Ok, in worst case, one needs to work a bit longer. If you’re scared of that possibility, then you should lower your market exposure - but in that case, surprise, surprise, you will also have to work longer due to lower expected returns in case there’s no crisis in the near future. I don’t think there’s a sure way around this - most likely you just need to be flexible and stay invested.
Big ERN has an awesome blog, but as a former FED analyst he’s too focused on economy fundamentals - for example, in 2008 all major economic indicators were positive and most economists, including FED economists, were positive about the state of economy. Crash was unexpected. It usually is unexpected.
“Over the last decade or so, we’ve seen an incredible rise in so-called passive investing. While definitions differ over what this means, we’ve seen more and more money poured into index funds (which own every stock in a given basket). Meanwhile, money has been yanked away from money managers who attempt to select individual stocks. One school of thought argues that this is a positive, in part due to lower fees. But is there a dark side? On this week’s episode, we speak to Mike Green of hedge fund Logica Capital, who argues that the trend is causing major market distortions that will eventually unwind with ugly consequences.”
Out of curiosity, can those videos but summarized in 1-2 sentences? (I find the signal/noise ratio pretty bad personally, I guess it’s more lucrative for them than text because ads on video are more expensive…).
I expect that some companies are playing with the index found in order to support the price of the shares. One example for me is KTM (The motobike company) which entered the SIX exchange but was already on the austrian stock exchange before. Automatically an index found following the SPI will buy some KTM and support the price. However I doubt that the traders within an index found are dumb people and if the price wants to go down in such an introduction on the market they have the freedom to let it go down in order to buy at a better price.
One positive aspect with index founds is that Vanguard or Blackrock have more power than myself to represent my interest at the shareholder meeting. If I buy directly US or european shares I am unable to vote and my voice will be used according to the recomemndation of the board.
Quantitative easing is bringing the price up with money that nobody had to give nether sweat nor blood to get it. The Swiss National Bank is a good example of such institution pushing the price up.
I think he does have a point. I also believe that index funds can only make sense upto a limit. And most likely regulations need to evolve to regulate how much liquidity they need to hold. Also there should be some sort of rules on what % of a company can passive investment funds hold (i do not know how to control that though)
For example. they should be able to manage X% outflows without crashing the market. I was a bit surprized to hear that Vanguard holds less than 100 MM cash for 1.5 Trillion asset size (believe comment was made for VTI). If banks are regulated to hold enough cash, index funds need to be regulated in similar way. Let`s face it, people use Index funds as bank accounts with higher interests.
We noticed a similar situation in small cap funds market in India. The funds (not index) started pushing too much money in small caps. This caused a frothy market and very high asset prices. There was a fear if investors start to pull money, there wont be enough buyers to buy the stocks of these small companies which can cause serious crash. The regulators came in and asked funds to prove that they are liquid. They all had to go through stress test. Normally these funds try to hold a certain portion of Large caps stocks to manage liquidity
Why would they need more cash? (what would it be used for). Equity is volatile by definition, if X% want out of equity we should expect the price to crash. It’s not even a matter of active vs. passive here.
If people get out of equity fund, someone need to buy the equity from them somewhere (usually market makers), and yes if many people do that it will drive the price down.
(that’s why there’s a premium for equity)
But yes bubbles are a risk, but don’t think we can blame passive for it, it’s investors who decide to pile into it.
Well. For markets to function properly, the largest share holders cannot be the ones selling in big chunks. Hence as passive grows, it’s a responsibility of these funds to be liquid. It’s for their benefit and everyone else.
Selling equity is one thing. But selling at whatever price is another thing. Thus index funds should be in position to liquidate at a pace which is moderate. If they don’t have liquidity they won’t be able to do that.
I am not blaming anyone. I am just saying regulators should build some guardrails.
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