That will never happen, there are lots of people out there who think they can outperform the market, I was one of them once upon a time, I realised the error of my ways.
There was that saying: There are 3 ways to beat everyone else in the stock market: Be smarter, be faster or cheat. I am definitely not faster than a high frequency trading algo, certainly not smarter than everyone else, and I won't cheat, so indexes it is.
There are lots of index fund holders that are selling, ones who are rebalancing, ones that de-risking because of retirement, ones that want to diversify, and those that just want to sell to live on the proceeds ... So lots of sellers and buyers. I don't think there is going to be any issues with just sticking to index funds. Just my opinion...
Agreed, it is quite likely the one who has the S&P 500 also has euro and asia etc indexes. A rebalance between these funds will cause a buys/sells to happen. Agreed, retirees are selling, they cant be holding on to the funds forever, they have to spend the money to live. Agreed, I'm not worried in the least, well may be I will diversify a bit more 👍👍
Yep .. I was a net buyer of index funds until 2019 when I stopped work at age 51. Now I'm a net seller and will be unwinding my position slowly over the next 45 years or so (if I live that long. If I don't, someone else will be selling them all the day after I can't)
When a retiree sells shares in an index fund, individual stocks are not necessarily sold. That only happens if more money flows out of the index fund than into the fund. So as long as more money is moving into index funds and away from active funds, retirees invested in index funds will not be a source of sellers in the market.
@@livingart2576 all depends on portfolio size I guess. If your total assets are £10k then it doesn't really matter if 20% are in one stock. You can rebalance with new contributions going forward. If you have a portfolio of 250k, it starts to become material. You'd then have to be clear that the Tesla stock is going to perform at least at as well as the index over the next couple of decades.
At the extreme, if the majority of people will be buying funds without evaluating them. That would open up huge valuation mistakes, which would make it possible for active managers to make a decent living again.
No, thats huge mistake. If something is overvalued, you can't profit off it. Only if something is undervalued - you can buy it. Market definitely can exist in a state of overvaluation when everyone see it. Because markets can be irrational longer than most bears can stay solvent.
In a state when index funds get more inflows than outflows, it can exists as self-fulfilling ponzi, and sure beat others because others don't get free dumb money as exit liquidity. But imagine if some day for some external reason funds will have only negative net inflows. Then suddenly even your grandma will beat index funds, because they'll start to have negative edge to the market: they'd have to sell more and more stocks, and because of that, it'll be ultimate losing stocks by the time.
Really? What indicator can experts use to buy stocks that are undervalued in their opinion on that scenario? Think about it, a stock only rises if people buy it, and if the experts buy "undervalued" champions that nobody realises to buy then they're just buying dead stocks. Dumb money, i.e. blindly buying the index, inevitably leads to stock concentration. Only an event opening the eyes to these blind buyers can make them change their option, and that event is called a crash. However undervalued stocks dump even in a crash. Hence these expert purchases are meaningless.
We also forget the one of the major buyers/sellers are the companies themselves with buybacks, stock comp, and dilution that can actively keep companies fairly valued.
Companies want to increase their stock price at the end of the day. They contribute to the stock overvaluation problem and don’t do anything to help solve it. Buybacks increase stock prices
I have over $200k ready to be invested, however I am having trouble trying to find out what investments would be best during this present economy. Heard index funds and ETFs provide diversified stock market exposure while spreading risk. How true?
Very true, there are strategies that could be put in place for solid gains regardless of economy situation, but such execution is usually carried out by an investment specialist
The issue is most people have the “I will do it myself mentality” but not skilled enough. Ideally, advisors are perfect reps for investing jobs and at first-hand experience, my portfolio has yielded over 330% since covid-outbreak to date, summing up nearly $1m.
@@J.woltz48 truly appreciate the implementation of ideas and strategies that result to unmeasurable progress, thus the search for a reputable advisor, mind sharing info of the professional guiding you please?
Paid off my mortgage with index funds. Worth remembering in the UK that you can get these as tax-free ISAs up to a certain level. After a current account, then rainy day fund in a quick access deposit account, investing in index funds up to the ISA limit is a decent third account. But as they say, time in the market beats timing the market: stocks are long term things.
Institutional investors have the most influence over price movements, and they will never be buying index funds. Plus was you say in the video, everyone else will always dabble in picking stocks, so I agree there will always be active investors out there.
100% vanguard sp500 here buddy. Too smart to know i cant and dont want to pick out stocks and that even the best of fund managers cant do it and i know i aint peter lynch
@@DarkoFitCoachthat's just.... not true. The global market goes through cycles and there have been many many periods where international outperforms the USA market.
@@justthebrttrk sure i know that. And other time like last 15yrs usa wins. Overal its about the same so i never quarrel with people about all world vs sp500. We are in index which is a win already
Nice video. I would just complement it: my understanding is that as index funds grow comparatively to individual stock buyers, the market becomes more predictable because there are fewer one-to-one transactions. That means that the reward for the successful individual stock buyers will increase while the index fund return will decrease comparatively to one another. So, there is a sweet spot where both methods operate in some sort of equilibrium. For this reason, there will be always an incentive for active funds to exist.
I have been trading ETF's as well as shares. Buy different funds within the same sector off different providers, each provider will have different XD days so you can chase the divs, you will always be invested in more or less the same comps all of the time ....
Love this. I primarily invest in index funds but do dabble in individual stocks when I spot a very good risk. This has served me quite well. I get the sustainability of the indexes, coupled with the occasional, high probability winner that pushes me forward
I really appreciated this video. I don't watch all your videos, just cause time. But out off all the finance channels I follow, I really appreciate when I watch yours. You have such an honest humility that isn't common in this space. I hope the world doesn't take that from you someday when you have millions of subscribers. I think your book review videos were some of my favorite. I've bought and read at least 5 that you suggested, and as you stated, were worth far more value than the tiny price tag to purchase them. I'd love to see more book reviews and recommendations in the future. Keep being you. Sincerely, A fan
Thank you for vid, was better than I thought judging from the thumbnail. Actively managed funds, the pricing has to be changed completely. 1. Only a performance fee capped at max. 20% of the outperformance compared to the index. 2. If the manager underperforms, the manager has to pay out of his pocket the same percentage (up to 20%) as in the case of outperformance. 3. This payout should be quaterly. 4. All other expenses should be capped at 0.2% in total for all expenses, no matter the kind of fund nor the kind of expense. 5. Bid/Ask spreads must be kept at max. 0.2% at all times. Anyway, modern technology will enable small small investors to buy or sell all 500 companies with a single order, at very low prices, or even for free, just bid/ask spread.
I left SJP after 12 years of investing with them. I put all my money into a Vanguard portfolio which somewhat mirrored the SJP investments and my profits soared. I have no doubt that it was the right decision.
Yep they take 2.2% of your portfolio to manage it. Doesn’t sound much but you compound that over a long period and it’s very significant indeed. The products that the SJP adviser will ‘sell’ are on a whole pretty poor performance wise. I woke up to this after 4yrs being them.
