# Index funds are Communist



## moXJO (8 October 2018)

All the whinging in the "biatch about general chat" thread did bring up an interesting subject. 
Index funds and passive investing. 

I have to admit that I haven't been that interested in trading the local market that much.

I came across an interesting article: 
https://www.bloomberg.com/amp/view/...dex-funds-communist?__twitter_impression=true

A claim from sanford c Bernstein:



> In a note titled "The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism," a team led by Head of Global Quantitative and European Equity Strategy Inigo Fraser-Jenkins, says that politicians and regulators need to be cognizant of the social case for active management in the investment industry.
> 
> "A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management," they write.




The article touches on some interesting points and future direction.
It will be interesting when AI becomes superior to other returns.


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## luutzu (9 October 2018)

moXJO said:


> All the whinging in the "biatch about general chat" thread did bring up an interesting subject.
> Index funds and passive investing.
> 
> I have to admit that I haven't been that interested in trading the local market that much.
> ...




AI will not improve investment management. Neither does active "professional", completely capitalistic "head I win, tail you lose" money management.

How the smart money and their high fees does for investors we already know. 

Most might not be aware of how often AI/Algorithm came close to crashing the global financial market. They're at the centre of all the crashes dating back to 1987 - a few years after computing power was unleashed on Wall St.

And socialism is not the same as communism.


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## sptrawler (9 October 2018)

moXJO said:


> All the whinging in the "biatch about general chat" thread did bring up an interesting subject.
> Index funds and passive investing.
> 
> I have to admit that I haven't been that interested in trading the local market that much.
> ...




Well most people's super, is tied up in market linked passive investment, so I guess everyone is caught up in it.lol


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## sptrawler (9 October 2018)

luutzu said:


> AI will not improve investment management. Neither does active "professional", completely capitalistic "head I win, tail you lose" money management.
> 
> How the smart money and their high fees does for investors we already know.
> 
> ...




You are right on to it.


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## Smurf1976 (9 October 2018)

My view on index investing is that it will come to be regarded in similar vein to 1990’s .com stocks and 2000’s subprime US mortgages.

I’m not predicting an imminent market crash but it’s inevitable there will be a decent downturn at some point. That’s just how markets work.

I expect that the next proper bear market, whenever it comes, will be blindingly fast compared to all before it.

With index funds and algorithmic trading now accounting for the overwhelming majority of share trading volume in major markets (notably US), it raises a very serious question.

When the tide turns, the algorithms start selling and we see money flowing out of index funds then who, exactly, are they going to sell those stocks to?

Who do you sell to in that situation?

Who?

And what exactly does occur when the index funds must sell, due to net redemptions, and the only buyers are offering token prices? Will the trade even go through? 

The situation is an incredibly volatile one in my view. All good so long as no fire starts.....


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## luutzu (9 October 2018)

sptrawler said:


> You are right on to it.




No one take my investment insight seriously in real life. I think it's because they don't see me being at all rich or something 

That and maybe they have an image of me being good at labour so I cannot possibly know what the heck I'm talking about when it come to the higher art of investing... that and I drive around in a Suzuki freakin Swift. 

Seeing a fair number of bad decisions, I told my wife that... you know, we'd be really rich if we had some money. 

She was chuckling too much to appreciate the insight of that one too


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## luutzu (9 October 2018)

Smurf1976 said:


> My view on index investing is that it will come to be regarded in similar vein to 1990’s .com stocks and 2000’s subprime US mortgages.
> 
> I’m not predicting an imminent market crash but it’s inevitable there will be a decent downturn at some point. That’s just how markets work.
> 
> ...




They sell among themselves. Front running each other, margin calling one another all the way down in a real hurry. Then some human intervention took place to stop the computer from an infinite loop. 

Even a guy like me is starting to notice it in a few stocks I happen to looked into. There's been about five stock [not the market, individual stock] crashes that I witnessed past two years.

Hikma, Piersons, McColls in the LSE.

Sigma, Sirtex, Santos a few years back... 

