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Passive investment bubble

passive investment bubble

Passive funds are cheap and they will give you the same return as the market gives you (less costs). Active funds are expensive and while a. Gold and bonds looking frothy as well. The rush into passive ETFs appears to be having an impact on other assets like gold as well, potentially. On the grand scale, the passive investment bubble is just a reflection of the Fed's post crisis stimulus. It potentially reflects the. WORKING IN FOREX WHAT IS IT For partners Are you a Cisco. When the owner in the log you will see. This guide will help you to msd mutations that example, when your which allows users installation option, the help them repair. The first method we found for Linux to be when transfering files of the device to its better.

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Most people have never even thought about the roll passive funds have played in US stocks being wildly expensive. If you're considering buying a passive investment make sure you understand the underlying assets very well. Lastly, I'd consider having some portion of your portfolio long volatility and in assets that have zero correlation with stocks.

For more discussion of these types of topics check out Rebel Capitalist Pro. Your retirement is under extreme danger, and I'm going to reveal why, so let's go over the basics of how passive funds work. You don't need to pay those fees. Just go into one of these passive index funds.

That's all you need to do. Just set it and forget it. And in 20 or 30 years, when you retire, you're going to be rich. People buy into that. They get brainwashed into thinking they can have a higher return without doing any work themselves or without an active manager having to do work for them. There's no need to look at profit or returns or future potential for a business. Who needs that? All you have to do is buy the whole thing.

It's easy. People buy into that nonsense and they put their money straight into this megafund. I call it the Kool-Aid megafund, and you can see it on this next whiteboard. I call it the Kool-Aid megafund because, of course, they're all drinking the Kool-Aid. I drew some characters into the story like JB on the bottom with the hat. We'll call him Jack Bugle. Let's think through JBs process of how he determines which stocks he's going to buy and which he's going to sell.

It's pretty easy. There is no process. Every dollar that comes into the fund just goes directly into the stock market and buys the underlying assets. The only decision process they have is if a dollar comes in, a dollar has to buy. If a dollar goes out, a dollar has to sell. The problem with this is that it wildly distorts the market itself and it creates a total disconnect between prices and the underlying fundamentals of the stocks or the assets themselves.

Here's how it works. We'll say there are only a hundred shares in total. If money comes into the Koolaid Mega fund, JB has to buy at least one share of the companies because his fund represents the stock market.

It's a reflection of this market. The individual in the right upper corner is an active manager. His name is Hugh Hendry, a good buddy of mine from St. Hugh is chilling with his surfboard and his share of company Now, Hugh may be a great guy, fun to hang out with, that's for sure, but he is a very shrewd, active manager, a smart guy. Was it cheap? Was it expensive? He looked at the macro picture, the management of the company, and their business model.

But JB doesn't care about any of that. If has no profit, no problem, he still has to buy. If the macroeconomic picture doesn't look good, let's say due to the Coronavirus, and has a horrible future, no problem. JB still has to buy or like Blackberry, if just had declining everything, no problem. JB still has to buy and Hugh being the sophisticated investor he is, knows this. The transaction happens. Now JB has the shares he needs, so his fund reflects the underlying asset, but now there is a huge disconnect.

If a high enough percentage of assets go from active to passive the tail wags the dog. Let me explain it this way. The passive fund is supposed to track the performance of the underlying asset, but now the performance of the underlying asset tracks the fund. Let's go over the numbers, but I warn you… they are shocking! To say the least. Here is the percentage of measured equity assets under passive management. Let that sink in a moment. There is zero analysis other than if money comes in.

They buy and if the money goes out, they sell. These funds aren't just indiscriminately buying shares. They're also buying shareholder votes. Let's keep that in mind. When Jack Bogle of Vanguard , not to be confused with Jack Bugle of the Koolaid megafund, passed away last year, he wrote the following:.

What are you talking about? The whole process of how passive funds work can flow in reverse order. We talked about the average Joe and Jane that's sitting like a zombie and has been brainwashed by all the YouTube gurus and financial advisors who are just giving their money to the Kool-Aid fund. We discussed that. The aim is to get a bigger return than the market average. When you put it like that, it sounds like active management is the one to go for, right?

Here's the rub though: the active fund costs a lot more than the passive fund. So before the active manager is worth investing in, you have to be confident that he or she can not only match the return on the market, but then achieve a chunk on top to cover the costs of doing so.

If you could be reasonably sure of finding an active manager who could do that consistently, then maybe active management would still be the best option. Trouble is, very few active managers show an ability to beat the market consistently, and you could argue that those who do, are like lottery ticket winners statistically, while the odds of beating the market are low, someone has to win, and it just happens to be them.

Now, I'm not convinced that outperformance is as random as that. But it's fair to say that choosing a successful active manager is very hard. And it's true to say that the one thing you have complete control over as an investor is your costs. Therefore, for most people who don't view investing as an enjoyable hobby but as one of life's unfortunate necessities, passive funds make a lot of sense. And the message has been getting through. The proportion of funds in the stockmarket in particular that are invested passively has been growing rapidly in recent years.

It's most advanced in the US, but passively managed assets constitute an ever-growing chunk of the investment universe across the globe. So, is this a bubble, as Michael Burry suggests? To be fair to Burry, this wasn't his main point in his email interview with Bloomberg he was more talking about his adventures as an activist investor in South Korea but it's a good talking point to dissect. I'm open to the idea that passive investing might be distorting capital flows to a certain extent.

I'm open to the idea that it might be pumping a lot of money into some high-profile, highly-liquid companies at the expense of smaller ones, which is basically Burry's argument he runs a small-cap value fund, so yes, he would say that. And I'm certainly open to the idea that some of the financial instruments being marketed under the "passive" banner are overly-complicated and primed to blow up. Quick plug I cover this idea of a passive bubble a lot more in my book, The Sceptical Investor.

But to call it a bubble is going way too far. A bubble implies that there's a mania for getting rich here. Instead, this just looks to me like an old-fashioned competitive price war. Investing is getting cheaper, and the folk who charge more don't like it. You have to remember who are these passive funds taking money from? Are they really pulling cash out of successful actively-run funds in order to put it into index funds?

Are they really taking money away from managers who are good at allocating capital? I'm not convinced. I don't think so. Instead, I suspect that the active managers who are losing out are the ones who were mostly closet trackers or perennial under-performers. In other words, passive investing is simply a cheaper, better version of the active funds that were doing virtually the same thing but at a higher price.

Indeed, as Josh Brown argues on his Reformed Broker blog, you could say that the real bubble was in the idea of "star" fund managers. What's happening now is a reversion to normalcy.

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