Most people [Is TSM not the best choice for informed investors?]

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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

secondopinion wrote: Thu Sep 23, 2021 11:06 am
bertilak wrote: Thu Sep 23, 2021 10:59 am
metacritic wrote: Thu Sep 23, 2021 10:05 am 99.9 percent is also "most people." Why are you so sure that 51 percent are able to consistently beat the market? The consistency aspect is absolutely crucial, not the year-to-year aspect of the figure you suggest.
I'm not "sure" and I'm not suggesting any figure. I'm saying advice that includes the phrase "most people" leaves the point ambiguous.

How can anyone know if the advice applies to them or not? What is the characteristic "most people" have that prevents them from improving on the market return? Does the reader have that characteristic? Perhaps not, even if "most people" do. How can (or should) someone work themselves out of that hapless "most people" class?

Actually, "most people" probably don't like being lumped in with that "most people" class: They want to think of themselves as special, unique, perhaps even better.

Don't just say "most people" with out further clarification! As I said, it is wishy-washy.
Only the last quality, better-ness, is in error. I think everyone is unique in their own way; the question is whether that applies to investing, let alone at getting better returns. Most do not know what they are doing with investing, even those who think they know.
Being in error, or not, is not the point. Granting someone's specialness and uniqueness, does that mean "most people" investment advice is not for them? I'm not trying to say it is or isn't but that it is ambiguous. Saying that the advice holds for "most people" may lead many to think "Well, that's not me!" Perhaps some of them are right, but why and which ones?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by secondopinion »

bertilak wrote: Thu Sep 23, 2021 11:10 am
secondopinion wrote: Thu Sep 23, 2021 11:06 am
bertilak wrote: Thu Sep 23, 2021 10:59 am
metacritic wrote: Thu Sep 23, 2021 10:05 am 99.9 percent is also "most people." Why are you so sure that 51 percent are able to consistently beat the market? The consistency aspect is absolutely crucial, not the year-to-year aspect of the figure you suggest.
I'm not "sure" and I'm not suggesting any figure. I'm saying advice that includes the phrase "most people" leaves the point ambiguous.

How can anyone know if the advice applies to them or not? What is the characteristic "most people" have that prevents them from improving on the market return? Does the reader have that characteristic? Perhaps not, even if "most people" do. How can (or should) someone work themselves out of that hapless "most people" class?

Actually, "most people" probably don't like being lumped in with that "most people" class: They want to think of themselves as special, unique, perhaps even better.

Don't just say "most people" with out further clarification! As I said, it is wishy-washy.
Only the last quality, better-ness, is in error. I think everyone is unique in their own way; the question is whether that applies to investing, let alone at getting better returns. Most do not know what they are doing with investing, even those who think they know.
Being in error, or not, is not the point. Granting someone's specialness and uniqueness, does that mean "most people" investment advice is not for them? I'm not trying to say it is or isn't but that it is ambiguous.
You are right that it is ambiguous; that is partly why I do my own thing.

If they have unique needs, then they should deviate from the TSM. But the question is how much? And I cannot guess for a random what will fix what. Since most index advisors do not want to write 1000s of options where only one works for that person, they pick the average and hopefully get a decent option.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by afan »

The market sets prices based on consensus estimated expected risk-adjusted returns. The opinions that matter the most are those of institutions that trade large dollar amounts of stocks. Their decisions to buy, sell or do neither dominate the price levels. The opinions of individual small investors can only drive prices for the smallest of microcap stocks. If many individual investors collectively start buying or selling they can move stock prices of somewhat larger stocks.

The "risk" in risk-adjusted returns encompasses multiple elements of risk, including but not solely volatility, as priced by market participants. Since the prices are set primarily by large institutional investors, their pricing of risk is what matters. To the extent that an individual weighs, for example, skewness, as more or less important in evaluating risk-adjusted return, that investor may have a different opinion about the value of a particular risk/return tradeoff than does the market as a whole.

If an investor is less repelled by negative skewness than is the market on average, then that investor can choose negatively skewed expected returns and find that those assets are on sale at a discount, since this particular investor would happily pay the same amount for a strongly negatively skewed investment than would the market.

The challenge is determining whether one's individual utility function is different from the market average and if so, how it differs.
Since most people don't know their utility functions and most don't know how their functions differ from the market average, they should adopt a null position that their risk preferences are the same as average.

I suspect that there are very few people who know their utility functions. Perhaps some economists or serious hobbyists. For everyone else, the market portfolio will have the consensus estimated best expected risk adjusted return.