If passive funds were the only things in the market, there would still be buying and selling, just not individual stocks for people. That's really what etfs are. They are just a group of stocks. A group can be literally any combination of the overall market using any metric imaginable. For example, there can be a Letter A index that just has all the companies starting with the letter A that are all equally weighted. Because of that, though, passive funds effectively have to trade stocks themselves. So even if people aren't directly trading stocks, they actually are doing so. It would not matter if there were only passive funds even if people only ever bought and never sold, because in order to keep their weights and stay diversified, the funds would have to trade between themselves and it can be automated. Additionally, funds are bought and sold like any stock and there will always be people selling even when it's not market related reasons. In this way, passive funds act like a grouping but also a regular stock of any company. That's why funds in general don't matter. All they do is add an additional layer of ambiguity to how much is being invested in a company because all of it can be done behind the scenes.
7:30 this is incorrect. Large swings in stock price can be a function of increased volume, but what Toby fails to mention is that the available float is a factor as well. With index funds gobbling up shares and basically taking liquidity out of the market, even small selling or buying pressure can result in large swings. This is happening, right now - and is entirely consistent with the theory that index funds are breaking market function.
Another funny thing to think about: you have all these working people paying automatically into index funds. Then on the other end you have retirees withdrawing funds by selling...to who? To the working people who are investing. So what's really happening is simply working people paying money to retired people. Sound familiar? It is pretty much identical to social security, and especially when it's all automated by indexing and automatic contributions. Food for thought. Also notice that there's no law saying that the quantity of sound investment opportunities has to exactly match the amount of money people need to invest for retirement...but the system of automatic investment into index funds proceeds as if this is the case.
Interesting comment - however if just young working people are buying and retirees were selling on an equal level you would have no price change at all.....The prices have risen as more buying pressure has entered the market. On your second point I'm not sure what you are trying to make here. An index fund promises nothing, only the returns of the market which can be positive or negative. The market will always have risks...but the alternative is far far riskier both in doing nothing or picking individual securities. If yu go down the latter route you have significant;y more risk and are likely to underperform :)
@@TobyNewbattthere is no "however". The price change does not mean anything. It is only an artifact of the distribution scheme. You do have the same with social security: the old get as much out as the young do put in. You do buy "shares" too, which is how the system counts your individual inputs when you were young. When you are old, the sum of all counts of all the old relative to your individual sum decides, how much you will get from the entire money the young give into the system. So it varies how much 1 in the calculation is worth in eg. Euros. The interesting part: it completely works without shares, since it is only bookkeeping. And it only redistributes income of the young to the old. The usage of stocks does only introduce mythical thinking. There are shares in circulation, which are about 100 years old. The investment, which was funded by selling those shares, is probably deconstructed since many decades. What is left from it is only a piece of paper.
Ah, the curse of being a dividend investor. How long would your dividend portfolio have to underperform the index for before you throw in the towel and just buy the index?
Good question. Before watching the video, I would say it creates a lot of short opportunities against companies that are struggling and getting overvalued from a P/E standpoint just by being in the index.
If everyone buys index funds, it would be ridiculously profitable to pick stocks. If I was the only guy on the planet picking stocks while everyone else indexed, I'd be insanely wealthy and hailed a genius. That'll never happen because the stock market environment is massively competitive and mispricing is jumped upon immediately. Nothing to worry about. It'll correct itself as soon as indexing begins to even slightly cause inefficient stock pricing in my opinion.
I’m a 41 year old single self made multimillionaire. Just retired. No kids. No worries. I am an early and long time buy and hold of a large concentrated position into NVDA. I am a professional and also personally have always considered the stock market my personal favorite hobby. I am very good at it. I was 100% convinced back in 2018 that nvda’s moat and market share for AI and machine learning would eventually payoff it was certain just a matter of time. I was right. I still am concentrated because it’s simply the best company with the best situation short and long term still. When that changes I will change my investment thesis.
You need to clarify: index funds are funds tracked to an index. You can buy crap index funds, but they are likely to do what they promise. The fidelity Bitcoin ETF tracks Bitcoin very well - does that mean it's a good fund? An international index fund over the past couple years is likely to be garbage. What you're saying isn't index funds, but total market. What happens if everyone buys total market? That's a very good question - doesn't the growth of a total market index fund slow to the rate of GNP?
I can definite challenge you. Depend on what people invest for. In CA index fund can’t beat the house appreciation value. Fund manager will diversify. If you take the aggressive part of portfolio and compare to the index.
There’s a bit of a misconception here because the ones that didn’t beat the market might’ve still done just fine. Maybe they were just short a half a percent. It doesn’t mean they were destitute.
There are these things called hedge funds. Many of them deeply analyse stocks and determine if they are underpriced, in which case they buy. If the market ever became hugely inefficient, people would pile in to close the inefficiency and make a fortune doing so. That’s why there will never be an index fund bubble
In the REAL world a LOT of hedge funds BLOW UP and have to be shut down after losing a HUGE proportion of their capital. Acting like these are reliably super efficient and accurate traders is INSANITY. Buffett won a bet awhile back, betting a hedge fund couldn't outperform SPY over a decade. And that's just the broad market index of large stocks. Nothing special or pushing high growth like tech.
@@rogergeyer9851 OP has a point, if there’s inefficiencies in pricing between asset classes the market will fill the gap. It’s essentially a risk free bet called arbitrage. It’s quite common in forex markets between multiple currency pairs or during merger/buyouts.
My wife worked for a Manhattan hedge fund for a while. She got out of there as soon as she was working for a literal scam and didn't want to get caught up in it when it imploded
Exactly. I would love for 99% of the market to be index funds, would make it easier and easier to pick out individual stocks that are clearly wildly misvalued.
In the case that everyone's passive, then wouldn't it be impossible to outplay as an active manager since there would be no one left to cause the swings in valuation? Companies could be mispriced based on the fundamentals, but if everyone's passive then it'll just keep tracking the index.
Very nice and informative clip. But I was wondering about a few things. The first thing is that when we are talking about "index funds" it seems like they are all based on the same index, and that is not the case. There are several indexes that have an index fund following it, so there is already a chance that some people will look at the different indexes and select an index fund that they think is best for them or will outperform the other indexes. A second thing are people working for a company and buying stocks of their company or people who get stocks as a form of payment. This will always provide a (small) number of buyers and sellers.
I started investing in indexes when I first got into investing two years ago after trying some stock and realising I didn’t know anything more than everyone else. Since then my total growth is around 30%! 18% each year thereabouts. I am hoping they’ll be a dip so I can get some discounts 😉
It’s not really the fact that everyone is invested in the same thing that people should wonder the downside of. It’s the fact that the dollar as the global reserve currency has resulted in the U.S. stock market holding 70% of the world’s investment money. The world is currently on the path of heavy dedollarization. What will happen to our investment markets.
Very interesting stats on managed portfolio vs index. What’s not mentioned there are the staggering compounding fees. I was victim of this where I invested in my retirement with Raymon & James and the money grew 4 % between 2019 and 2023. And most of it was sitting in cash with 0,1 % interest. Its shocking how many crooks there are in this world and that statistic shows it. Learn how money works, because at some point you will realise (like me) that no one cares about your money as much as you do!
If more stocks move into buy and hold index funds, there are less stocks available to move the market short term, which means the market becomes less liquid, which again means that price volatility must increase in between index buying periods.
