The Downside of Everyone Buying Index Funds
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- เผยแพร่เมื่อ 21 ต.ค. 2024
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Index fund investing is often praised for its simplicity and effectiveness, but even this widely loved strategy has some surprising flaws. While index funds allow you to passively grow wealth by tracking market indices, there are a few risks that can quietly chip away at your long-term returns if you're not careful.
One of the biggest strengths of index funds is their simplicity, which lets investors avoid the stress of constant management. But this same simplicity can lead to a false sense of security. Many investors feel the need to take action, constantly reacting to market news or events. This mindset can cause poor decisions like trying to time the market, which often leads to lower returns.
Additionally, if everyone became an index fund investor, it could actually harm the stock market. Index funds rely on active investors to set the prices of individual stocks through a process called price discovery. Without enough active investors, the market could become less efficient, causing problems for all investors.
Another overlooked flaw is proxy voting. When you invest in index funds, you give fund managers the power to vote on your behalf in corporate decisions. These votes may not always align with your personal values or financial goals, which raises concerns about how much control you really have over your investments.
Finally, while index funds are a great long-term strategy, they aren’t risk-free. Index funds track the market, meaning they will fall during market downturns just like any other investment. Understanding your risk tolerance and aligning your investments with your personal goals is crucial to navigating these risks effectively.
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Disclaimer: This video is for entertainment purposes only. Everyone's situation is different so do your own research before making any decisions with your money.
Thirty years ago I read Jack Bogle’s book on index funds. Just retired at 65 with 2 million in my 403b. Thanks Jack Bogle.
Congrats!!! 🎉
This is where i want to be in 22 years.
If the S&P takes a catastrophic turn for the worst, we have bigger problems than being broke. I'm not worried.
This was my exact argument to someone recently when they said "what if the market completely bottoms out?!?". If the market were to do that and become unrecoverable then not having money will be low on the list of problems. Having no money isn't much of an issue if that money is completely worthless even if you did have some; however, not being murdered for food would probably become a top concern.
Watching in my 40s... And only just starting I feel so behind!
Na, you're still young
You've got this I started at 41... was in 7K debt and living in my overdraft. I'm now debt free have a 15K emergency fund. 20K saving pot and just surpassed ~$150K. Diversification and a clear understanding of your financial goals are key... I am almost 43 now!
The only comparison that matters is the one to yesterday's self. Today you're starting which means you're already better than you were yesterday:)
Congrats! I lost a lot chasing individual stocks and I feel pretty silly for not understanding how investing works. I have a double major in economics but I’ve been trying to make sense of the market.
Not any compelling info here. I highly recommend index funds and so do the best investors of all time including Warren Buffett.
Jarrad, you surprised me. From the title of the video, I expected you to hate on index funds. As a 40 year veteran of total stock market index fund investing, I attest to its power. As John Bogle said: "Don't peak." I only look at my portfolio once a year. I don't rebalance. I don't move investments around. You are correct about Vanguard proxy policy: Our only aim is to maximize shareholder profits. Good job.
No way, I love index funds and their ETF equivalent. But they aren't perfect so I wanted to call out those blindspots for people who don't understand them. At the end of the day these are minor issues and not a reason to avoid investing in them.
They vote in favor of what has a negative impact on us and our future returns. They implement changes that come at a great cost. They know if there is a benefit it will be so far down the line it has a negative impact on us. It affects us at work with lower wages and they found a legal way to knock specific people out of job opportunities.
I'm a firm believer that there will always be active investors. There will always be someone that believes they can generate alpha.
And the good thing is that some of them do beat the market over 3, 5, 10 time frames but the further you go out, outperformance decreases heavily.
This was a hard lesson for me to learn when I first started investing but after watching hours upon hours of Boglehead philosophy, I’ve learned that it’s ok to be average and just be the market.
I don't get the whole idea that passive investors need active to have grow. We invest passively and market goes up steadily 6-10% yearly, without downs.
@@iz1907 It does so because there are still a good amount of active investors, active mutual funds, those who trade options, etc.