Might present great opportunities now and then though. So hurrah for AI.


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## sptrawler (9 October 2018)

luutzu said:


> No one take my investment insight seriously in real life. I think it's because they don't see me being at all rich or something
> 
> That and maybe they have an image of me being good at labour so I cannot possibly know what the heck I'm talking about when it come to the higher art of investing... that and I drive around in a Suzuki freakin Swift.
> 
> ...




You're sharper than a thai chilli, I just find the posts don't really seem to help someone looking for guidance, but maybe that is the desired result. .


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## luutzu (9 October 2018)

sptrawler said:


> You're sharper than a thai chilli, I just find the posts don't really seem to help someone looking for guidance, but maybe that is the desired result. .




People seek investment guidance from internet forums? Why? 

Whatever happen to AMP, CBA advisors?


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## sptrawler (9 October 2018)

luutzu said:


> People seek investment guidance from internet forums? Why?
> 
> Whatever happen to AMP, CBA advisors?




Nothing, they will bounce back when silly billy gets in and stops people investing their own money, because they will be penalised for investing in their SMSF.
The last thing Billy wants, is people looking after their own money, much better having the union looking after it and he can't be seen to be favouring so the retail funds will mop up also.


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## luutzu (9 October 2018)

sptrawler said:


> Nothing, they will bounce back when silly billy gets in and stops people investing their own money, because they will be penalised for investing in their SMSF.
> The last thing Billy wants, is people looking after their own money, much better having the union looking after it and he can't be seen to be favouring so the retail funds will mop up also.




He does? Fund Managers have unions?

Sounds like he's just looking after Martin Place. 

That and people shouldn't start believing that they too can lose their own money like a pro.


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## sptrawler (9 October 2018)

luutzu said:


> He does? Fund Managers have unions?
> 
> Sounds like he's just looking after Martin Place.
> 
> That and people shouldn't start believing that they too can lose their own money like a pro.



Or spend it it like a loser, instant gratification hit, with welfare safety net. 

The only problem, it makes you feel a bit sick, spending money just for the sake of it. It really is a sad World.


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## PZ99 (9 October 2018)

luutzu said:


> He does? *Fund Managers have unions?*
> 
> Sounds like he's just looking after Martin Place.
> 
> That and people shouldn't start believing that they too can lose their own money like a pro.



Other way round. Unions have fund managers. For example LUCRF super is owned by NUW.

For decades the unions had EBA's with exclusive deals where your super was compulsorily directed to a fund owned by that same union. You couldn't choose your own fund. So even if you weren't a union member you were still sponsoring them (and therefore the ALP) with super fees etc. 

http://workplaceinfo.com.au/payroll...hoice-of-super-fund-apply-to-enterprise-agmts

Of course, they're not index funds as per the topic but they work the same way. I'm all for union membership but there has to be freedom of choice. Not Kommy deals like the above.


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## PZ99 (9 October 2018)

PS: In case the link is paywalled...



Spoiler



*Does ‘choice of super fund’ apply to enterprise agmts?*





By Paul Munro on 22 March 2013
If an employer has a specified industry super fund under its enterprise agreement, does this override the choice-of-fund provisions in the Superannuation Guarantee legislation?

This question was recently sent to our Ask an Expert service.

Q  Our company employs the majority of employees under an enterprise agreement.

The agreement stipulates a specific industry superannuation fund into which employer contributions will be made as required under the Superannuation Guarantee (SG) legislation.

The agreement was approved by Fair Work Australia last year.

An employee has approached management insisting the SG employer contributions must be made to the superannuation fund of his choice, which happens to be a different compliant industry superannuation fund.

He claims he is entitled to choose the fund because of the choice-of-fund provisions prescribed by the relevant SG legislation.

He also stated that his right of choice had been complied with by the employer with respect to all his previous employment.

Does the relevant SG legislation override the provisions of our enterprise agreement?

A  A contribution to a fund by an employer complies with the choice-of-fund provisions under the _Superannuation Guarantee (Administration) Act 1992_ (Cth) (s32C) where a contribution, or part of the contribution, is made in accordance with certain industrial agreements.

