Comment by pottertheotter
19 hours ago
That's not the idea behind index funds. It's arithmetic. The aggregate return of active investors, before fees, is the market return. Once you subtract fees, it's below the market return. While some active managers' performance less fees is higher than the market return, it's very difficult to predict which will perform this way. So your best bet is to own the market through a broad index fund that has almost no cost.
If you want to read about this, see Sharpe (1991), The Arithmetic of Active Management.
In a spherical cow sense sure. But no one is buying the market return when they buy even a total market index fund. Other commenter is right, they are expecting past performance of these index funds to be indicative of future returns. But then again they aren't really actively investing either. Automatic contributions pervert a lot of the efficient market hypothesis ideas I think since these people are buying, routinely, maybe as long as they are alive, with no information in front of them.
I've always wondered what happens as we approach a structural event, such as peak population, that reduces this positive pressure.
You brought a real economy issue to a finance economy discussion.
One of the hottest questions, yes! ++1
And its not that discussed,as Id say: What happens if the number of people interested in buying ETF are shrinking in numbers?
For sure, the liquidity will stay out there - somewhere, somehow. But what impact on stock/index prices?
Boomers now retiring, in most western countries this is the biggest cohort of all time - what happens if they want cash for stocks?
> So your best bet is to own the market through a broad index fund that has almost no cost.
There's also the fact that index funds have de facto become pension funds in most of the Western world, so Western politicians are trying to do their damn best to keep the stock exchanges afloat (i.e. always going up) in order to keep those aged 45-50 and older on their side when it comes to voting. We've last had a market crash in 2008-2009 (the covid thing was just a blip), I don't see today's politicians allowing a crash like that to happen if they can help it.
So in fact putting one's money into index funds is betting on the current political system continuing doing its thing, no need to involve any advanced maths.