I stick with the market portfolio because I am sure I don't know whether or how my utility function differs from that of the market as a whole. Plus, I can get market returns essentially for free.
Last edited by afan on Fri Sep 24, 2021 6:21 am, edited 1 time in total.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by David Jay »

afan wrote: Thu Sep 23, 2021 5:25 pm The market sets prices based on consensus estimated expected risk-adjusted returns. The opinions that matter the most are those of institutions that trade large dollar amounts of stocks. Their decisions to buy, sell or do neither dominate the price levels. The opinions of individual small investors can only drive prices for the smallest of microcap stocks. If many individual investors collectively start buying or selling they can move stock prices of somewhat larger stocks.

The "risk" in risk-adjusted returns encompasses multiple elements of risk, including but not solely volatility, as priced by market participants. Since the prices are set primarily by large institutional investors, their pricing of risk is what matters. To the extent that an individual weighs, for example, skewness, as more or less important in evaluating risk-adjusted return, that investor may have a different opinion about the value of a particular risk/return tradeoff than does the market as a whole.

If an investor is less repelled by negative skewness than is the market on average, then that investor can choose negatively skewed expected returns and find that those assets are on sale at a discount, since this particular investor would happily pay the same amount for a strongly negatively skewed investment than would the market.

The challenge is determining whether one's individual utility function is different from the market average and if so, how it differs.
Since most people don't know their utility functions and most don't know how their functions differ from the market average, they should adopt a null position that their risk preferences are the same as average.

I suspect that there are very few people who know their utility functions. Perhaps some economists or serious hobbyists. For everyone else, the market portfolio is will have the consensus estimated best expected risk adjusted return.

I stick with the market portfolio because I am sure I don't know whether or how my utility function differs from that of the market as a whole. Plus, I can get market returns essentially for free.
Well said. And I doubt that one person in 10,000 can accurately describe their financial utility functions. Which suggests that market portfolios are appropriate for virtually everyone (although many may believe that they are "different").
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

David Jay wrote: Thu Sep 23, 2021 5:34 pm Well said. And I doubt that one person in 10,000 can accurately describe their financial utility functions. Which suggests that market portfolios are appropriate for virtually everyone (although many may believe that they are "different").
In practice cannot one ignore things like utility function, risk skew, factor tilts and whatnot? Risk can be adjusted by a simple adjustment to one's stock/bond AA. Is TSM truly not right for the stock allocation under some characteristic not shared by "most people?"
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Re: Most people

Post by dziuniek »

reln wrote: Wed Sep 22, 2021 4:23 pm
bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
If you're smart enough to beat the market or if you're willing to take the risk of underperforming to beat the market, then you should try to beat it. For everyone else that isn't either smart enough or risk taking enough, TSM is a fine solution.
In my case atleast, better lucky than smart. :twisted: :sharebeer
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Taylor Larimore »

Bogleheads:

For most people, I believe a Total Stock Market Index Fund (TSM) IS the best choice for informed investors. These experts agree:

viewtopic.php?f=10&t=156579

Best wishes.
Taylor
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by David Jay »

bertilak wrote: Thu Sep 23, 2021 5:57 pm
David Jay wrote: Thu Sep 23, 2021 5:34 pm Well said. And I doubt that one person in 10,000 can accurately describe their financial utility functions. Which suggests that market portfolios are appropriate for virtually everyone (although many may believe that they are "different").
In practice cannot one ignore things like utility function, risk skew, factor tilts and whatnot? Risk can be adjusted by a simple adjustment to one's stock/bond AA. Is TSM truly not right for the stock allocation under some characteristic not shared by "most people?"
For someone who seeks positive skew in their risk-taking, TSM is likely not perceived as being appropriate (even though it likely is). The longer I am on this board the more I see investing as primarily behavioral, not technical.
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Re: Most people

Post by HomerJ »

namajones wrote: Wed Sep 22, 2021 4:34 pm I've had the best luck in life not doing what "most people" do.
Most people don't invest in TSM.

Most people SHOULD.

But since most don't, you can still go against the wisdom of the dumb crowds and be the smart one investing in TSM.
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Re: Most people

Post by namajones »

HomerJ wrote: Thu Sep 23, 2021 6:22 pm
namajones wrote: Wed Sep 22, 2021 4:34 pm I've had the best luck in life not doing what "most people" do.
Most people don't invest in TSM.

Most people SHOULD.

But since most don't, you can still go against the wisdom of the dumb crowds and be the smart one investing in TSM.
No idea what TSM is--and don't care.

Also don't care about being "the smart one."
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Re: Most people

Post by StartedAt22 »

namajones wrote: Fri Sep 24, 2021 3:42 am
HomerJ wrote: Thu Sep 23, 2021 6:22 pm
namajones wrote: Wed Sep 22, 2021 4:34 pm I've had the best luck in life not doing what "most people" do.
Most people don't invest in TSM.

Most people SHOULD.

But since most don't, you can still go against the wisdom of the dumb crowds and be the smart one investing in TSM.
No idea what TSM is--and don't care.

