> Everyone says index fund, and they're okay but it's a big thing on Passive Investing, I really enjoy Michael Burry 's quip about passive investing being the next big fall:
Michael Burry is wrong. Going with index funds is no more and no less than investing in the entire market, so unless the entire stock market fails (i.e., every publicly traded company collapses, which would be akin to the economy collapsing), you'll be fine.
And even if there's a major rout, if you put in a little every month via continuous, automatic investing (sometimes mistakenly labelled "dollar cost averaging"), you'll probably do well over the long term. Someone putting a little in at a time (which most of us do monthly for retirement) would have even done pretty well through the 1930s Great Depression (notwithstanding high unemployment, etc) to come out on the other end 25+ years later.
If you believe the economy will completely collapse and not ever recover you're also likely to be someone who has an underground bunker.
> Going with index funds is no more and no less than investing in the entire market
I don't think that's entirely true. When most people talk about investing in index funds they're largely talking about funds like eg. $SPY, not total market funds like $VTI.
There's certainly a case to be made that increasing passive investing in certain indices (like $SPY) causes companies within the index to be overvalued simply because of the nature of passive investing. You often see companies getting a big boost in their share price simply for joining the S&P, even though reason would dictate that there's nothing fundamentally different about the company.
The usual counterargument to this is that we should reach an equilibrium where active managers will then be free to invest in companies that are undervalued simply because they're not a part of an index, but of course that also is making a number of assumptions.
Without reading the article too deeply I'm not sure if that's Burry's specific criticism, but it's one that's not uncommon and certainly isn't completely outlandish.
> I don't think that's entirely true. When most people talk about investing in index funds they're largely talking about funds like eg. $SPY, not total market funds like $VTI.
My personal performance of investing in all three categories (total market index, S&P 500 index, NASDAQ-100 index) matches every chart you can find online over last 5 years; the total index funds are carrying the baggage of all that "not S&P" weight and are worse returns than the 500, with the 100 achieving almost twice the performance as the 500 (near 24% returns over 5y).
The new "target retirement date" funds are falling below all three with the highest expenses and lowest returns, worse than a generic total market fund, $0.02 anecdata from a lifetime passive investor in index funds. (I'm still in the red this year on small cap specific and world growth and similar "diversification" funds, they're by far the biggest money wastes compared to passive index fund investing in my portfolio)
> My personal performance of investing in all three categories (total market index, S&P 500 index, NASDAQ-100 index) matches every chart you can find online over last 5 years; the total index funds are carrying the baggage of all that "not S&P" weight and are worse returns than the 500, with the 100 achieving almost twice the performance as the 500 (near 24% returns over 5y).
I think you're perhaps inadvertently proving my point: If S&P funds are performing significantly better than total market funds, either there's something particularly special about S&P companies (very valid reasoning, it's not a random assortment) or S&P companies are overvalued simply because they're part of the S&P and investors value that more than perhaps the fundamentals would support (not a completely asinine thought).
> I think you're perhaps inadvertently proving my point
Yes sorry that was the intention - the "market mechanics" which I observe as a passive investor support your theory, as well as my own choices in how I move that money. My goal is overall return on investment as opposed to say socially-conscious or other types of investing choices (although I have dabbled in some of the socially conscious funds, good for the soul but not really the pocketbook); the data shows that using the index funds over total market funds is a better financial choice for a guy like me who just wants to "sort of care from time to time" over the long term.
> matches every chart you can find online over last 5 years; the total index funds are carrying the baggage of all that "not S&P" weight and are worse returns than the 500, with the 100 achieving almost twice the performance as the 500 (near 24% returns over 5y).
Looking at only the last five years is myopic and not wise. You may want to look up the "Lost Decade" of the S&P 500 from 2000 to 2009.
See also this recent <15 minute video from Index Fund Advisors entitled "50 Year Market Review" for a longer perspective:
> Looking at only the last five years is myopic and not wise. You may want to look up the "Lost Decade" of the S&P 500 from 2000 to 2009.