There's a bog oversight with your theory. The funders who create index funds make money from that index fund based on the average dividends of that fund. This skews the market to create index funds which hold companies with dividends.
Tech has always traded at a higher PE. The fact that they have grown so big, it makes sense that the overall PE avg is higher. To argue that index funds causes the overall PE to be higher, you’d need to show that non-tech funds in the S&P are also trading higher than usual, rather than the tech funds.
Let's not forget that there are multiple "passive" index funds that get rebalanced according to fundamentals (i.e. Value, Quality stocks), so in practice there are ETFs that actually serves as counter-balance of the more traditional ETFs, such as SP500
There are so many companies I don't want to invest in. So I just pick a few I think that are ok, and keep them forever. I think this is not that much different from buying an index fund, but I can leave out companies I don't like.
Passive index funds get money from every day Joe. What happens when there is global recession and Joe will be out of job and needs those funds? What is 20-30% passive index funds money will be taken out from market? How much stocks will go down?
What index funds do is take shares out of circulation so what shares are left have huge impact on average price. It's basically the same as buybacks but for free
It's not my job to pick which stock I should be and then sell. I'm not an expert and don't have the time to time my buy and selling. It's why ETF and Index were made for. For people who want to invest in the market but not having to but much time in which to buy and sell. It's a safe way to put your money.
Also worth mentioning, market makers (citadel securities and others) are constantly buying and selling these index funds to make sure their market price approximates that of its net asset value (i.e. the market price of the underlying stocks). So while index funds will probably never be exactly 1:1 the value of its NAV, it will be very close to it
I find the "no one can beat the index" claims to be a little weak. Not because I see a lot of funds beating it, but because I can beat it. If I can, others can. I average a compound daily interest of about 0.7% a day. I win almost all trades, whether the market goes up or down because leveraged index ETFs come in long and short variants.This is how I replace the wages I lost when retiring recently. What I don't do is hold stocks overnight. I trade leveraged index ETFs intra day and never hold stock overnight. This isn't some savant skill. It's a strategy based on sound statistical principles. It helps that I am an expert on random time series analysis and entropy analysis, but I don't think it's essential. There is money left on the table with holding stocks overnight, but risk is a function of both volatility and time in the market. You can't control volatility, but you certainly can control the time you expose your money to the market and if you can do the mathematics, you can quantify risk and trade safely.
when will people realise that being overpriced and being in a bubble are not the same thing ? Bubbles typically involve a positive feedback loop that cause price to rise unsustainably. If something is overpriced - just say that. A more succinct way of putting this would be to say that the delta, or the change in passive investor volume over time, can affect the overall return of the fund. For example, you wouldn't want to be the investor who buys at the peak of index fund popularity and exits when others are moving into bonds, as this timing could negatively impact your returns. In reality - as things stand today - such an effect is probably tiny. We are talking low number basis points. A bigger concern of mine is the ability of a fund manager to move quickly in the event of a major financial event.
I completely agree. The current balance between active and passive investors is at a healthy place right now and they compliment each other. Even though the market is currently soaring, there are none of the weaknesses like deep 80% margin trading as in 1929. Now if governments would just stop flooding the market with cash from the printing press...
I think some forget that index fund managers are active buyers and sellers. Not all are actively managed, but a lot of the specialty ones are. Sure, a lot of people are buy and forget, but I think there'll always be enough people in the middle, who think "yeah, we're heading into a recession, I don't want to be invested in entertainment but do want consumer staples," even though they aren't sure what companies to buy, therein.
But lately there is a rise in active management etfs For example active value is beating the index value,recently avantis and dimensional are growing aum fast and their cost is close to the passive ones
Crypto (particularly Kaspa) > ETF’s/Index Funds. 8% per year doesn’t make anyone wealthy, unless they’re already wealthy to begin with. Kaspa is up 95,000% since its inception. Index funds, stocks, ETF’s, 401K’s, etc. are for suckers.
The major factor of why the trackers have performed so well is because of the insane concentration in a few US technology names. A lot of FM’s won’t hold such a large amount in single names. What’s my point, well it was easy to outperform the index by factoring this in. A lot of countries active managers smash their index.
There are many different index funds. Investing in a clean energy index or a chips index will give you different companies than a world index. There will be indexes that beat the world index and this will diversify capital.
I believe there is some substance in the Index Bubble story. I watched a podcast Rational Reminder, where Mike Green makes a good and scary case of Index Bubble.
I think, a misunderstanding is, that buying stocks is "investing". Most of the time it is not. Only new emissions of stocks result into invesstments. The stock market looks more like this: Imagine a carousel, where alternating you have money and stocks in the seats, where money is chasing the stocks and stocks chasing money. Nothing really happens here which makes the economy grow - and even if, only on paper. The entire carousel is a store for money. What we do see here, is not investing but saving, which is the complete opposite of an investment. And this is also why people do buy index fonds. They do not want to invest at all, otherwise they would start a business. They do want to save money.
You are not really answering the question. You are alway mentioning that "stocks pickers" do this or that. The question is what if there wasn't "stocks pickers" and everyone can ONLY buy index funds. Everyone is not the same as most people.
Excellent presentation. Very insightful. I believe there will always be active investors as you said. This is because there are some people out there who believe the can beat the market.
The real question is, how many active traders are needed to keep the stock market efficient? Nobody knows the answer to this, but my best guess is that it's not that many.
Whilst I do own some passive funds, the majority of my investments are actively managed. Ultimately passive investors are reliant on active investors to ensure capital is properly allocated and thus valuations reflect company performance. Personally I choose to partake in that process. In doing so I hope to outperform, but am willing to accept the risk of under performance too (statistics don't lie!).
Capital allocation is performed by the company boards, on behalf of investors. Good capital allocators (like Microsoft, Amazon etc) generate higher earnings which pushes prices up. Poor capital allocators (like Zoom) have no impact on earnings and prices go down. It doesn't really matter whether the underlying shareholders are active or passive.
Great video, and well researched. However, I think problems would arise if/when a handful of large active investors were able to manipulate the markets.
Seth klarman speaks about it in margin of safety. If everybody would buy index fund, the stock would be disconected to the fundamentals making huge bubbles.
I am gradually unwinding all my individual stock positions and going to VTI. It will take five years or so as I want to dollar cost average out and some of them pay good dividends and my cost basis is low thanks to DRIP. But, when I got to my NVDA shares last year, I held them. I am glad I did….. but there will come a time to unwind that position as well. That is the tough part, knowing when to sell.
Great video . I have 20% of my pension in active global fund with Baille Gifford on the off chance they pick the next Amazon like in the past 🤞🏼 Rest is passive. Global inc Small caps. Question Toby - is there any passive fund that tracks global market but more concentrated i.e global tracker of top 200 companies ? Was thinking this may provide better returns with more concentrated collection of global companies but still enough diversification as would be industry agnostic ?
I agree that index funds are a good investment, especially when young. It was my strategy for the first 25 years of my career. But as I grow older, I think buying good dividend paying stocks is the best way to retire. When the market goes down, there is a high likelihood that my stocks will continue to pay dividends or increase their dividends. Just my opinion.
Thank you for this video, I agree with your analysis. The market will correct since active managers will find opportunities if it becomes too hot from a passive perspective.