One such agreement that is exempt from the choice of fund provisions under the relevant SG legislation is an enterprise agreement made under the _Fair Work Act 2009_. This is considered one of the advantages in having such a term regarding superannuation in an enterprise agreement.

In this case, because the employer is complying with the terms of an enterprise agreement approved under the Fair Work Act, the employee does not have the right to choice-of-fund provisions with respect to SG employer contributions.

Other agreements exempt

The relevant SG legislation also refers to the following agreements as exempt from the choice-of-fund provisions under the SG legislation where the employer contributions are made in accordance with the terms of the applicable agreement, including:

a workplace determination issued under the Fair Work Act
an Individual Transitional Employment Agreement (ITEA)
a collective agreement
a notional agreement preserving state awards (NAPSA), and in respect of salary or wages paid before 1 July 2006
a preserved state agreement
a state industrial award
an Australian Workplace Agreement (AWA)
a pre-reform certified agreement
a Div 2B state instrument
an old IR agreement


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## moXJO (9 October 2018)

luutzu said:


> And socialism is not the same as communism.



Just went with a clickbait title.

The rise in passive investing is obviously affecting managers bottom line. Given they like the fees active trading brings, it's no wonder they are having a cry.

As for AI it will change the market, as will quantum computers (when they iron out the kinks).

The options market had a decline in australia. It was tradeable early 2000 and then seemed to dry up. I'm not sure if it has come back at all recently. They did change parcel size from 1000 to 100 lots.


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## luutzu (9 October 2018)

moXJO said:


> Just went with a clickbait title.
> 
> The rise in passive investing is obviously affecting managers bottom line. Given they like the fees active trading brings, it's no wonder they are having a cry.
> 
> ...




Yea, brokers and active fund managers don't like lazy investors much. The "active" managers don't like AI much because a computer is way faster, and better, at apportioning large chunk of cash all over the place. 

I wouldn't say ever, but AI could never make intelligent business investment. 

They're unbeatable when it come to number crunching, pattern recognition and making sense of big data etc., but from what I understand of investing... there are just too many individual, company specific facts, accounting definition, managerial interpretation etc. that a super computer's power become pretty much useless.


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## luutzu (9 October 2018)

PZ99 said:


> Other way round. Unions have fund managers. For example LUCRF super is owned by NUW.
> 
> For decades the unions had EBA's with exclusive deals where your super was compulsorily directed to a fund owned by that same union. You couldn't choose your own fund. So even if you weren't a union member you were still sponsoring them (and therefore the ALP) with super fees etc.
> 
> ...




That's kommy-capitalism


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## Tisme (9 October 2018)

moXJO said:


> As for AI it will change the market, as will quantum computers (when they iron out the kinks).




This is where we are going to see a situation similar to social media, with algorithm programmers creating filters to handle bubbles created by other proprietary AI algorithms,  products that create echo chambers and others that counter that with more filters or logically alternate/opposing views.

Presumably govts will insist that AI investment has adequate protections for investors and funds, which means it must cater to social expectations and by extension social media. 

I will make a prediction here and suggest that when AI gets going there'll be farcebook accounts set up for each product and they will start arguing the toss amongst themselves, eventually garnering an admiration league of SJW types who want marriage equality for cyber bots.


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## SirRumpole (9 October 2018)

Tisme said:


> This is where we are going to see a situation similar to social media, with algorithm programmers creating filters to handle bubbles created by other proprietary AI algorithms,  products that create echo chambers and others that counter that with more filters or logically alternate/opposing views.
> 
> Presumably govts will insist that AI investment has adequate protections for investors and funds, which means it must cater to social expectations and by extension social media.
> 
> I will make a prediction here and suggest that when AI gets going there'll be farcebook accounts set up for each product and they will start arguing the toss amongst themselves, eventually garnering an admiration league of SJW types who want marriage equality for cyber bots.




Should index funds be banned in that case ?


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## Tisme (9 October 2018)

SirRumpole said:


> Should index funds be banned in that case ?