I'm 50+, my money has been moving around these funds since the late 90s. :) I lived as a tech worker through all the 2000-2010 had to offer us, everyone took a beating not just index funds. Besides that point, holding a fund 5 years is normal - it's not like you have to keep a fund longer than 5, make your money and let it go. Roll it over into something else - passive investing does not mean ignoring your investing, you must still tend to your crops from time to time.
> Besides that point, holding a fund 5 years is normal - it's not like you have to keep a fund longer than 5, make your money and let it go.
Why would one jump from one fund to another?
> Roll it over into something else - passive investing does not mean ignoring your investing, you must still tend to your crops from time to time.
Tend in what way? I can think of perhaps rebalancing so if you're doing a multi-fund setup with particularly desired asset allocation (bonds, equities: US, world, EM). But if you're using (say) a target date fund, what's there to do?
In Canada we have "all-in-one" ETFs that have particular asset allocations which do rebalancing internally:
> Tend in what way? I can think of perhaps rebalancing so if you're doing a multi-fund setup with particularly desired asset allocation (bonds, equities: US, world, EM). But if you're using (say) a target date fund, what's there to do?
(General response, just quoting this part) - life is messy, things change around you. My 401k for example (throughout different jobs) bounces around, I've had Schwab, WellsFargo, Vanguard (even some no-brand way back when) who each offer their own strategies; some having severely limited options, some having open playing fields - in 2000 WellsFargo may have offered 1 of 3 choices IIRC. In 2020, they have 30 choices (many are target date funds) - but Schwab is open-ended, do what you want; when your money rolls over from one to the other, it's usually a liquidation and cash transfer (although I've used in-kind for a Roth IRA, worked OK but not perfect - lost some cost basis data, had to repair). I do not get to choose where my 401k is hosted in USA, your company chooses the vendor - this may differ up there in Soviet Canuckistan. :)
Some companies shut down their investment division (USAA -> Victory Capital recently), so what was a no-fee no-load option at that company now costs $$ at another company - for example, I think Vanguard funds are free to trade on Vanguard but really expensive on Schwab, so if you held VFINX and rolled it in-kind over to Schwab it would now cost you more than if you unloaded VFINX and replaced it with SWPPX. Some funds are unique to that company and it's hard to find replacements (USAA's USNQX e.g.) so you might choose to eat cross-vendor fees because it's performance is just that good. Really depends on all the "what's free to trade at this vendor" - it's not always an even playing field, each vendor wants to push their in-house flavour of the index.
Different category but related: company stock - for whatever reason, that's almost always been E-Trade (now Morgan Stanley!) in tech; both Google and Red Hat offered friends-of-company shares exclusively though E-Trade, my company does it, etc. - so now I have yet another vendor to deal with and it tends to grow arms and legs unless you keep pulling money out and pushing it over to your preferred vendors. Target funds are actively managed assets, they have higher fees and constant re-balancing being done by humans to meet "the target" - they're still kind of new (many created mid-2010s I think) so we only have so much data, but generally they're 4-star and lag (returns) behind any common 5-star index fund. (compare 2 from the same vendor, for example SWPPX vs SWYGX but almost all vendors have them now, this is not investing advice).
In Canada our 401k-equivalent is the Registered Retirement Saving Plan (RRSP). Most companies have something similar to what you describe in that they hook up with a financial services company and do contribution matching. That company has certain offerings, either mutual fund (often fees/MERs > 1%) or if you're lucky perhaps ETFs nowadays.
I frequent /r/PersonalFinanceCanada and semi-often we get people asking which of the offered mutual funds should someone buy. The general consensus is that for most people to choose the funds that have the lowest fees and closely match a equity or bond index: pick a bond percentage weighting that generally let's you sleep at night.
When you leave a job you can often leave the money with the financial company, but it's often easier to do a liquidate-and-transfer to a 'central' RRSP account if you hope around a lot.