While the market would never get to 100% index it could grow to where prices of individual stock are distorted from their intrinsic value. However I figured if individual stock prices got out of whack it would be self correcting. There will always be people who would step in to take advantage.
This assumes that the market is efficient enough. Particularly in the case of the s&p 500, if it's overpriced, its likely to stay overpriced, until it hits a significant crash. This means that you are getting roughly the same returns as the market while taking on higher risks. With this in mind, smarter investors would find ways to match the market returns, with lower risks, not necessarily seek to make a profit on stocks that are likely to stay overvalued until a crash.
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Maybe the better way to say it is: “it is difficult to beat the indexes during a bull run like we’ve had in the last 15 years”. Despite what some people have witnessed in their “long” investing careers, the market doesn’t just go up and index investing isn’t risk free. I find it interesting that the bond market or even money market accounts are providing great rates with virtually no risk and the S&P is still reaching new ATH. Some people will be surprised when this comes to an end - I will not be. The stock market is driven by illogical humans making emotional decisions. At this point, I can’t see what would change the collective minds of the masses but I have no doubt there is something (something that will make as little sense as how we got here)
The reason the active fund managers can't beat the market is that their performance is being evaluated against their peers on a quarterly basis which is very short term. Therefore, they are incentivized to perform best in the short term and as a result the long term performance is sacrificed for the sake of short term benchmarks as they keep buying & selling to try to get the best results in the short term. That's where we retail investors have an advantage because we have a long term mind set. So we are not forced to sell any stock in the short term & can ride out the market fluctuations to get the best long term results.
But if 50% of the funds are index funds. Say i share loses 10% couldn't that the mean that 10% if all shares owned by index funds then have to sell. Then value goes down etc causes a big slide. Same for increases.
I don't think it works like that. Just because a share price drops 10% doesn't mean that it instantly gets sold off by all the index investors. If anything, the index investor mindset of buy and hold long term reduces the impact of sell off's and market manipulation. My understanding (I may be wrong) is that if a single stock drops by 10%, and that stock happens to be e.g. Apple, 5.9% of the index is Apple, so the index drop is the allocation in the index of Apple stock, which is currently 5.9%, of the 10% drop, which would be a 0.59% drop in the index.
It's the owners of index fund units who sell, not the fund themselves. Similarly, index funds only buy if new units are bought by investors (or dividends are received in the case of acc funds)
there was an observation in horse racing and the trifecta. attempts by experts to pick the winners were generally unsuccessful. however, picking the losers was less difficult?
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Also companies that go to market are new sellers as well. They also create new stock.
As long as there are some active investors to determine the fair prices of stocks, indexing (passive investing) will continue to work just fine. The chances of active investing disappearing are ZERO. It is against human psychology to invest passively so active investing will be with us forever.
This video had the potential to be very interesting but ended up basically saying nothing. I'm interested in the mechanics behind these ETFs. What *would* actually happen if everyone started buying SPY until there were no shares left to sell? Market makers would be forced to sell short on margin and potentially not be able to deliver. Youre incorrect when you say that index funds work like any other equity, where their price is a factor of supply and demand. It is, but only on a very minute level, for S&P, the price is a factor of the underlying assets and if the price of SPY diverges because of lots of buying, the price would ultimately not change at all because SPY tracks the underlying stocks and arbitrage bots will come in to correct the price. A video which talked about these mechanisms and theorized on what would happen if too many people bought (or sold) index funds would be interesting. But this video was not
People get ito index funds after they get beat down picking and choosing, been in for yrs good times and bad times works for me,thats my advice for young people cost averaging throughout the work years
This guy doesn't understand the index. It's a combination of actively traded companies getting a weight. Buying an index automatically is the same as buying the equip equivalent list of equities at changing weights according to the periodic basis. The index literally is just a convenience tool so that you don’t have to buy 500 stocks to get into S&P 500 each week. As people pass away that other people are putting down stocks and changing the order of their weights within the index so each week the auto buys somewhat different allocations.
Mutual funds not only charge modest management fees @~1-2%, investors also incur hidden trade fees. The fees for most Index ETF's are super low and ETF's are more tax efficient. So, why pay more in fees? I'm just saying. NOTE: The returns on ANY investment MUST be at least 5-7% because you have to beat the rate of inflation, or you loose money over time. Then there's short term, 1 year (@15% ) TAX on gains.
That sounds pretty hideously high for a management fee. Even a target retirement year fund (where you pay even more to have someone else take it out of stocks and put it into bonds) shouldn't run that high.
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Everybody should go for stock picking , so I can make money with my index fund 🙂
😉
Lol
Lol
That will never happen, there are lots of people out there who think they can outperform the market, I was one of them once upon a time, I realised the error of my ways.
I overperformed with the Nasdaq etf 😂😂😂
What if everyone tries to do both
while you can its quite difficult, If you really look into a company you can actually make good money, just don't buy pink sheet stocks
@@jakkuwolfinsomnia8058 they never do
@@dysaster4521 Too much work, I much rather use my time to enjoy my hobbies.
There was that saying: There are 3 ways to beat everyone else in the stock market: Be smarter, be faster or cheat. I am definitely not faster than a high frequency trading algo, certainly not smarter than everyone else, and I won't cheat, so indexes it is.
There are lots of index fund holders that are selling, ones who are rebalancing, ones that de-risking because of retirement, ones that want to diversify, and those that just want to sell to live on the proceeds ...
So lots of sellers and buyers. I don't think there is going to be any issues with just sticking to index funds.
Just my opinion...
Agreed, it is quite likely the one who has the S&P 500 also has euro and asia etc indexes. A rebalance between these funds will cause a buys/sells to happen.
Agreed, retirees are selling, they cant be holding on to the funds forever, they have to spend the money to live.
Agreed, I'm not worried in the least, well may be I will diversify a bit more 👍👍
Correct. Retirees have to sell monthly, nee customers, ongoing customers, selling all and buying new etc etc. Plenty of vplume on any vanguard etf
Yep .. I was a net buyer of index funds until 2019 when I stopped work at age 51. Now I'm a net seller and will be unwinding my position slowly over the next 45 years or so (if I live that long. If I don't, someone else will be selling them all the day after I can't)
S&P is already diverse. Lot of the companies are in Asia and Europe
When a retiree sells shares in an index fund, individual stocks are not necessarily sold. That only happens if more money flows out of the index fund than into the fund. So as long as more money is moving into index funds and away from active funds, retirees invested in index funds will not be a source of sellers in the market.
I'm 100% index funds. Can't be bothered with picking stocks. Happy to just set and forget :)
Me too.
I have most of my portfolio in index funds but also have 20% Tesla. 20% may seem a little high for an individual stock but I’m happy with my choice.
@@livingart2576 all depends on portfolio size I guess. If your total assets are £10k then it doesn't really matter if 20% are in one stock. You can rebalance with new contributions going forward.
If you have a portfolio of 250k, it starts to become material. You'd then have to be clear that the Tesla stock is going to perform at least at as well as the index over the next couple of decades.
100% this...
Same
At the extreme, if the majority of people will be buying funds without evaluating them. That would open up huge valuation mistakes, which would make it possible for active managers to make a decent living again.
Exactly this :)
No, thats huge mistake. If something is overvalued, you can't profit off it.