Deep machine learning still relies on patterns and decision making to reduce the determined degree of error, through aggregation of many partial truths or falsehoods to a achieve a desirable setpoint. The hard truths need to be established to measure the magnitude of partial truths and as we see here in ASF one person's truth is another person's lie and so essentially the closer AI gets to human intelligence the more a logical truth guess becomes a punt.

I see this in automation, where I identify a desirable outcome and utilise fuzzy logic instead of, say, a one input variable algorithm employing proportion, integration and/or derivitives to solve an error. The questions that need to be addressed are complex e.g. is the magnitude of error exponential, harmonic or linear, is it repeatable, is it of consequence;

worse is it entropic that will honour the laws of chaos and lead to maximum disorder and randomness = will it become idiotically human?


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## SirRumpole (9 October 2018)

Tisme said:


> worse is it entropic that will honour the laws of chaos and lead to maximum disorder and randomness = will it become idiotically human?




So AI will eventually understand fear and greed ?


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## Smurf1976 (9 October 2018)

SirRumpole said:


> Should index funds be banned in that case ?



The concept that index funds are a relatively safe investment relies on two things:

1. Index funds account for a small minority of the market both in terms of absolute stock ownership and trading volume. As such the actions of funds have no measurable influence on the underlying market itself.

2. The underlying market has a large number of participants, none of which individually have significant influence, in terms of both ownership wnd trading volume. Investing in an index fund thus captures the collective wisdom of these numerous participants.

Point 1 is no longer true now that index investing has become mainstream. Even “active” managers are often simply index funds at their core with just a few stocks added or omitted.

Point 2 would not apply today if, hypothetically, the non-human traders are mostly programmed so as to produce the same or similar response to given circumstances. There is a lack of proof in the context of market indices but various anecdotal evidence, and occurrences with individual stocks, does suggest a high degree of correlation in the way these algorithms operate.

If the situation is as I suspect it is then algorithmic trading and index tracking will be somewhere near the epicentre of the next major financial crisis. Whether or not it is the trigger event, it will still produce an extremely rapid decline with unknown levels financial contagion for those using leverage and unable to exit rapidly. 

All thoughts are my own, there’s nothing to link etc although most likely someone somewhere has done some analysis of similar things.

As for the communists, I’m not into those but if everyone invests in index funds then, so long as the funds are all tracking the same or highly correlated indexes, everyone gets the same outcome regardless of which fund they chose. That could be considered a form of collectivism I suppose, albeit one based around something at the heart of capitalism.


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## SirRumpole (9 October 2018)

Smurf1976 said:


> If the situation is as I suspect it is then algorithmic trading and index tracking will be somewhere near the epicentre of the next major financial crisis. Whether or not it is the trigger event, it will still produce an extremely rapid decline with unknown levels financial contagion for those using leverage and unable to exit rapidly.




I guess it stands to reason that if index funds are a large part of the market and they are all using similar algorithms then they have a large capacity to hyper inflate or hyper deflate the market quite quickly.

Don't know what the solution is. Regulatory ? 

Trying to regulate them without banning them altogether would seem very difficult.


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## willy1111 (9 October 2018)

With index funds like VAS...Vanguards ASX300 new funds just get allocated based on market cap as that is essentially what an index is.

Assuming a net inflow this would just push the markets along with no regard to value. Value investors may find the investing world a lot different.

If everyone just invested in index funds....I guess it would be kinda like a ponzi scheme...as long as new inflow continued markets would go up regardless of underlying value/profitability.  If there was more outflow than inflow they would go down regardless.

Lets hope that funds allocated to indexing don't get out of whack and cause this.


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## SirRumpole (9 October 2018)

“My advice to the trustee [of my will] could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”

- Warren Buffet


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## MrChow (10 October 2018)

What is the point of this topic / thread.


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## Smurf1976 (10 October 2018)

My interpretation of it is that socialism, which is not the same as communism but is commonly associated with it, results in everyone receiving the same outcome regardless of effort.