I think the USA is sort of the same, my experience is layperson so I don't know if this is typical or normal: the company itself pays a fee to the vendor to maintain your 401k account under whatever the 401k legalities are (taxes being deferred etc.). A lot of time the funds available to choose from are the "institutional" kind that us mere mortals can't buy, only large vendors. So our money is pool-leveraged at scale using techniques and funds we individuals cannot access.
When you leave that employer, you can leave your 401k at that vendor but after awhile the old company starts to bug you about moving it as it's costing them money to maintain an account for an ex-employee. I missed that subtle point you noted - most companies (? all?) only match contributions to their vendor 401k, so there's our internal-company incentive to get you onto their plan to get those sweet, sweet matching dollars.
> But if I push it out only 1 year (9/2002 to 2/2010) the return is +25%.
Which is kind of my point: many people are looking at the last ten years and seeing that equities/S&P 500 can do no wrong. But things were painful in the previous decade. But then pretty good again in the 1990s.
See Index Fund Advisors' recent ~15 minute video "50 Year Market Review":
A lot of people are dumping money into $SPY and and $QQQ, and that's certainly worked recently, but may not work all the time, especially if you have another few decades to go until retirement (which is many/most people's primary long-term financial goal is).
> Which is kind of my point: many people are looking at the last ten years and seeing that equities/S&P 500 can do no wrong. But things were painful in the previous decade.
I will posit that 40 years is probably a bulk of the average person's investing years (25-65), and I may be being generous in "average" based on how often I read people do not invest (if true).
40 year (1980-2020) chart for VFINX (Vanguard S&P 500) - a share was $20 in 1980 (~$63 adjusted for inflation 2020); trades at $320 today. Using a random historical rate of return calculator[1], $10k one time invested in an S&P 500 index in 1980 is just shy of $238k at the end of 2019 at 8.5% return.
> I will posit that 40 years is probably a bulk of the average person's investing years (25-65)
Except that at 65 (the 'traditional' retirement age) one generally doesn't just liquidate all one's equity holdings.
Best practices is generally to increase bond holdings as one ages, but going all-bonds/fixed income is rarely done as I understand things. Unless you've built up enough cash to simply buy an annuity so that it's now the insurance company's problem, or one has a pension, some form of equity returns are needed.
At 65, most people's average life expectancy can be another twenty years in most developed countries (with a 50% chance of making it into one's 90s), so from start (ending school) to finish (death), that could be 60 years. And that doesn't include a partner that may live beyond you if they're of a younger age, and so would also use whatever resources are left for their own needs.
Target date retirement funds aren't new? And they include bonds, so of course you're not going to beat the market with them.
Most target date funds (Vanguard, Fidelity's Zero funds, Schwab's Target Date Index) use passive index funds and are exceedingly cheap and have excellent performance. Schwab's have a net ER of just 0.08%, the lowest in the industry, beating Vanguard by 7 basis points.
There are some ridiculously complicated and overpriced TDFs (T. Rowe Price comes to mind) out there, of course. Knowing what you buy is important.
The reason the NASDAQ 100 is beating the S&P is because of FAANG stocks, and the trend has mostly been the last decade or so. Meanwhile, the total market index is pretty much on par with the S&P since 1992 [1].
Yeah I don't pretend to be a pro to know what constitutes "new", other than for example "many 2020 target date funds were created 2005-2008 at the major vendors" - is that "new"? Is 15 years "tenured"? shrug Compared to an index fund going back to 1980, I tend to think that's "new" in the long term skyline of mutual funds.
Target date funds have existed since the 1990s. The age of current TDFs is skewed by the fact that they are created with a specific time horizon; Vanguard's 2065 fund was only created in 2017, for example, for obvious reasons.
TDFs are just funds-of-funds, so you only need to know the characteristics of the underlying funds to understand their makeup and performance. Vanguard's TDFs, for example, are composed of some of the most highly respected index mutual funds in the business.