Only if something is undervalued - you can buy it.
Market definitely can exist in a state of overvaluation when everyone see it. Because markets can be irrational longer than most bears can stay solvent.
In a state when index funds get more inflows than outflows, it can exists as self-fulfilling ponzi, and sure beat others because others don't get free dumb money as exit liquidity.
But imagine if some day for some external reason funds will have only negative net inflows.
Then suddenly even your grandma will beat index funds, because they'll start to have negative edge to the market: they'd have to sell more and more stocks, and because of that, it'll be ultimate losing stocks by the time.
Really? What indicator can experts use to buy stocks that are undervalued in their opinion on that scenario? Think about it, a stock only rises if people buy it, and if the experts buy "undervalued" champions that nobody realises to buy then they're just buying dead stocks. Dumb money, i.e. blindly buying the index, inevitably leads to stock concentration. Only an event opening the eyes to these blind buyers can make them change their option, and that event is called a crash. However undervalued stocks dump even in a crash. Hence these expert purchases are meaningless.
@@Georgggg"If something is overvalued, you can't profit off it." Hmmm, I guess you never heard about Put options?
We also forget the one of the major buyers/sellers are the companies themselves with buybacks, stock comp, and dilution that can actively keep companies fairly valued.
Companies want to increase their stock price at the end of the day. They contribute to the stock overvaluation problem and don’t do anything to help solve it. Buybacks increase stock prices
@@clint3868Thus stock prices end up "overvalued" so people will sell them off with a profit, what kind of an argument is this?
I have over $200k ready to be invested, however I am having trouble trying to find out what investments would be best during this present economy. Heard index funds and ETFs provide diversified stock market exposure while spreading risk. How true?
Very true, there are strategies that could be put in place for solid gains regardless of economy situation, but such execution is usually carried out by an investment specialist
The issue is most people have the “I will do it myself mentality” but not skilled enough. Ideally, advisors are perfect reps for investing jobs and at first-hand experience, my portfolio has yielded over 330% since covid-outbreak to date, summing up nearly $1m.
@@J.woltz48 truly appreciate the implementation of ideas and strategies that result to unmeasurable progress, thus the search for a reputable advisor, mind sharing info of the professional guiding you please?
’Karen Lynne Chess’ is the licensed advisor I use. Just search the name online. You’d find necessary details to work with and set up an appointment.
These bot comments are everywhere trying to scam people
Paid off my mortgage with index funds. Worth remembering in the UK that you can get these as tax-free ISAs up to a certain level. After a current account, then rainy day fund in a quick access deposit account, investing in index funds up to the ISA limit is a decent third account. But as they say, time in the market beats timing the market: stocks are long term things.
Institutional investors have the most influence over price movements, and they will never be buying index funds. Plus was you say in the video, everyone else will always dabble in picking stocks, so I agree there will always be active investors out there.
100% vanguard sp500 here buddy. Too smart to know i cant and dont want to pick out stocks and that even the best of fund managers cant do it and i know i aint peter lynch
Why just America? Why not all world fund too?
@@samstiles7053 "just" america? Usa stock market is 60% of total world stock market. If usa goes down so will any other country on this planet
me neither
@@DarkoFitCoachthat's just.... not true. The global market goes through cycles and there have been many many periods where international outperforms the USA market.
@@justthebrttrk sure i know that. And other time like last 15yrs usa wins. Overal its about the same so i never quarrel with people about all world vs sp500. We are in index which is a win already
Nice video. I would just complement it: my understanding is that as index funds grow comparatively to individual stock buyers, the market becomes more predictable because there are fewer one-to-one transactions. That means that the reward for the successful individual stock buyers will increase while the index fund return will decrease comparatively to one another. So, there is a sweet spot where both methods operate in some sort of equilibrium. For this reason, there will be always an incentive for active funds to exist.
Perfect summary :)
And you would then expect the best active managers to show us how good they really are :P
If everyone bought index funds, it would simply turn into social security or universal basic income.
I have been trading ETF's as well as shares. Buy different funds within the same sector off different providers, each provider will have different XD days so you can chase the divs, you will always be invested in more or less the same comps all of the time ....
Love this. I primarily invest in index funds but do dabble in individual stocks when I spot a very good risk. This has served me quite well. I get the sustainability of the indexes, coupled with the occasional, high probability winner that pushes me forward
Very simple explanation of a complex sounding topic
Thank you! Yes there's a LOT of detail you can go into here :)
I really appreciated this video. I don't watch all your videos, just cause time. But out off all the finance channels I follow, I really appreciate when I watch yours. You have such an honest humility that isn't common in this space. I hope the world doesn't take that from you someday when you have millions of subscribers.
I think your book review videos were some of my favorite. I've bought and read at least 5 that you suggested, and as you stated, were worth far more value than the tiny price tag to purchase them.
I'd love to see more book reviews and recommendations in the future. Keep being you.
Sincerely,
A fan
A very comprehensive way of explaining. It made a lot of sense to me with your real life examples. Thanks for making this video.
You're very welcome!
I am invested in index and stocks. My Nvidia purchase a few years ago has more than made up for any wrong stock I picked.
Damn. Good pick 😮
You got lucky. Longterm Nvidia is unlikely to beat the market
@@carlyndolphin Oh it’s way overvalued at this point. I sold some off.
I still regret needing to sell AMD when I bought a bunch at $2. But I sold everything for rent money later that year.
@lVlegabyte womp womp
Thank you for vid, was better than I thought judging from the thumbnail.
Actively managed funds, the pricing has to be changed completely.
1. Only a performance fee capped at max. 20% of the outperformance compared to the index.
2. If the manager underperforms, the manager has to pay out of his pocket the same percentage (up to 20%) as in the case of outperformance.
3. This payout should be quaterly.
4. All other expenses should be capped at 0.2% in total for all expenses, no matter the kind of fund nor the kind of expense.
5. Bid/Ask spreads must be kept at max. 0.2% at all times.
Anyway, modern technology will enable small small investors to buy or sell all 500 companies with a single order, at very low prices, or even for free, just bid/ask spread.
I left SJP after 12 years of investing with them. I put all my money into a Vanguard portfolio which somewhat mirrored the SJP investments and my profits soared. I have no doubt that it was the right decision.
It’s of fees saved! Insane how they add up!
Yep they take 2.2% of your portfolio to manage it. Doesn’t sound much but you compound that over a long period and it’s very significant indeed. The products that the SJP adviser will ‘sell’ are on a whole pretty poor performance wise. I woke up to this after 4yrs being them.
2.2% is CRAZY expensive. Vanguard sp500 is 0.07. Thats 30x the difference. Plus index beats managed funds most of the time anyway
So far SJP is matching my Vanguard portfolio.
@@carlyndolphintell me you work for SJP without telling me you work for SJP 😂
If passive funds were the only things in the market, there would still be buying and selling, just not individual stocks for people. That's really what etfs are. They are just a group of stocks. A group can be literally any combination of the overall market using any metric imaginable. For example, there can be a Letter A index that just has all the companies starting with the letter A that are all equally weighted. Because of that, though, passive funds effectively have to trade stocks themselves. So even if people aren't directly trading stocks, they actually are doing so. It would not matter if there were only passive funds even if people only ever bought and never sold, because in order to keep their weights and stay diversified, the funds would have to trade between themselves and it can be automated.
