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Weekend reading: Welcome to Indexville – please invest passively

Good reads from around the Web.

The question of how many active investors and financial intermediaries are needed to make the market go around is becoming less theoretical as passive investing’s popularity grows each year.

This week the blog Philosophical Economics [1] made a great – if theory-heavy – stab at answering it.

The article introduces us to the economy of Indexville – a land where everyone is a passive investor (and Monevator is an even more popular site than Buzzfeed).

The first hurdle for successful equity investing in Indexville is company valuation – in our world a free ride enjoyed by passive investors as a consequence of active investors competing for bargains.

The author’s conclusion is that perhaps 20,000 analysts would be sufficient in a passive-only world to value the equivalent of the entire US stock market.

That’s a cheap wage bill, the piece suggests, compared to the total cost of today’s actively managed funds, where the equivalent fees might be 25-100 times higher.

A bigger problem comes with providing liquidity to investors who want to buy or sell their passive funds, instead of just receiving dividends.

I’ll leave you to read the article [1] for that long discussion.

The author concludes that even in the fantasy-land of Indexville, some percentage of investors would need to be active – but maybe as few as 5%.

Those active investors would be playing a zero-sum game [2] in any speculation.

But by providing liquidity to passive investors, they would also in aggregate earn a small additional return over passives – effectively a fee charged for providing liquidity, and for taking on the risks of doing so.

Axe-wielding passive investing maniacs

Like me you probably won’t agree with every assumption made in the piece, but it’s a fascinating discussion – albeit one for finance nerds, really – and it strips back our bloated financial markets to their bare bones.

It will be fascinating to look back in 20-30 years to see whether the financial services industry did get significantly cut down to size.

Or – surely more likely – to see how it managed to avoid that fate.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: You can now get a table-topping 1.7% from Shawbrook Bank’s [18] 120-day notice period savings account, reports The Telegraph [19]. Don’t spend it all at once!

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 [20]

Passive investing

Active investing

A word from a broker

Other stuff worth reading

Book of the week: Simon Jenkins in The Guardian [44] sounds like a desperate man in claiming that physical books have seen off the challenge of digital books – not just grasping at straws, but onto the ankles of his own straw man. But there’s no doubt some physical books will survive as things of beauty, just like I suppose a few people will always wear old-fashioned analogue watches while the rest of us will be using our wristbands to be beamed up to a Premier Inn orbiting the moon. One of my favourite purchases in the beautiful books category in the past couple of years has been Death & Co: Modern Classic Cocktails [45], which is now £5 cheaper than when I bought it. The Kindle edition is £2 cheaper still, and I thoroughly do not recommend you save the money.

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  1. 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”. [ [48]]