Also don't care about being "the smart one."
Quite the contrarian, aren't you!
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by afan »

TSM="Total Stock Market". A capitalization-weighted portfolio of US stocks. An excellent proxy for the stock market as a whole. Extremely low cost. In its most efficient form (the ETF) it is effectively free. No need for expensive advisers. No high expense ratios to capture the tilts. No high transaction costs to create and maintain the tilted portfolios.

David Jay raises a good point about those who think they know their utility functions: Are they correct in their beliefs? It is difficult to know one's function and even more difficult to test the accuracy of that presumption.

Another consideration that comes up with factor investing-Many people seem to look at the risk characteristics of factor tilted portfolios and convince themselves that they prefer those risks to those of the market. That is, they do it backwards. They see something that, perhaps over some periods of time, generated higher returns than the market at the cost of increases in risk. They then declare that they prefer those risks to justify why they chase this performance. Apparently many investors find this backward approach appealing. It lets them think they have beaten the market, when all they have done is increase their risk.

Staying with TSM eliminates this sort of thinking for those who are susceptible to it.

Did I mention that it is free?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

afan wrote: Fri Sep 24, 2021 6:31 am TSM="Total Stock Market". A capitalization-weighted portfolio of US stocks. An excellent proxy for the stock market as a whole. Extremely low cost. In its most efficient form (the ETF) it is effectively free. No need for expensive advisers. No high expense ratios to capture the tilts. No high transaction costs to create and maintain the tilted portfolios.

David Jay raises a good point about those who think they know their utility functions: Are they correct in their beliefs? It is difficult to know one's function and even more difficult to test the accuracy of that presumption.

Another consideration that comes up with factor investing-Many people seem to look at the risk characteristics of factor tilted portfolios and convince themselves that they prefer those risks to those of the market. That is, they do it backwards. They see something that, perhaps over some periods of time, generated higher returns than the market at the cost of increases in risk. They then declare that they prefer those risks to justify why they chase this performance. Apparently many investors find this backward approach appealing. It lets them think they have beaten the market, when all they have done is increase their risk.

Staying with TSM eliminates this sort of thinking for those who are susceptible to it.

Did I mention that it is free?
Well said!

And not a vague "most people" disclaimer in sight!
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by diabelli »

Standalone companies don't last forever, even the best of them.
How will you know when to take profits and exit your positions?
I'd have no idea and index funds eliminate that problem for me.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by psteinx »

David Jay wrote: Thu Sep 23, 2021 5:34 pm
afan wrote: Thu Sep 23, 2021 5:25 pm...I suspect that there are very few people who know their utility functions. Perhaps some economists or serious hobbyists. For everyone else, the market portfolio is will have the consensus estimated best expected risk adjusted return...
Well said. And I doubt that one person in 10,000 can accurately describe their financial utility functions. Which suggests that market portfolios are appropriate for virtually everyone (although many may believe that they are "different").
This overstates the case significantly, I think.

Clearly, as regards the BROAD market portfolio (stocks vs bonds vs bills/cash vs real estate, etc), folks have widely varying risk preferences (aka utility functions), and act accordingly.

Maybe Alex is, in the eyes of an outside observer, too cautious relative to Bob and Carol, who are otherwise similarly situated, but that's a matter of taste. Maybe Alex gets the heebie-jeebies when the market drops 10%, and Bob shrugs it off...

Translating broader risk preferences into within-market preferences (what to invest in, solely within the field of traditional equities) is tricky, and probably gets far less focus, on this board at least, than whether one should be 60/40 or 40/60, but *IT* is thought about and acted on by some - more than 1 in 10,000...
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by psteinx »

Admittedly, it's a lot easier to just dial up or down your overall portfolio risk by varying equities vs. bonds.

But still...

Choices among over/under weighting international, small/value stocks, other exotica that was perhaps more favored by Swedroe and his supporters, etc., are I think at least partly driven by risk preferences/tolerances outside of the traditional stocks/bonds dichotomy.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by SpreadsheetsAreFun »

bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
It is honestly unclear to me if the intention of your original post is to (a) understand why some people on this forum deviate in their equity allocations from the general recommendation to follow a TSM allocation or (b) seek confirmation from other members of this forum that TSM is the only feasible allocation any investor should ever pursue. From the distribution of responses to this thread it seems that it overwhelmingly appealed to folks in the latter category.

If your intent was to pursue the former, I will be happy to share the philosophical and empirical reasons why I deviate in my equity allocation from TSM. In my personal opinion I am following the core boglehead principles and am investing in relatively low-cost index funds with an ISP that I derived after pursuing to understand for a few years what is my own personal ability, need, and willingness to take risk. That said, my asset allocation includes deviations from the 3-fund portfolio (which is a really good portfolio concept in general) that the plurality of the forum members are likely going to find a violation of their own sacrosanct interpretation of Mr. Bogle's teachings. Among those are (1) not following TSM on the equity side, (2) significant allocations to gold, and (3) a pursuit of factor investing. If only I added a little bit of cryptocurrency to it, I am sure at least 90% of members would be disgusted with it.