Additionally, funds are bought and sold like any stock and there will always be people selling even when it's not market related reasons. In this way, passive funds act like a grouping but also a regular stock of any company. That's why funds in general don't matter. All they do is add an additional layer of ambiguity to how much is being invested in a company because all of it can be done behind the scenes.
Big money doesn't buy index funds, those funds are for us little guys.
Big money has insider information.
100% spot on with the comment about only seeing the successes instead of the failures.
7:30 this is incorrect. Large swings in stock price can be a function of increased volume, but what Toby fails to mention is that the available float is a factor as well. With index funds gobbling up shares and basically taking liquidity out of the market, even small selling or buying pressure can result in large swings. This is happening, right now - and is entirely consistent with the theory that index funds are breaking market function.
Another funny thing to think about: you have all these working people paying automatically into index funds. Then on the other end you have retirees withdrawing funds by selling...to who? To the working people who are investing. So what's really happening is simply working people paying money to retired people. Sound familiar? It is pretty much identical to social security, and especially when it's all automated by indexing and automatic contributions. Food for thought.
Also notice that there's no law saying that the quantity of sound investment opportunities has to exactly match the amount of money people need to invest for retirement...but the system of automatic investment into index funds proceeds as if this is the case.
Interesting comment - however if just young working people are buying and retirees were selling on an equal level you would have no price change at all.....The prices have risen as more buying pressure has entered the market.
On your second point I'm not sure what you are trying to make here. An index fund promises nothing, only the returns of the market which can be positive or negative. The market will always have risks...but the alternative is far far riskier both in doing nothing or picking individual securities. If yu go down the latter route you have significant;y more risk and are likely to underperform :)
@@TobyNewbattthere is no "however". The price change does not mean anything. It is only an artifact of the distribution scheme.
You do have the same with social security: the old get as much out as the young do put in. You do buy "shares" too, which is how the system counts your individual inputs when you were young. When you are old, the sum of all counts of all the old relative to your individual sum decides, how much you will get from the entire money the young give into the system. So it varies how much 1 in the calculation is worth in eg. Euros.
The interesting part: it completely works without shares, since it is only bookkeeping. And it only redistributes income of the young to the old.
The usage of stocks does only introduce mythical thinking. There are shares in circulation, which are about 100 years old. The investment, which was funded by selling those shares, is probably deconstructed since many decades. What is left from it is only a piece of paper.
People strongly believe in those 500 companies and they think if those 500 fall there will be no need for money anymore.
If I was not into individual dividend stocks I would buy the S&P 500 either the VUAG or VUSA.
@@pmason6076I prefer VUSA and have it set to auto-reinvest the dividends as it gives me the option to take it in the future if I wish.
or GPSA
For how long of a period have you beaten the market already?
@@pmason6076is that such a problem to get dividend and just press 1 button to buy more with it?
Ah, the curse of being a dividend investor.
How long would your dividend portfolio have to underperform the index for before you throw in the towel and just buy the index?
Brilliant video Toby! Your editing is so good! I’ve got a lot to learn 😂 wishing you all the continued success with your channel 👍
Thank you!!! It gets easier the more you do as you know :)
Good question. Before watching the video, I would say it creates a lot of short opportunities against companies that are struggling and getting overvalued from a P/E standpoint just by being in the index.
If everyone buys index funds, it would be ridiculously profitable to pick stocks. If I was the only guy on the planet picking stocks while everyone else indexed, I'd be insanely wealthy and hailed a genius.
That'll never happen because the stock market environment is massively competitive and mispricing is jumped upon immediately.
Nothing to worry about. It'll correct itself as soon as indexing begins to even slightly cause inefficient stock pricing in my opinion.
I’m a 41 year old single self made multimillionaire. Just retired. No kids. No worries.
I am an early and long time buy and hold of a large concentrated position into NVDA. I am a professional and also personally have always considered the stock market my personal favorite hobby. I am very good at it. I was 100% convinced back in 2018 that nvda’s moat and market share for AI and machine learning would eventually payoff it was certain just a matter of time. I was right. I still am concentrated because it’s simply the best company with the best situation short and long term still. When that changes I will change my investment thesis.
You need to clarify: index funds are funds tracked to an index. You can buy crap index funds, but they are likely to do what they promise. The fidelity Bitcoin ETF tracks Bitcoin very well - does that mean it's a good fund? An international index fund over the past couple years is likely to be garbage.
What you're saying isn't index funds, but total market. What happens if everyone buys total market? That's a very good question - doesn't the growth of a total market index fund slow to the rate of GNP?
I can definite challenge you. Depend on what people invest for. In CA index fund can’t beat the house appreciation value. Fund manager will diversify. If you take the aggressive part of portfolio and compare to the index.
There’s a bit of a misconception here because the ones that didn’t beat the market might’ve still done just fine. Maybe they were just short a half a percent. It doesn’t mean they were destitute.
There are these things called hedge funds. Many of them deeply analyse stocks and determine if they are underpriced, in which case they buy. If the market ever became hugely inefficient, people would pile in to close the inefficiency and make a fortune doing so. That’s why there will never be an index fund bubble
In the REAL world a LOT of hedge funds BLOW UP and have to be shut down after losing a HUGE proportion of their capital. Acting like these are reliably super efficient and accurate traders is INSANITY.
Buffett won a bet awhile back, betting a hedge fund couldn't outperform SPY over a decade. And that's just the broad market index of large stocks. Nothing special or pushing high growth like tech.
@@rogergeyer9851 OP has a point, if there’s inefficiencies in pricing between asset classes the market will fill the gap.
It’s essentially a risk free bet called arbitrage. It’s quite common in forex markets between multiple currency pairs or during merger/buyouts.
My wife worked for a Manhattan hedge fund for a while. She got out of there as soon as she was working for a literal scam and didn't want to get caught up in it when it imploded
Exactly. I would love for 99% of the market to be index funds, would make it easier and easier to pick out individual stocks that are clearly wildly misvalued.
In the case that everyone's passive, then wouldn't it be impossible to outplay as an active manager since there would be no one left to cause the swings in valuation? Companies could be mispriced based on the fundamentals, but if everyone's passive then it'll just keep tracking the index.
It makes it easier for active managers as most of the market is blindly following each other, causing many tickers to be incorrectly valued
May be diversify into different index funds like large cap, mid cap, small cap etc. This way you cover the majority of the market.
Very nice and informative clip. But I was wondering about a few things. The first thing is that when we are talking about "index funds" it seems like they are all based on the same index, and that is not the case. There are several indexes that have an index fund following it, so there is already a chance that some people will look at the different indexes and select an index fund that they think is best for them or will outperform the other indexes. A second thing are people working for a company and buying stocks of their company or people who get stocks as a form of payment. This will always provide a (small) number of buyers and sellers.