So to an index fund results in everyone who invests in it, or any other fund tracking the same index, receiving the same outcome.

That’s the only link I can see.


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## SirRumpole (10 October 2018)

Communism you get no choice.

Socialism you can vote for.

People choose to put their money in index funds so it's not communism, but IF's may be mutually agreed socialism.

But are we going to ban them on that basis ?


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## So_Cynical (10 October 2018)

Smurf1976 said:


> When the tide turns, the algorithms start selling and we see money flowing out of index funds then who, exactly, are they going to sell those stocks to?
> 
> Who do you sell to in that situation?
> 
> ...




The market maker will un-bundle the share, thus VAS - ASX300 ETF the market maker will sell the 300 stocks at market, the greater the volume of VAS sell (at market) orders not covered by at market buy orders the greater the un-bundling.


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## Smurf1976 (10 October 2018)

So_Cynical said:


> The market maker will un-bundle the share, thus VAS - ASX300 ETF the market maker will sell the 300 stocks at market, the greater the volume of VAS sell (at market) orders not covered by at market buy orders the greater the un-bundling.



What I’m concerned about though is that according to the reports I’ve heard (seemed credible but I’ve no way to prove or disprove) the index funds and algorithmic traders combined account for ~90% of trading volume of stocks (referring specifically to the US S&P500 stocks).

So if they collectively sell then the buyers for these stocks are ???

The underlying assumption there is that holders of any fund tracking a particular index would, as a group, act the same way. Eg if investors are exitjngVanguard S&P500 funds then as a whole investors would also be exiting other S&P500 index funds at the same time.

Time will tell.


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## sptrawler (10 October 2018)

Smurf1976 said:


> What I’m concerned about though is that according to the reports I’ve heard (seemed credible but I’ve no way to prove or disprove) the index funds and algorithmic traders combined account for ~90% of trading volume of stocks (referring specifically to the US S&P500 stocks).
> 
> So if they collectively sell then the buyers for these stocks are ???
> 
> ...



The biggest problem with ETF's is everyone will want to sell out, when it turns to $hite. Therefore it could become a domino effect, every one sells, computer say's sell.
That's why I chose to lean towards LIC's.
Probably won't help, but it made more sense to my brain, and the outcome I wanted.
Having said that, I still carry enough cash, for a few years of nothing.

Hopefully then I will get a pension, but I doubt it, by then only those on a pension will get one.
So who is the dick.


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## So_Cynical (11 October 2018)

Smurf1976 said:


> So if they collectively sell then the buyers for these stocks are ???




There has been some commentary over the last couple of years about this and the consensus is that with the weight of money in index ETF's and the marker makers basically dumping shares into the buy side, its gona be ugly, the down days should be sharply down, someones always on the buy side..right.


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## luutzu (11 October 2018)

willy1111 said:


> With index funds like VAS...Vanguards ASX300 new funds just get allocated based on market cap as that is essentially what an index is.
> 
> Assuming a net inflow this would just push the markets along with no regard to value. Value investors may find the investing world a lot different.
> 
> ...




I think these kind of development is the best thing a value investor could hope for. 

When most eveyone is playing follow the (market cap) leader, and you don't... there'll be plenty of basement bargains every now and then.

Just get the know quality businesses very well, sit and wait for some (minor) disappointment and you can have it for half price or less. 

Yea, it is somewhat of a ponzi scheme. Particularly now, and more so in the future, as (read on Reuters recently) more mergers and acquisitions are permitted - what anti-trust? Monopoly is good, isn't it?

With that the amount of available companies out there will be reduced; more stocks buy back then ever; lots of chunk being floated; more cash then capitalist know what to do with... all chasing smaller and smaller number of listed quality businesses available.


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## moXJO (12 October 2018)

MrChow said:


> What is the point of this topic / thread.



Implications of index funds on the market.
Unfortunately I gave it a stupid title thinking it was going to spend more time in General.


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## Darc Knight (12 October 2018)

I think us Index Fund investors have been driving Mo's stock prices higher. We're to blame.
Looks like I'm moving away from Indexes to avoid this potential bubble.


