Every study over the past 50 years has demonstrated that active stock managers cannot outperform a passive stock index over time (eg 10 years).
What gets some people confused is: if you check a listing of all mutual funds/etfs with their 10 year performance, you will always see some that outperformed the S&P500. But the secret is: those leaders change every month or year. Remember: if you fill a football stadium with 100,000 people and everyone tosses a coin with those tossing tails required to leave, someone is going to toss heads 16 times in a row and be the only one left standing. Everyone would consider her a god of coin tossing. The problem being, do it again tomorrow and it would be a very bad bet to bet on her being the winner two days in a row.
Long story short: active stock picking doesn't work. It has been proven it doesn't work. Active fund managers cannot beat passive indexes, which is why passive index funds now control over 50% of the mutual fund market. And who exactly are the people raising arguments about the "dangers" of passive investing? Answer: the stock managers who engage in active stock picking and who are competing against passive indexes, and losing. It's actually quite pathetic.
Passive investing may well be in the best interest of each individual when regarded separately and yet when everyone does it, makes the market worse and riskier for everyone. Which from what I can tell is what TFA is arguing. It’s like a giant society-wide prisoner’s dilemma.
On individual scale it is effective investment tool. When too large part of investment is passive, it distorts the price discovery. Prices move higher, because they move higher... It works until it does not.
Essentially more money gets poured in higher the fraction of total market cap is. And same if when something drops in market cap. Which in some scenarios clearly can mean not optimal distribution of value. Albeit it does looks like great "wealth" generation if you get to sell on the way up or at top.
I have seen zero evidence that passive index investing is having any deleterious impacts on market pricing. If people are putting their money into stocks, it really doesn't matter if they buy a small piece of the entire market (at current stock prices) or if they put the money into one stock (which then impacts that stock differently than 'buying the market').
But, at the end of the day, this is only an issue for money managers who are losing customers to passive index funds. For individual investors who want the best return, there is no issue.
Every study over the past 50 years has demonstrated that active stock managers cannot outperform a passive stock index over time (eg 10 years).
What gets some people confused is: if you check a listing of all mutual funds/etfs with their 10 year performance, you will always see some that outperformed the S&P500. But the secret is: those leaders change every month or year. Remember: if you fill a football stadium with 100,000 people and everyone tosses a coin with those tossing tails required to leave, someone is going to toss heads 16 times in a row and be the only one left standing. Everyone would consider her a god of coin tossing. The problem being, do it again tomorrow and it would be a very bad bet to bet on her being the winner two days in a row.
Long story short: active stock picking doesn't work. It has been proven it doesn't work. Active fund managers cannot beat passive indexes, which is why passive index funds now control over 50% of the mutual fund market. And who exactly are the people raising arguments about the "dangers" of passive investing? Answer: the stock managers who engage in active stock picking and who are competing against passive indexes, and losing. It's actually quite pathetic.
Passive investing may well be in the best interest of each individual when regarded separately and yet when everyone does it, makes the market worse and riskier for everyone. Which from what I can tell is what TFA is arguing. It’s like a giant society-wide prisoner’s dilemma.
On individual scale it is effective investment tool. When too large part of investment is passive, it distorts the price discovery. Prices move higher, because they move higher... It works until it does not.
Essentially more money gets poured in higher the fraction of total market cap is. And same if when something drops in market cap. Which in some scenarios clearly can mean not optimal distribution of value. Albeit it does looks like great "wealth" generation if you get to sell on the way up or at top.
I have seen zero evidence that passive index investing is having any deleterious impacts on market pricing. If people are putting their money into stocks, it really doesn't matter if they buy a small piece of the entire market (at current stock prices) or if they put the money into one stock (which then impacts that stock differently than 'buying the market').
But, at the end of the day, this is only an issue for money managers who are losing customers to passive index funds. For individual investors who want the best return, there is no issue.