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That seems to be a rather over blown peice. The fundamental concept has some merit, but I think the outcome described is wildly exaggerated.
If you'd owned an index tracker for the past 5 or more decades, you'd be doing ok and would have outperformed active portfolios in aggregate.
Where's the proof that active investing has been key to the success of stock indexes since their conception? I don't see it.
Edit: when I click on your link, I get a different article which starts:
"BlackRock is already the world’s largest asset manager, but it is in touching distance of another crown: becoming Britain’s biggest."
I've got a subscription to the FT.
2nd Edit: apologies, I see you were quoting one of the comments. Obvs, comments are a free for all and largely there for shits and giggles.
Agree that the article was pretty bland and not what I expect for my £50 a month.
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ChasnotRobert
Howard
the FT yesterday wrote an extremely average piece on indexed funds. Top comment predicts indexed funds will end in tears. Anyone have any thoughts on this comment?
"Like all other widely-adopted trends in financial markets, this will end in tears. Passive investing assumes that there a lot of people out there actively choosing between stocks after doing the analysis, and that therefore one can just piggy-back on the net effect of that. What it doesn’t account for is what happens when there is a high proportion (not even a majority) of passive investment taking place in the market.
The answer is that it creates bubble-like situations. As all stocks are being bought blind, correlations increase. As correlations increase, the relative risk of individual stocks falls on an optical, cosmetic level. That makes these stocks more attractive in portfolio risk models to active investors, meaning that it is more difficult not to invest in them, thereby increasing correlations further via the active investor sector. More broadly, and more dangerously, the increase in passive investing increases the performance of the index against active strategies. As a result, passive investing every day looks even more attractive in past performance. Confidence rises in it as a strategy.
And so the cycle continues. As it does, active investors find it more and more difficult to get any relative movement in the market, and cease their activities. The money they were investing goes into passive strategies. Index member stocks continue to hold their value regardless of any change in company profitability. In the meantime, more dynamic businesses which are not in the index are starved of capital. This brings down growth and productivity in the real economy, making the index even more-overvalued.
At some point, all the passive investing which can take place will have taken place and the index member stocks in which they are invested will be hugely overvalued versus other stocks or businesses. That is when the whole edifice collapses. Index holders at that point will lose huge amounts of money.
If you accept this, then the question from an investment perspective is for how long do you think that the bubble can inflate – are we near the beginning or the end? If you currently think it is near the end, for how long and how far does the market need to move relatively before you are forced into it? If you think it is near the beginning, what strategy do you have if you are wrong – what relative shift tells you that it is all over?"