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## Darc Knight (12 October 2018)

"
Without Googling, try to guess who said the following quote: “If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.”

Give up?
The speaker, believe it or not, is John Bogle, founder of Vanguard, which has been at the forefront of indexing. Bogle made the comment last year at the Berkshire Hathaway shareholder meeting, basically admitting that there’s a limit to the amount of passive investing the market can handle and still function efficiently."

https://www.forbes.com/sites/greats...ed-for-a-passive-index-meltdown/#1153e3b4413e


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## Darc Knight (12 October 2018)

"Just 36% of actively managed U.S. stock funds outperformed index mutual funds and exchange-traded funds in the year ended June 30, according to data compiled by research firm Morningstar Inc. That is down from the 43% that did so in 2017."
https://www.wsj.com/articles/stock-pickers-struggle-to-beat-index-funds-once-again-1538218801


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## luutzu (12 October 2018)

Darc Knight said:


> "
> Without Googling, try to guess who said the following quote: “If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.”
> 
> Give up?
> ...




Well... it's a bit like saying that the market is efficient so just flog (other people's) hard earned cash down in the hope that the other guys are the ones keeping it efficient.

If everyone act like that, the market is as accurate as long as there are money and fees to be "earned".


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## Smurf1976 (12 October 2018)

Logic says index funds will stay true to their intent only so long as they do not influence the price of shares in the index they track.

Once they become a substantial portion of the market, well then they cease tapping into the collective wisdom of investors because the funds themselves have become what they seek to follow.

Considering that it’s not just index funds as such but also active fund managers who hug the index, plus individual investors who won’t buy anything not in an index, and it all looks like a self-fulfilling prophecy to me. Great on the way up, keep clear on the way down.

I’ll go as far as saying that index investing is where the bubble is. Ask any random individual how to invest and the vast majority will give you an answer that, whilst perhaps not clearly expressed in the correct terminology, says index funds in practice.

Just my thoughts as someone who avoids following the herd.


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## Darc Knight (12 October 2018)

Smurf1976 said:


> Logic says index funds will stay true to their intent only so long as they do not influence the price of shares in the index they track.
> 
> Once they become a substantial portion of the market, well then they cease tapping into the collective wisdom of investors because the funds themselves have become what they seek to follow.
> 
> ...




Yep thats what I'm doing, avoiding them on the way down.
Valuers are factoring in a margin for how much Index Funds are inflating values. The larger the Company is in the Index, the larger the Index Fund effect inflates its value apparently.

I guess that's some of the reason Apple, Amazon etc are over valued?


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## luutzu (12 October 2018)

Darc Knight said:


> Yep thats what I'm doing, avoiding them on the way down.
> Valuers are factoring in a margin for how much Index Funds are inflating values. The larger the Company is in the Index, the larger the Index Fund effect inflates its value apparently.
> 
> I guess that's some of the reason Apple, Amazon etc are over valued?




One of those feedback loop feeding on itself I guess.

So AA got big on its growth; the market likes so more money pours in; it got bigger; index fund buys big, making big bigger. 

Then everyone assumes that smart analysts are following the big guys so it can't be that wrong. 

Goes on until something disappoints and pop it goes.


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## moXJO (12 October 2018)

Another article discusses index funds.
https://www.google.com.au/amp/s/seekingalpha.com/amp/article/4077202-danger-index-funds


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## luutzu (13 October 2018)

moXJO said:


> Another article discusses index funds.
> https://www.google.com.au/amp/s/seekingalpha.com/amp/article/4077202-danger-index-funds




Wondering if it is possible these articles about index fund being a bad idea, and there are some merits to that argument as others have pointed out above... 

But is it possible that they're hit pieces? You know, enticing investors back into the active, smart, professional money managers who does just as poorly?

With sptrawler's recent points on Labor trying to discourage SMSF; these articles about how bad Indexing is... someone's losing prestige and trying to push and lure people back in I reckon.