I am asking because my post would be quite long and I would have to put effort into it for making figures and data tables etc. And it seems from the prior responses in this thread that there is a high likelihood I would be called a performance-chaser, someone who thinks they are so much smarter than everyone else, someone who does not understand that they do not understand their own utility function, and probably other things would be thrown at me. When really the goal of my allocation is just to make my portfolio more robust. And I don't want to put extra effort into it, unless your original intent is true curiosity and open-mindedness. I am not asking for a friend, but for myself.

By the way. If your intent was along the lines of (a), I'd recommend starting a new thread for it. Maybe with a statement like

I am a follower of the theory that TSM is the best allocation for my portfolio. But I am open to understand why it is not for others and interested: What are your reasons to deviate from TSM in your equity allocations? Are they philosophical, empirical, or other reasons?
Have a great day. | Asset allocation: 70% Stocks, 15% Treasuries, 15% Gold (all ETFs)
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by psteinx »

VERY briefly, some questions for OP to think about. Most of these have been widely discussed in other threads on this forum, or OP can start a new thread to drill down:

* Overall risk tolerance - loosely expressed as portfolio standard deviation/max likely drawdown that OP can tolerate

* US vs. international - match global weights, or more typical recommendations on BH for underweighting international, or forego the latter altogether?

* How much cash, how much bonds, for the safer part of the portfolio...

* Munis, yeah or nay?

* Real estate as a separate allocation - either via REITs/REIT indexes, or in more direct forms

* Factor tilting (small, value, etc.)

* Use of leverage

* Other asset possibilities, including gold, timber, farmland

* Direct investment in individual stocks - there can be many reasons why these might be good, with or without thinking you can personally outpick the market

* To what extent should current portfolio deviations from the market (due to appreciated positions), be corrected? Incur deferrable taxes/transaction costs vs. maintain a lopsided portfolio?

* Interaction of market risk with career risk - how secure is your job in the face of certain possible market crashes?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by afan »

psteinx wrote: Fri Sep 24, 2021 11:00 am
David Jay wrote: Thu Sep 23, 2021 5:34 pm
afan wrote: Thu Sep 23, 2021 5:25 pm...I suspect that there are very few people who know their utility functions. Perhaps some economists or serious hobbyists. For everyone else, the market portfolio is will have the consensus estimated best expected risk adjusted return...
Well said. And I doubt that one person in 10,000 can accurately describe their financial utility functions. Which suggests that market portfolios are appropriate for virtually everyone (although many may believe that they are "different").
This overstates the case significantly, I think.

Clearly, as regards the BROAD market portfolio (stocks vs bonds vs bills/cash vs real estate, etc), folks have widely varying risk preferences (aka utility functions), and act accordingly.

Maybe Alex is, in the eyes of an outside observer, too cautious relative to Bob and Carol, who are otherwise similarly situated, but that's a matter of taste. Maybe Alex gets the heebie-jeebies when the market drops 10%, and Bob shrugs it off...

Translating broader risk preferences into within-market preferences (what to invest in, solely within the field of traditional equities) is tricky, and probably gets far less focus, on this board at least, than whether one should be 60/40 or 40/60, but *IT* is thought about and acted on by some - more than 1 in 10,000...
I do not believe I have ever seen anyone detail their utility function and how it trades off mean, variance, skewness and kurtosis, let alone higher moments. If you have seen someone do this, or if you have done it yourself, please post. I have searched and cannot find even where to begin in determining my function. I have no idea of how to test whether I got it right the first time, whether the preferences are stationary over time, or how they behave in the extremes. I don't even know the general form of my risk aversion.

People certainly deviate from the market portfolio. I just don't know how many of them can demonstrate that they derive their strategies from a robust estimate of their personal utility functions. If someone has, I would love to know.
Last edited by afan on Fri Sep 24, 2021 11:46 am, edited 1 time in total.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by psteinx »

afan - I think we're disagreeing on how one expresses one's risk function. I agree that few, if any, discuss it in the mathematical terms and to the level of detail you describe.

But from a practical perspective - should I just go 60/40 or whatever, TSM/BND - well, I think a fair number of folks who might still be targeting a ~60/40 (or other ratio) overall deviate from that, for reasons that they can think reasonably rationally and coherently about. I think that's closer to the spirit of OP's original question.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

psteinx wrote: Fri Sep 24, 2021 11:19 am afan - I think we're disagreeing on how one expresses one's risk function. I agree that few, if any, discuss it in the mathematical terms and to the level of detail you describe.

But from a practical perspective - should I just go 60/40 or whatever, TSM/BND - well, I think a fair number of folks who might still be targeting a ~60/40 (or other ratio) overall deviate from that, for reasons that they can think reasonably rationally and coherently about. I think that's closer to the spirit of OP's original question.
OP here.

