The Psi-Fi blog
- How much should millennials save? – Stumbling & Mumbling
- The new Credit Suisse Global Investment Yearbook [PDF] – C.S.
- Why aren’t more women investing? [London event] – EventBrite
- A brief visit to the end of the world – Raptitude
Product of the week: The new 1.14% two-year fixed rate mortgage from Yorkshire Building Society is the cheapest, says The Telegraph. Market turmoil has inched such deals back towards their all-time low of 1.05% from the Post Office last August.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
- The benefit of saving more rather than investing riskier – Vanguard
- Regular investing gains from volatility (with a caveat) – Business Insider
- Swedroe: Small cap works better if you screen out the junk – ETF.com
- Time to buy gold? Here’s how [Search result] – FT
- 10 high conviction picks from proven stock pickers – Morningstar
- Hunting for bargains in the oil services sector – Interactive Investor
- The Big Long: HBOS bankers who bet on its bruised bonds – Bloomberg
A word from a broker
- Yields from various alternative income sources – TD Direct Investing
- Standard Life’s 5.8% dividend yield is attractive – Hargreaves Lansdown
Other stuff worth reading
- Millennials respond to that “save £800 a month” piece [Search result] – FT
- A new tax calculator for the dividend and savings changes – Telegraph
- Most people are foolishly frugal – The New Yorker
- An Irish cattle farmer became an expert on Euro Crisis [podcast] – Bloomberg
- Why don’t people manage debt better? – Scientific American
- There’s been a surge in brilliant US maths students. Why? – The Atlantic
Book reader of the week: Amazon has knocked £20 off its rugged Fire Kids Edition. It expects the little darlings to use it to watch Disney movies, but who knows, perhaps they’ll start reading Monevator?
Like these links? Subscribe to get them every week!
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]