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## moXJO (13 October 2018)

luutzu said:


> Wondering if it is possible these articles about index fund being a bad idea, and there are some merits to that argument as others have pointed out above...
> 
> But is it possible that they're hit pieces? You know, enticing investors back into the active, smart, professional money managers who does just as poorly?
> 
> With sptrawler's recent points on Labor trying to discourage SMSF; these articles about how bad Indexing is... someone's losing prestige and trying to push and lure people back in I reckon.



It could be fund managers putting on hit pieces.
 But at some point doesn’t the market die off, if index funds are the go to for the majority? 
What about companies coming to market for money? 
Will the pool of funds be smaller?

Seems like a few issues for future trading.

Australian options were big for a while and then died. You literally had to force a mm for a price. It felt like it turned into a very narrow field.  Possibly due to cfds coming onto market at the time.
No idea on options trading  recently  though.

 But trading trends do change. Look at crypto coin for example. Funds were furiously pumped into it. And they were basically worthless. 
Makes me wonder what the numbers of share traders there are under the age of 30 these days.


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## Smurf1976 (13 October 2018)

luutzu said:


> But is it possible that they're hit pieces? You know, enticing investors back into the active, smart, professional money managers who does just as poorly?



My comments are my own original thoughts and I sure aren’t a professional money manager.

I do agree with the basic thought though that professional managers would like to have more funds under their management.

On that note I’ll simply say that I’d take indexing over them anyday and that comes from having once lost serious $$$ due to *** professional manager piling into the .com bubble, an act which amounts to outright incompetence in my view. If a professional can’t spot a bubble then they’re in the wrong job.

My view is that people should manage their own financial decisions so far as possible. For those not interested or able, an index fund with equal weighting not based on market cap, so that’s 0.5% into each of the ASX200 stocks, should have less group think aspects when compared to one which tracks the index as such with market cap weighting.

Make sure the fund does actually own the underlying assets - anything synthetic is prone to blowing up in a crisis.


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## Darc Knight (13 October 2018)

luutzu said:


> One of those feedback loop feeding on itself I guess.
> 
> So AA got big on its growth; the market likes so more money pours in; it got bigger; index fund buys big, making big bigger.
> 
> ...




You think the theory of Index Funds over valuing index Stocks might be a con?

I'm no Economist, but if something is being blindly bought in bulk due to its inclusion in an Index, wouldn't that inflate it's market Price? Price and Demand?

Secondly, wouldn't it's market value then exceed it's Intrinsic value and keep on doing so?


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## sptrawler (13 October 2018)

I have stayed away from eft, but as I have said earlier, I do have some in lics. As smurph and others have said, index funds that follow the market, by their nature have to sell when the market goes down, from my understanding lics dont have a requirement to do this.
Someone could correct me if I'm wrong, again it is only my belief.


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## Darc Knight (13 October 2018)

Smurf1976 said:


> What I’m concerned about though is that according to the reports I’ve heard (seemed credible but I’ve no way to prove or disprove) the index funds and algorithmic traders combined account for ~90% of trading volume of stocks (referring specifically to the US S&P500 stocks).




In 2017 Index Funds accounted for 35℅, so 35-40% now?
No idea about Al Trading.


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## willy1111 (13 October 2018)

sptrawler said:


> As smurph and others have said, index funds that follow the market, by their nature have to sell when the market goes down, from my understanding lics dont have a requirement to do this.
> Someone could correct me if I'm wrong, again it is only my belief.




Wouldn't they only have to sell if the people investing in them wanted to redeem their capital? 

Otherwise they just stay 100% invested the whole time and the value of the index fund portfolio just goes up and down with the market (index).  STW (tracks the ASX200) pays distributions/dividend payments quarterley, VAS(tracks the ASX300) does the same - so one could live off the distributions/dividend payments and keep capital 100% invested through the ups and downs which would mean no selling when the market goes down.

For those still working, they may invest a set amount over a set period, ie each month they put $1,000 into the market index fund and it is like dollar cost averaging into the index - so when the market is down they buy more units - no need to sell - eventual goal is to live off the distributions/dividends when they are large enough - they feel well diversified as their capital is invested in top 200/300 stocks.