My comment was about the form of advice containing the phrase "most people" without any explanation of what that criteria actually means. How do recipients of the advice know whether or not it applies to them? Many people do not think they are just one of the many "most people!." Maybe they are one of the "some people" who can do better. If so, why listen to advice aimed at the hoi polloi? This is similar to the sales pitch against index investing because "Who wants to be just average?" Adding "most people" to advice seems to acknowledge the validity of that sales pitch."

I am not the one who added "[Is TSM not the best choice for informed investors?]" but an answer may be that "informed" investors are not the "most people" the advice applies to.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by HomerJ »

Accept you're likely not as smart as you think you are and just invest in TSM.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by afan »

psteinx wrote: Fri Sep 24, 2021 11:19 am afan - I think we're disagreeing on how one expresses one's risk function. I agree that few, if any, discuss it in the mathematical terms and to the level of detail you describe.

But from a practical perspective - should I just go 60/40 or whatever, TSM/BND - well, I think a fair number of folks who might still be targeting a ~60/40 (or other ratio) overall deviate from that, for reasons that they can think reasonably rationally and coherently about. I think that's closer to the spirit of OP's original question.
The problem is that the risks are multidimensional. Without knowing preferences for at least the first 4 moments, how can one pick an asset allocation? Shifting the percent in stocks to bonds will move the risk profile in a broad way, but there is no way to know whether such a shift will move one closer to or farther from their personal function. Would a 10% increase in kurtosis be received the same way as a 10% increase in variance? How about shifting the skewness? If you don't know where you want to be, how can you know in which direction you want to go?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
No, choosing a portfolio that is not TSM puts you in the non-TSM category. What is your friend's question?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

Northern Flicker wrote: Fri Sep 24, 2021 12:08 pm
bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
No...
You both quoted the (rhetorical) question and answered it.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by HomerJ »

afan wrote: Fri Sep 24, 2021 12:00 pmWould a 10% increase in kurtosis be received the same way as a 10% increase in variance? How about shifting the skewness?
You have 20 programmers running models and 6 PhDs working for you.

I think the rest of us will be fine with just

"TSM and TBM and Age-in-bonds."

And then retiring rich.
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ByThePond
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by ByThePond »

Not trying to be a wise guy, but is it possible that those people who choose TSM are the informed investors?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by MAKsdad »

bertilak wrote: Thu Sep 23, 2021 10:59 am How can (or should) someone work themselves out of that hapless "most people" class?
Why do you consider the "most people" class to be hapless? There are lots of very intelligent people here who are more than happy to be in that group. If I wanted to work on Wall Street and pick stocks well...I'd be doing that as my profession.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by vanbogle59 »

MAKsdad wrote: Fri Sep 24, 2021 12:53 pm
bertilak wrote: Thu Sep 23, 2021 10:59 am How can (or should) someone work themselves out of that hapless "most people" class?
Why do you consider the "most people" class to be hapless? There are lots of very intelligent people here who are more than happy to be in that group. If I wanted to work on Wall Street and pick stocks well...I'd be doing that as my profession.
And probably have access to all sorts of info that you currently don't have.
I mean Warren Buffet is not "most people", right?
But the idea that he is using the same info and choosing from the same set of options available to the public seems ridiculous to me.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Beensabu »

I don't think you need the math in order to determine your personal maximum utility (maybe because I can't do the math, and I don't have numbers for the inputs).

You want to target the highest level of personal satisfaction with all potential outcomes based on what is known now. That is how you "feel" (yes, I said it) about your asset allocation being most likely to get you to where you need/want to be.

To do the math, you need to be aware of each potential outcome as well as the probability of each outcome, in order to assign the correct weight to each in determining maximum utility. I can't do it. I don't have the numbers for the inputs, and I don't know how to come up with them.

So... I wing it. I try to think of as many potential outcomes/paths as I can (as well as their effect on my personal situation), and determine possible points of branching. It's building a map, or a tree, or whatever. I weigh those potentials outcomes according to my personal view of likelihood of occurrence, taking into consideration possible points of branching. If X happened at point B, I would want this; if Y happened, I would want something else. Is X more likely to happen than Y, based on what is known now? Is either more likely enough to happen that I want to overweight for that possibility vs. the other possibility (or neither possibility, depending on how far out on the path the branch point is?) What is the likelihood of even getting to point B on that particular path vs. going down another path at the earlier branch point A? And so on. It's not precise. It's a general weighing of the scales at each point.

In the end, you get to an asset allocation that gives you the highest level of personal satisfaction with all potential outcomes in your mind. Because it's your mind that you need to satisfy in order to sleep well and have no inclination to tinker. Unless, of course, something becomes known in the future that dramatically changes the potential outcomes/paths to the extent that you're no longer satisfied that your asset allocation can best handle all possibilities (with newly assigned likelihoods) for you and your situation.