I do 80% index and 20% active 😊
Good stuff Toby ❤
That’s a nice balance 😎
I started investing in indexes when I first got into investing two years ago after trying some stock and realising I didn’t know anything more than everyone else. Since then my total growth is around 30%! 18% each year thereabouts. I am hoping they’ll be a dip so I can get some discounts 😉
Vanguard owns 8.94% of MSFT
Blackrock owns 4.74% of MSFT
I think stocks are far from being move only by ETFs
It’s not really the fact that everyone is invested in the same thing that people should wonder the downside of. It’s the fact that the dollar as the global reserve currency has resulted in the U.S. stock market holding 70% of the world’s investment money. The world is currently on the path of heavy dedollarization. What will happen to our investment markets.
Very interesting stats on managed portfolio vs index. What’s not mentioned there are the staggering compounding fees. I was victim of this where I invested in my retirement with Raymon & James and the money grew 4 % between 2019 and 2023. And most of it was sitting in cash with 0,1 % interest. Its shocking how many crooks there are in this world and that statistic shows it. Learn how money works, because at some point you will realise (like me) that no one cares about your money as much as you do!
If more stocks move into buy and hold index funds, there are less stocks available to move the market short term, which means the market becomes less liquid, which again means that price volatility must increase in between index buying periods.
There's a bog oversight with your theory. The funders who create index funds make money from that index fund based on the average dividends of that fund. This skews the market to create index funds which hold companies with dividends.
Tech has always traded at a higher PE. The fact that they have grown so big, it makes sense that the overall PE avg is higher. To argue that index funds causes the overall PE to be higher, you’d need to show that non-tech funds in the S&P are also trading higher than usual, rather than the tech funds.
Let's not forget that there are multiple "passive" index funds that get rebalanced according to fundamentals (i.e. Value, Quality stocks), so in practice there are ETFs that actually serves as counter-balance of the more traditional ETFs, such as SP500
There are so many companies I don't want to invest in. So I just pick a few I think that are ok, and keep them forever. I think this is not that much different from buying an index fund, but I can leave out companies I don't like.
Passive index funds get money from every day Joe. What happens when there is global recession and Joe will be out of job and needs those funds? What is 20-30% passive index funds money will be taken out from market? How much stocks will go down?
What index funds do is take shares out of circulation so what shares are left have huge impact on average price. It's basically the same as buybacks but for free
It's not my job to pick which stock I should be and then sell. I'm not an expert and don't have the time to time my buy and selling. It's why ETF and Index were made for. For people who want to invest in the market but not having to but much time in which to buy and sell. It's a safe way to put your money.
Also worth mentioning, market makers (citadel securities and others) are constantly buying and selling these index funds to make sure their market price approximates that of its net asset value (i.e. the market price of the underlying stocks). So while index funds will probably never be exactly 1:1 the value of its NAV, it will be very close to it
I find the "no one can beat the index" claims to be a little weak. Not because I see a lot of funds beating it, but because I can beat it. If I can, others can. I average a compound daily interest of about 0.7% a day. I win almost all trades, whether the market goes up or down because leveraged index ETFs come in long and short variants.This is how I replace the wages I lost when retiring recently. What I don't do is hold stocks overnight. I trade leveraged index ETFs intra day and never hold stock overnight. This isn't some savant skill. It's a strategy based on sound statistical principles. It helps that I am an expert on random time series analysis and entropy analysis, but I don't think it's essential. There is money left on the table with holding stocks overnight, but risk is a function of both volatility and time in the market. You can't control volatility, but you certainly can control the time you expose your money to the market and if you can do the mathematics, you can quantify risk and trade safely.
when will people realise that being overpriced and being in a bubble are not the same thing ? Bubbles typically involve a positive feedback loop that cause price to rise unsustainably. If something is overpriced - just say that.
A more succinct way of putting this would be to say that the delta, or the change in passive investor volume over time, can affect the overall return of the fund. For example, you wouldn't want to be the investor who buys at the peak of index fund popularity and exits when others are moving into bonds, as this timing could negatively impact your returns.
In reality - as things stand today - such an effect is probably tiny. We are talking low number basis points.
A bigger concern of mine is the ability of a fund manager to move quickly in the event of a major financial event.
I recently learned that you can trade options with ETFs. Kind of the best of both worlds.
I completely agree. The current balance between active and passive investors is at a healthy place right now and they compliment each other. Even though the market is currently soaring, there are none of the weaknesses like deep 80% margin trading as in 1929. Now if governments would just stop flooding the market with cash from the printing press...
Very interesting, great video Toby.
Thanks 👍
I think some forget that index fund managers are active buyers and sellers. Not all are actively managed, but a lot of the specialty ones are. Sure, a lot of people are buy and forget, but I think there'll always be enough people in the middle, who think "yeah, we're heading into a recession, I don't want to be invested in entertainment but do want consumer staples," even though they aren't sure what companies to buy, therein.
But lately there is a rise in active management etfs
For example active value is beating the index value,recently avantis and dimensional are growing aum fast and their cost is close to the passive ones
Crypto (particularly Kaspa) > ETF’s/Index Funds. 8% per year doesn’t make anyone wealthy, unless they’re already wealthy to begin with. Kaspa is up 95,000% since its inception. Index funds, stocks, ETF’s, 401K’s, etc. are for suckers.
The major factor of why the trackers have performed so well is because of the insane concentration in a few US technology names. A lot of FM’s won’t hold such a large amount in single names. What’s my point, well it was easy to outperform the index by factoring this in. A lot of countries active managers smash their index.
There are many different index funds. Investing in a clean energy index or a chips index will give you different companies than a world index. There will be indexes that beat the world index and this will diversify capital.
I believe there is some substance in the Index Bubble story. I watched a podcast Rational Reminder, where Mike Green makes a good and scary case of Index Bubble.
I think, a misunderstanding is, that buying stocks is "investing".
Most of the time it is not. Only new emissions of stocks result into invesstments.
The stock market looks more like this:
Imagine a carousel, where alternating you have money and stocks in the seats, where money is chasing the stocks and stocks chasing money. Nothing really happens here which makes the economy grow - and even if, only on paper.
The entire carousel is a store for money. What we do see here, is not investing but saving, which is the complete opposite of an investment.
And this is also why people do buy index fonds. They do not want to invest at all, otherwise they would start a business. They do want to save money.
Another great video, Toby! I think your editing is really good. If you don’t mind my asking, what software are you using?
PE ratio of 26.7x of a mag7 is high? Cmon ...
MSFT has the same PE ratio as in 2015
AMZN had a much higher PE ratio in 2017
It doesn’t matter what fund you’re in. It’s all the same 15 stocks. It’s really just a matter of how much they charge you.
Large cap, sure. But total market...
I got NVDA as large part
of my portfolio. I am happy buy and hold investor.
You are not really answering the question. You are alway mentioning that "stocks pickers" do this or that. The question is what if there wasn't "stocks pickers" and everyone can ONLY buy index funds. Everyone is not the same as most people.
Excellent presentation. Very insightful. I believe there will always be active investors as you said. This is because there are some people out there who believe the can beat the market.
The real question is, how many active traders are needed to keep the stock market efficient? Nobody knows the answer to this, but my best guess is that it's not that many.
Whilst I do own some passive funds, the majority of my investments are actively managed. Ultimately passive investors are reliant on active investors to ensure capital is properly allocated and thus valuations reflect company performance. Personally I choose to partake in that process. In doing so I hope to outperform, but am willing to accept the risk of under performance too (statistics don't lie!).
Capital allocation is performed by the company boards, on behalf of investors.