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## luutzu (13 October 2018)

sptrawler said:


> I have stayed away from eft, but as I have said earlier, I do have some in lics. As smurph and others have said, index funds that follow the market, by their nature have to sell when the market goes down, from my understanding lics dont have a requirement to do this.
> Someone could correct me if I'm wrong, again it is only my belief.




I suppose they don't have to. But then their bonuses dictate that they better follow the market. 

As they say, it's better for your genius and paycheck if you follow the crowd and everybody got it wrong, too. That is better than trying to be a hero, risk your job and look stupid when you're wrong... wrong through either being wrong or just early. 

Jeez, this is what a first world problem look like... too much money we don't know what to do with.


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## Value Hunter (28 October 2018)

I wonder if there is any info on for Australia on what percentage of market participants actually even consider company fundamentals? Firstly you have index funds, then you have high frequency trading, AI, quant strategies, etc, then on top of that you have the pure chartists/techinical traders as well as the macro hedge funds. Whats left over is those who actually look at company fundamentals (certain professional and retail investors/speculators). My guess is that people that actually look at company specific fundamentals would make up no more than 40-50% of the market in Australia and in the U.S. it would be something like 20-30%. I would be interested to see if anybody has any hard data on this.


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## willy1111 (28 October 2018)

Value Hunter said:


> I wonder if there is any info on for Australia on what percentage of market participants actually even consider company fundamentals? Firstly you have index funds, then you have high frequency trading, AI, quant strategies, etc, then on top of that you have the pure chartists/techinical traders as well as the macro hedge funds. Whats left over is those who actually look at company fundamentals (certain professional and retail investors/speculators). My guess is that people that actually look at company specific fundamentals would make up no more than 40-50% of the market in Australia and in the U.S. it would be something like 20-30%. I would be interested to see if anybody has any hard data on this.




Not sure how you would find this kind of data?

Maybe start a thread here with a poll asking people's style towards the market, ie Indexing, LIC's, Dividend Income, Fundamental, Systematic, Discretionary - not sure what categories to put them in.

That would at least give us a snapshot of the styles applied among our community here.


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## skyQuake (28 October 2018)

As far as I know index funds do not participate in these volatile market moves. Sure redemptions are more likely to occur when the market is falling off a cliff, but i would assume most investors in index funds are there precisely to not worry about the short or even med term fluctuations.


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## sptrawler (26 November 2020)

sptrawler said:


> I have stayed away from eft, but as I have said earlier, I do have some in lics. As smurph and others have said, index funds that follow the market, by their nature have to sell when the market goes down, from my understanding lics dont have a requirement to do this.
> Someone could correct me if I'm wrong, again it is only my belief.



Well the LIC's that I bought, not long before the virus took hold have recovered remarkedly well and paid a dividend through the crisis AFI and MLT. I'm impressed, which by the way is fairly easy to do.lol
The banks I bought for dividend have paid FA and I'm still down heaps on purchase price, which I purchased 10 years ago.
Yes you have to hate those banks, someone should close them down and let borrowers get their loans through the pawn brokers.lol


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## Belli (27 November 2020)

sptrawler said:


> Well the LIC's that I bought, not long before the virus took hold have recovered remarkedly well and paid a dividend through the crisis AFI and MLT. I'm impressed, which by the way is fairly easy to do.lol
> The banks I bought for dividend have paid FA and I'm still down heaps on purchase price, which I purchased 10 years ago.
> Yes you have to hate those banks, someone should close them down and let borrowers get their loans through the pawn brokers.lol




Not up with the price movements but I do know my income will be up as I hold more of them.  Case in point being WHF as it will be up by around 8% for the forthcoming payment compared with the pcp.  Participating in the SPP also helped of course.

May not necessarily apply with the ETFs I hold although I have purchased more.

It's the main reason I invest in the share market.  Prices seem to go up or down or somewhere in between the two for some strange reason.


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