This is really what most people are doing. Their brains are doing it for them, based on what they know. When someone learns something new that changes/increases the potential outcomes/paths that they can see, if that broader perspective results in them no longer achieving the highest level of personal satisfaction / sleep wellness with their current asset allocation, then that is when they change it and deviate from the starting point. If that level of personal satisfaction is not affected by the new information, then they do not change anything.

tldr: Everyone needs an asset allocation they can live with through many possible futures. That's different for everyone.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by peppers »

vanbogle59 wrote: Fri Sep 24, 2021 12:59 pm
MAKsdad wrote: Fri Sep 24, 2021 12:53 pm
bertilak wrote: Thu Sep 23, 2021 10:59 am How can (or should) someone work themselves out of that hapless "most people" class?
Why do you consider the "most people" class to be hapless? There are lots of very intelligent people here who are more than happy to be in that group. If I wanted to work on Wall Street and pick stocks well...I'd be doing that as my profession.
And probably have access to all sorts of info that you currently don't have.
I mean Warren Buffet is not "most people", right?
But the idea that he is using the same info and choosing from the same set of options available to the public seems ridiculous to me.
I believe ol' Warren has a lot more resources than "most people", :wink:
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vanbogle59
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by vanbogle59 »

At the risk of derailing this thread...

The idea that a real live human being's utility function could be expressed mathematically is ridiculous.
First of all, it's impossible to know anyone at that level. And that would be especially true of trying to know yourself.
Secondly, people change. And not just from year to year, but from breath to breath. Beer to beer. Burger to burger.
Finally, even if you are an absolute determinist, and reject free will completely, you have to admit the appearance of free will at the level of individual choice (e.g. you cannot predict if I will choose door #1 or door #2).

So, if knowing your utility function is the requirement for NOT choosing TSM, then everyone should choose TSM.


Full disclosure: I always considered an "individual utility function" more like a metaphor in the homo economicus model. Not an actual thing. Really???
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Northern Flicker »

bertilak wrote: Fri Sep 24, 2021 12:16 pm
Northern Flicker wrote: Fri Sep 24, 2021 12:08 pm
bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
No...
You both quoted the (rhetorical) question and answered it.
I'm still try to understand if you posed a question or a tautology.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by tibbitts »

afan wrote: Fri Sep 24, 2021 6:31 am TSM="Total Stock Market". A capitalization-weighted portfolio of US stocks. An excellent proxy for the stock market as a whole. Extremely low cost. In its most efficient form (the ETF) it is effectively free. No need for expensive advisers. No high expense ratios to capture the tilts. No high transaction costs to create and maintain the tilted portfolios.

David Jay raises a good point about those who think they know their utility functions: Are they correct in their beliefs? It is difficult to know one's function and even more difficult to test the accuracy of that presumption.

Another consideration that comes up with factor investing-Many people seem to look at the risk characteristics of factor tilted portfolios and convince themselves that they prefer those risks to those of the market. That is, they do it backwards. They see something that, perhaps over some periods of time, generated higher returns than the market at the cost of increases in risk. They then declare that they prefer those risks to justify why they chase this performance. Apparently many investors find this backward approach appealing. It lets them think they have beaten the market, when all they have done is increase their risk.

Staying with TSM eliminates this sort of thinking for those who are susceptible to it.

Did I mention that it is free?
Just FYI: if you secure-message Vanguard (okay maybe chat in the future???) and a question about TSM, that's Taiwan Semiconductor to them. Careful, the answer you get might not be what you expect (happened to me.)
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by SpreadsheetsAreFun »

bertilak wrote: Fri Sep 24, 2021 11:47 am
psteinx wrote: Fri Sep 24, 2021 11:19 am afan - I think we're disagreeing on how one expresses one's risk function. I agree that few, if any, discuss it in the mathematical terms and to the level of detail you describe.

But from a practical perspective - should I just go 60/40 or whatever, TSM/BND - well, I think a fair number of folks who might still be targeting a ~60/40 (or other ratio) overall deviate from that, for reasons that they can think reasonably rationally and coherently about. I think that's closer to the spirit of OP's original question.
OP here.

My comment was about the form of advice containing the phrase "most people" without any explanation of what that criteria actually means. How do recipients of the advice know whether or not it applies to them? Many people do not think they are just one of the many "most people!." Maybe they are one of the "some people" who can do better. If so, why listen to advice aimed at the hoi polloi? This is similar to the sales pitch against index investing because "Who wants to be just average?" Adding "most people" to advice seems to acknowledge the validity of that sales pitch."