There are other arguments for not holding target date funds, but generally speaking I think they're the best investment that your average retail investor can make.
> There are other arguments for not holding target date funds, but generally speaking I think they're the best investment that your average retail investor can make.
(I am an amateur, maybe I'm making this too simple) If I look up August 1st 2006 to 2020 for two Vanguard funds which are competing during this time frame, VFINX (S&P500) and VTWNX (TDF 2020), a person ~50yo (assuming 65 retirement target 2020) who had a choice in 2006 (the month after the TDF was created, impossible to invest before then) where to put their money:
That's just me doing basic math, not adding any fancy inflation calculations, etc. Can you help me understand why this 2020 TDF would have been the "best investment" for this average 50yo in 2006? They would have lost money investing in it compared to the index fund from the same vendor.
You can't compare the S&P 500 with a fund that, at age 50, would hold 25% in bonds. Of course the TDF will lose.
The function of gradually transitioning to bonds is to hedge against inflation, lock in profits, and buffer against market volatility. Those are useless for someone just starting out in their 20s — which is why TDFs start out with very little bonds — but important to someone whose time horizon is just 15 years. Someone at age 50 should be extremely careful about holding just the S&P.
Also, keep in mind that the equity portion of Vanguard's TDFs are 60/40 US/international, because that's what Vanguard thinks gives you best diversification [1]. Depending on the time period you measure, international does either better or worse than the US [2].
You may be interested in reading about Vanguard's target date fund philosophy. [3]
I wasn't stating my question clearly, apologies - I'm on board with the reasons and the theories (and do not argue), but here's where my brain is having a problem - why not invest in the index fund until you're 65 and then roll it over into a TDF at 65? You get more bang for the buck even paying the capital gains tax after 15 years and taking the money you earned and have more TDF buying power. You (me) do not need the benefits of the TDF until I actually retire (well I won't, am I common?).
Parameters for my math: already-income-taxed dollars; $1200 one-time investment in 2006 (no re-investments of dividends, etc.) and capital gains of 15% (middle tier). Just to make the math round nicely and account for gains tax for a rollover and forum comment. :)
So if our sample 45yo person had placed their $1200 into VFINX in 2006, they could have sold it in 2020, paid 15% in gains tax and purchased ...eh, let's say 78 shares of VTWNX, a +16 share gain over just buy-and-hold of 60x VTWNX until 2020. In 2020 this sample person is now 60 and eligible to withdraw without penalty (thinking a Roth IRA here, my model). Remember that this target date is marketed at and intended for people who retire on or close to that year, so our sample person who buys it in 2006 is 45yo (the target audience). It is not expected this fund would have been purchased by a 20yo in 2006, logically.
This is where I'm not following why it was better for this person to buy and hold VTWNX for 15y instead of increasing gains with VFINX first, then rolling it over into that more "bond-like" scenario later. Feels like I'm leaving money on the table as 40 years of market data shows the index @8.25% just keeps going up over time (even when you lose like in 2009 with a low of $68, the loss is still higher than 1995 value of $55 without inflation adjustments).
If you think the S&P will hold up until the day you retire, sure.
In that case, I wouldn't use a TDF (because you have no target date); I'd move to a balanced fund such as Vanguard LifeStrategy.
But a pure equity portfolio is considered very aggressive and risky for someone close to retirement. What if another 2008 happens?
Bonds reduce volatility. Look at the mid-March 2020 drop. At the lowest, the S&P was -32% YTD. BND's lowest point was -4% and was positive 2 weeks later. S&P didn't pass zero until August, more than 5 months later.
Bonds also allow you to lock in your gains. Being less volatile, the bond portion is much safer than stocks. Your main enemy there is inflation, which is why many TDFs supplement with US TIPS.
I understand if you want to be aggressive. That's fine, and you don't have to use a TDF. I know J. L. Collins (who's retired) caps his bond allocation to 20%.