Been watching for a while. Sold me even more with the Trio reference. Solid work!
Good to know you have great taste in music!
The right choice of an investment has always been a big problem for me I know picking a wrong investment will leave a big scar in the future..
My portfolio doesn’t just cater to dividend stocks. I hold $VFIAX (S&P 500 index fund) in my Roth IRA and $VTI (Total Stock Market ETF) in my taxable brokerage account. Two of my largest holdings. The individual dividend stock positions all complement the index holdings.
One point I don't understand to this day, is why do we need to buy bonds as we grow older? We know the S&P 500 has given good results in the long run why do I need to sell an index that will give greater results for bonds that don't even outperform inflation? This is insane to me! Am I alone in this?
If you are retired and do not want to deal with volatility and potentially having to wait a year or two to recover from a downturn it makes some sense
Not alone. Retired last spring. Almost no bonds. However I do have over a year's worth of expenses in treasury bills and dividends cover my normal expenses. I base my cash allocation on dollar amount not portfolio percentage. I expect my portfolio to continue growing and if it does, my allocation to stock will continue to increase.
The main reason given for a retired/older person to hold bonds, and why I hold cash, is when living on your portfolio you do not want to sell when the market is down. If you need a certain amount per month and the market is going up, great. But if the S&P 500 drops 50% as is somewhat common, now you have to sell twice as much to meet your needs. Much better to have some stable assets like cash or bonds that you can tap instead of selling while you wait for the market to recover.
Because dollar cost ravishing is real. Read up on sequencing risk. That's the reason for bonds and fixed income (or just holding a few years cash) allows you to not ravish the pot when it's at its weakest. In essence it's to do with the volatility of equities
Volatility does not equal risk. m.th-cam.com/video/JlgMSDYnT2o/w-d-xo.html
Have you talked about target date funds vs choosing an index?
your opinion on index funds or ETFs for a Roth IRA age 60, with planned retirement in 7-10 years?
BTW, really enjoy vids of yours I have watched so far!!
Thanks!
Smart take. Also, this guy's kinda jacked! Good for you dude!
You sold me on subscribing to your channel with the trio reference hah
I can see that, and if you want to be hands off a couple of index funds seem like the best option. I though, have a hard time with index funds. I see what is going on inside the fund and 🤦. Only 19.2% of my portfolio is in funds of any kind, and that is mostly because of a couple of small accounts I can't be bothered, plus my last 401(k) - no other option and not quite ready to roll it over. Holding individual companies I can see and control what is going on in my portfolio. Dividends are paying my expenses.
Respect on the alkaline trio reference!
🤣 you're the 4th Trio comment. Way more than I would of guessed before I released the video.
With millions of people indexing now, stocks are purchased every month by these massive funds, regardless of underlying fundamentals. Couple this with the Fed's manipulation of interest rates where they drove rates to 5,000 year lows, a huge bubble has been formed. With the national debt at $35T and operating deficits of $2T per year, the bond market is going to blow up. When the bubble goes pop, millions of people are going to be in the poor house. Look out below!
Ive been considering index funds but hate the idea of giving more power to agenda focused entity.And also they charge expense ratio.eff that
AK3 fan here! Maybe I’ll catch fire….
Nice! I wan't expecting anyone who watched this video to know who they are. That album was my first introduction to them when it came out and I've been hooked ever since.
Only those that jump off the roller coaster during the ride get hurt.
A sucker is born every minute so need to worry about running out of suckers trying to time and beat the market. With regards to volatility if your savings horizon is long 10+ years I'd r3commended tracking it using the ratchet method only update tour account balance tracking when it goes up when you look at your account you will only see the average upward movement of your investments
VFIAX forever. I max out my 401k and with the power of compounding interest and dividends, set it and forget it.
Is this video a satire ? 😅. I got confused.
Na, I’m a big fan of index funds and their ETF counterparts, but they aren’t flawless. I think it’s important to highlight the potential blind spots for those who may not fully understand how they work. However, these issues are relatively small and definitely not a reason to shy away from investing in them.
First!