I am not the one who added "[Is TSM not the best choice for informed investors?]" but an answer may be that "informed" investors are not the "most people" the advice applies to.
Oh, that makes a lot of sense then. My personal interpretation is that it probably is similar to any other type of knowledge. One will only know if the advice that is generally the right advice for most people is the right advice for one person in particular in one particular situation if one has already a well-informed and relatively unbiased knowledge base in that matter. Which makes one no longer a general person in the field and would not seek out generalized advice anyway.

Add to that that the word passive inherently has negative associations in most situations. People are usually encouraged to be more active, take control, manage things and take ownership. In investing through, passive behavior is usually the smarter thing to do. Bogleheads internalize that, make ISPs that can stand the test of time. And we do that because we understand the matter enough to understand that it is generally the better thing to do. We learned that behavior from the lessons of others. This forum often figuratively recommends to concerned folks to "Don't just do something. Stand there!" during times of anxiety. And it is the usually the right thing to do and it is simple. But for someone who has not yet internalized that something so simple can be the right thing, it just feels inherently wrong.

Without this knowledge it just sounds right if an investing salesperson argues that "You don't just want index investing. Do you care about your investments? Of course you do. So you should not just have your investments be there... passively. You want them to be active. To make your investments more active, you need someone who manages them right for you. Someone you can trust. Like Fancytitlecompanyinvestingcorp LLC. We already put some active work into this tailored proposal just for you. Here are the 23 mutual funds from Trustedoverpricedcompany that we tailored to your needs. We will actively manage them for you so your money is not just passively stuck."
Have a great day. | Asset allocation: 70% Stocks, 15% Treasuries, 15% Gold (all ETFs)
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by MAKsdad »

vanbogle59 wrote: Fri Sep 24, 2021 12:59 pm
MAKsdad wrote: Fri Sep 24, 2021 12:53 pm
bertilak wrote: Thu Sep 23, 2021 10:59 am How can (or should) someone work themselves out of that hapless "most people" class?
Why do you consider the "most people" class to be hapless? There are lots of very intelligent people here who are more than happy to be in that group. If I wanted to work on Wall Street and pick stocks well...I'd be doing that as my profession.
And probably have access to all sorts of info that you currently don't have.
I mean Warren Buffet is not "most people", right?
But the idea that he is using the same info and choosing from the same set of options available to the public seems ridiculous to me.
Well he's buying companies and operating them, or lending/financing acquisitions. He's not picking stocks (generally). Big difference.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by mikejuss »

But do most investors, in fact, own a total-stock-market-like index fund? I don't think so. Does anyone have any numbers on this?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by 1789 »

HomerJ wrote: Fri Sep 24, 2021 11:56 am Accept you're likely not as smart as you think you are and just invest in TSM.
Most people don't like what you said, but i like it. :sharebeer
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by whereskyle »

bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
It is the best choice for the 49% as well as the 51%, particularly if you accept the proposition, as I think you and everyone should, that the greatest threat to successful investment performance is the investor's behavior. No equity investment can claim to have less behavioral risk than a market-cap-weighted total-market Index fund because that is the only fund that promises nothing but the average return of all equity transactions and therefore makes no bets other than on market performance. Behavioral risk is therefore lessened to the greatest degree among all possible equity investments.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by HomerJ »

1789 wrote: Fri Sep 24, 2021 1:51 pm
HomerJ wrote: Fri Sep 24, 2021 11:56 am Accept you're likely not as smart as you think you are and just invest in TSM.
Most people don't like what you said, but i like it. :sharebeer
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Re: Most people

Post by DMSeattle »

cacophony wrote: Wed Sep 22, 2021 4:19 pm Well if you didn't have at least some people investing in individual securities then how would they be accurately priced?
Great & important question.
At what point (if any) do index funds become a problem for accurate markets?

Index funds depend on the collective wisdom of investors who are selecting individual securities. The fewer the people looking at individual companies the weaker the index fund. No?
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Re: Most people

Post by vanbogle59 »

DMSeattle wrote: Fri Sep 24, 2021 2:10 pm
cacophony wrote: Wed Sep 22, 2021 4:19 pm Well if you didn't have at least some people investing in individual securities then how would they be accurately priced?
Great & important question.
At what point (if any) do index funds become a problem for accurate markets?
When casinos start to lose money.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Taylor Larimore »

Bogleheads:

In my opinion, TSM (Total Stock Market Index Fund) is the "best choice for informed investors". This is a speech which I heard Mr. Bogle give to the Morningstar Investment Forum in Chicago in 2002:
"Like Dr. Fama, I believe that the market portfolio is the most sensible decision. It takes the need for judgement out of your decision making; it reduces cost, it increases tax efficiency; it avoids the need to pore over past market data to figure out why the data are what they are. Then, if you accept the data, you have to decide whether or not the patterns it has revealed will persist during the span of years remaining on your investment horizon."
Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Investing in equities entails four risks: stock risk, style risk, manager risk, and market risk. You can easily eliminate the first three of these risks simply by owning the entire stock market—owning the haystack, as it were— and holding it forever." "You could go your entire life without a sector fund."
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Re: Most people

Post by HomerJ »

DMSeattle wrote: Fri Sep 24, 2021 2:10 pm
cacophony wrote: Wed Sep 22, 2021 4:19 pm Well if you didn't have at least some people investing in individual securities then how would they be accurately priced?
Great & important question.
At what point (if any) do index funds become a problem for accurate markets?