> When most people talk about investing in index funds they're largely talking about funds like eg. $SPY, not total market funds like $VTI.
You're not wrong, but for most people, most of the time, this quibble is not worth getting into.
Too many people are not saving anything, either because they (feel they) don't have enough income, are too scared of headlines, or just are not financially literate enough. If these people manage to get something (anything) going, even if it is into a 'non-optimal' S&P 500 fund, that's getting them from 0 to 80. I would be happy with more people doing 'only' that.
If you want to try to try to get them from 80 to 100, be my guest: but IMHO the perfect is the enemy of the good in this case.
> The usual counterargument to this is that we should reach an equilibrium where active managers will then be free to invest in companies that are undervalued simply because they're not a part of an index, but of course that also is making a number of assumptions.
There will always people who think they can do better, and some of those people will be right (at least some of the time):
The concern isn't that it's bad on the individual level, but that it might represent a long-term structural problem when everyone's doing it. If we end up in a scenario where the prices of S&P 500 stocks are determined primarily by the number of indexed investors rather than the performance of the underlying companies... well, that's a Ponzi structure, where the performance of index funds depends critically on people continuing to invest in them.
> If we end up in a scenario where the prices of S&P 500 stocks are determined primarily by the number of indexed investors rather than the performance of the underlying companies...
The prices of individual equities is determined by buyers and sellers coming to an agreement, not buy-and-holders. As long as there are two people who think they can take advantage of each other, there will be price discovery:
From the article(s), Blackrock estimated that only about 5% of buy and selling is done by index funds, so the vast majority of market activity, where price discovery happens, is still with the active folks.
See also the recent financial markets discussion with some of the sub-threads on about the (alleged?) usefulness of HFT systems in keeping liquidity high:
> You're not wrong, but for most people, most of the time, this quibble is not worth getting into.
Sure. I assumed we were talking about whether passive investing could potentially cause negative effects at scale, not whether your average person should invest or not. I don't think the latter is much of a discussion (i.e. yes, they should).
When people criticize passive investing, they're largely criticizing increased institutional passive investment, not retail investors--retail investors don't generally affect the market much one way or the other. And yes, even many institutional funds invest in indices that aren't just total market indices.
If the concern about said passive investing is valid, this of course may end up affecting many average americans down the line, eg. CalSTRS is one of the largest funds in the world.
Burry argues that the nuts and bolts of actually implementing a large passive index fund break if enough people sell at once. The price will diverge from the actual underlying assets, causing more selling, causing more divergence, etc. If perfectly implemented (as in you actually get a slice of all companies in the index) then it would work as advertised. This isn’t the case in real life though.
> Burry argues that the nuts and bolts of actually implementing a large passive index fund break if enough people sell at once.
What seems to be happening is more inflows into index funds as time goes on from the articles I've seen. Most people, so far, seem to be keeping their heads and even loading up during downturns (buying low).
The other thing with index funds is that they're often automated (e.g., monthly saving for retirement), so a lot of folks aren't actually looking at their portfolios (generally a good thing), and so are going on with their daily lives regardless of financial headlines.
Failed companies are dropped from stock market indices, so I wonder if investing in indices is in effect a method of biasing the selection in favor of "winners" over the general performance of the economy....?
Michael Burry is wrong. Going with index funds is no more and no less than investing in the entire market, so unless the entire stock market fails (i.e., every publicly traded company collapses, which would be akin to the economy collapsing), you'll be fine.
And even if there's a major rout, if you put in a little every month via continuous, automatic investing (sometimes mistakenly labelled "dollar cost averaging"), you'll probably do well over the long term. Someone putting a little in at a time (which most of us do monthly for retirement) would have even done pretty well through the 1930s Great Depression (notwithstanding high unemployment, etc) to come out on the other end 25+ years later.
If you believe the economy will completely collapse and not ever recover you're also likely to be someone who has an underground bunker.