Good capital allocators (like Microsoft, Amazon etc) generate higher earnings which pushes prices up. Poor capital allocators (like Zoom) have no impact on earnings and prices go down.
It doesn't really matter whether the underlying shareholders are active or passive.
Sp500 index adjusts itself and costs 0.07% which is fuckall. Zero reason to be in active managed expensive funds
Great video, and well researched. However, I think problems would arise if/when a handful of large active investors were able to manipulate the markets.
Everyone doesnt need to buy index funds, but you should.
Nice! Thanks for breaking it down 👍
Seth klarman speaks about it in margin of safety. If everybody would buy index fund, the stock would be disconected to the fundamentals making huge bubbles.
Great video - made a lot of sense to me. Thanks :)
Glad to hear it!
Thanks Toby. A well discussed video.
I really appreciated this nuanced explanation of how the fears are overly simplistic
Appreciate the support 👍
I am gradually unwinding all my individual stock positions and going to VTI. It will take five years or so as I want to dollar cost average out and some of them pay good dividends and my cost basis is low thanks to DRIP. But, when I got to my NVDA shares last year, I held them. I am glad I did….. but there will come a time to unwind that position as well. That is the tough part, knowing when to sell.
Great video . I have 20% of my pension in active global fund with Baille Gifford on the off chance they pick the next Amazon like in the past 🤞🏼 Rest is passive. Global inc Small caps. Question Toby - is there any passive fund that tracks global market but more concentrated i.e global tracker of top 200 companies ? Was thinking this may provide better returns with more concentrated collection of global companies but still enough diversification as would be industry agnostic ?
Legal & General Global 100 Index Fund
IOO (iShares Global 100 ETF)
But I'd recommend investing in IWQU or IWFQ instead. It gets better returns.
I agree that index funds are a good investment, especially when young. It was my strategy for the first 25 years of my career. But as I grow older, I think buying good dividend paying stocks is the best way to retire. When the market goes down, there is a high likelihood that my stocks will continue to pay dividends or increase their dividends. Just my opinion.
Thank you for this video, I agree with your analysis. The market will correct since active managers will find opportunities if it becomes too hot from a passive perspective.
Is the question not same as what happens if everyone buys the same stocks?
I can see the argument though.
While the market would never get to 100% index it could grow to where prices of individual stock are distorted from their intrinsic value. However I figured if individual stock prices got out of whack it would be self correcting. There will always be people who would step in to take advantage.
This assumes that the market is efficient enough.
Particularly in the case of the s&p 500, if it's overpriced, its likely to stay overpriced, until it hits a significant crash. This means that you are getting roughly the same returns as the market while taking on higher risks.
With this in mind, smarter investors would find ways to match the market returns, with lower risks, not necessarily seek to make a profit on stocks that are likely to stay overvalued until a crash.
Simplest way to double money in the next 4 years:
1. Set aside some money that you absolutely don't need for at least 3 years.
2. During a period of Fed QT, buy a few mid-cap cryptocurrencies
3. After Fed QE, wait until your investment doubles.
4. Put your money back in the bank before the party ends
So easy! If only everyone could time the market like that everyone would be a billionaire! :P
Maybe the better way to say it is: “it is difficult to beat the indexes during a bull run like we’ve had in the last 15 years”. Despite what some people have witnessed in their “long” investing careers, the market doesn’t just go up and index investing isn’t risk free.
I find it interesting that the bond market or even money market accounts are providing great rates with virtually no risk and the S&P is still reaching new ATH. Some people will be surprised when this comes to an end - I will not be. The stock market is driven by illogical humans making emotional decisions. At this point, I can’t see what would change the collective minds of the masses but I have no doubt there is something (something that will make as little sense as how we got here)
The reason the active fund managers can't beat the market is that their performance is being evaluated against their peers on a quarterly basis which is very short term. Therefore, they are incentivized to perform best in the short term and as a result the long term performance is sacrificed for the sake of short term benchmarks as they keep buying & selling to try to get the best results in the short term. That's where we retail investors have an advantage because we have a long term mind set. So we are not forced to sell any stock in the short term & can ride out the market fluctuations to get the best long term results.
But if 50% of the funds are index funds. Say i share loses 10% couldn't that the mean that 10% if all shares owned by index funds then have to sell. Then value goes down etc causes a big slide. Same for increases.
I don't think it works like that. Just because a share price drops 10% doesn't mean that it instantly gets sold off by all the index investors. If anything, the index investor mindset of buy and hold long term reduces the impact of sell off's and market manipulation. My understanding (I may be wrong) is that if a single stock drops by 10%, and that stock happens to be e.g. Apple, 5.9% of the index is Apple, so the index drop is the allocation in the index of Apple stock, which is currently 5.9%, of the 10% drop, which would be a 0.59% drop in the index.
Funds usually only rebalance once every few months.
It's the owners of index fund units who sell, not the fund themselves.
Similarly, index funds only buy if new units are bought by investors (or dividends are received in the case of acc funds)
When you buy a fund you don't own the stock, the brokerage does and it gets the board positions for it
there was an observation in horse racing and the trifecta. attempts by experts to pick the winners were generally unsuccessful. however, picking the losers was less difficult?
Also companies that go to market are new sellers as well. They also create new stock.
As long as there are some active investors to determine the fair prices of stocks, indexing (passive investing) will continue to work just fine. The chances of active investing disappearing are ZERO. It is against human psychology to invest passively so active investing will be with us forever.
Great analogy. Definitely puts things into perspective when viewing the market holistically
This video had the potential to be very interesting but ended up basically saying nothing. I'm interested in the mechanics behind these ETFs. What *would* actually happen if everyone started buying SPY until there were no shares left to sell? Market makers would be forced to sell short on margin and potentially not be able to deliver.
Youre incorrect when you say that index funds work like any other equity, where their price is a factor of supply and demand. It is, but only on a very minute level, for S&P, the price is a factor of the underlying assets and if the price of SPY diverges because of lots of buying, the price would ultimately not change at all because SPY tracks the underlying stocks and arbitrage bots will come in to correct the price. A video which talked about these mechanisms and theorized on what would happen if too many people bought (or sold) index funds would be interesting. But this video was not
People get ito index funds after they get beat down picking and choosing, been in for yrs good times and bad times works for me,thats my advice for young people cost averaging throughout the work years
This guy doesn't understand the index. It's a combination of actively traded companies getting a weight. Buying an index automatically is the same as buying the equip equivalent list of equities at changing weights according to the periodic basis. The index literally is just a convenience tool so that you don’t have to buy 500 stocks to get into S&P 500 each week. As people pass away that other people are putting down stocks and changing the order of their weights within the index so each week the auto buys somewhat different allocations.
Mutual funds not only charge modest management fees @~1-2%, investors also incur hidden trade fees. The fees for most Index ETF's are super low and ETF's are more tax efficient. So, why pay more in fees? I'm just saying. NOTE: The returns on ANY investment MUST be at least 5-7% because you have to beat the rate of inflation, or you loose money over time. Then there's short term, 1 year (@15% ) TAX on gains.
That sounds pretty hideously high for a management fee. Even a target retirement year fund (where you pay even more to have someone else take it out of stocks and put it into bonds) shouldn't run that high.