Index funds depend on the collective wisdom of investors who are selecting individual securities. The fewer the people looking at individual companies the weaker the index fund. No?
No idea of exact numbers, but I'd bet price discovery would work even with 90% Index, 10% individual investors. Or at least 80/20.

It's a self-correcting problem in any case. If it becomes easier to beat the index because the market has become less efficient, then more people will move out of index investing, and then the market will become more efficient again.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by 22twain »

DMSeattle wrote: Fri Sep 24, 2021 2:10 pm At what point (if any) do index funds become a problem for accurate markets?
This has been discussed here occasionally. For example:

If everybody indexed, the only word you could use is chaos, catastrophe

What will happen if everyone indexed?

Are index funds becoming too popular?
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by Lee_WSP »

bertilak wrote: Thu Sep 23, 2021 10:59 am
metacritic wrote: Thu Sep 23, 2021 10:05 am Why are you so sure that 51 percent are able to consistently beat the market? The consistency aspect is absolutely crucial, not the year-to-year aspect of the figure you suggest.
I'm not "sure" and I'm not suggesting any figure. I'm saying advice that includes the phrase "most people" leaves the point ambiguous.
Ambiguity is probably the point. The author probably isn't licensed to dispense investment advice in your state.
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Re: Most people

Post by bertilak »

HomerJ wrote: Fri Sep 24, 2021 2:23 pm It's a self-correcting problem in any case. If it becomes easier to beat the index because the market has become less efficient, then more people will move out of index investing, and then the market will become more efficient again.
Exactly!
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Re: Most people

Post by reln »

dziuniek wrote: Thu Sep 23, 2021 6:04 pm
reln wrote: Wed Sep 22, 2021 4:23 pm
bertilak wrote: Wed Sep 22, 2021 4:14 pm Much of the "total market" advice talks about TSM being best for "most people."

Well, 51% is most. Does reading all those words of wisdom put one in the 49% where TSM is NOT the best choice?

Asking for a friend.
If you're smart enough to beat the market or if you're willing to take the risk of underperforming to beat the market, then you should try to beat it. For everyone else that isn't either smart enough or risk taking enough, TSM is a fine solution.
In my case atleast, better lucky than smart. :twisted: :sharebeer
I've recently started to invest a small portion in active funds. Dumb luck I'm sure those active investments have outperformed the rest of my indexed portfolio so far. I have the same rough asset allocation strategy between both active and passive, about 50/50 US stock / international stock. The biggest outperformance has come in my active international and US large growth funds.
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Re: Most people [Is TSM not the best choice for informed investors?]

Post by bertilak »

Lee_WSP wrote: Fri Sep 24, 2021 2:25 pm
bertilak wrote: Thu Sep 23, 2021 10:59 am
metacritic wrote: Thu Sep 23, 2021 10:05 am Why are you so sure that 51 percent are able to consistently beat the market? The consistency aspect is absolutely crucial, not the year-to-year aspect of the figure you suggest.
I'm not "sure" and I'm not suggesting any figure. I'm saying advice that includes the phrase "most people" leaves the point ambiguous.
Ambiguity is probably the point. The author probably isn't licensed to dispense investment advice in your state.
That may be it. Ya gotta leave an out! "So, you lost money following my advice. Did I say EVERYONE? Or YOU in particular?"
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Re: Most people

Post by David Jay »

HomerJ wrote: Fri Sep 24, 2021 2:23 pm
DMSeattle wrote: Fri Sep 24, 2021 2:10 pm
cacophony wrote: Wed Sep 22, 2021 4:19 pm Well if you didn't have at least some people investing in individual securities then how would they be accurately priced?
Great & important question.
At what point (if any) do index funds become a problem for accurate markets?

Index funds depend on the collective wisdom of investors who are selecting individual securities. The fewer the people looking at individual companies the weaker the index fund. No?
No idea of exact numbers, but I'd bet price discovery would work even with 90% Index, 10% individual investors. Or at least 80/20.

It's a self-correcting problem in any case. If it becomes easier to beat the index because the market has become less efficient, then more people will move out of index investing, and then the market will become more efficient again.
This! (bold above)

I am a recovering stock picker, and if it becomes relatively easy to outperform the market then I will go back to stock picking. My personal indication is when most (ha-ha) of active mutual funds in the SPIVA scorecard can beat their respective indexes. Today that number stands at about 20%.
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